Topgolf Callaway Brands Corp (MODG) 2004 Q1 法說會逐字稿

Good afternoon.

My name is Cassidy, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Callaway Golf Company first quarter earnings results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period.

If you would like to ask question during this time, simply press star, then number one on your telephone pad.

If you would like to withdraw your question, press the pound key.

On the conference today, we have Ron Drapeau, Chairman and CEO, and Brad Holiday, Chief Financial Officer of Callaway Golf.

Mr. Holiday, you may begin.

Thank you, and welcome, everyone, to Callaway Golf Company's first quarter 2004 conference call.

I am Brad Holiday, Chief Financial Officer of Callaway Golf Company.

Joining me today is Ron Drapeau, Chairman and Chief Executive Officer of Callaway Golf Company.

During today's conference call, Ron will provide a brief overview of our first quarter results and current trends.

I will provide more detailed comments about our financial results, and Ron will then conclude with some additional thoughts.

We will then open the call for questions.

Before we begin, I would like to point out any comments made about future performance, events or circumstances, including estimates of sales and earnings per share information for 2004, the estimated charges and benefits to be realized from the integration of the Callaway Golf and Top Flite operations, the new tax rates and lost market share within the Woods business and the elimination of golf ball losses, are forward-looking statements, such as considered harbor protection under the Federal Securities Laws.

Such statements reflect our best judgment today based on current market trends and positions, and are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected in the forward looking statements.

For details concerning these and other risks and uncertainties, you should consult our most recent form 10K filed with the SEC, as well as the company's other reports subsequently filed with the SEC from time to time.

In addition, during the call, in order to assist interested parties with period over period comparisons, we will provide certain proforma information as to the company's performance, excluding the Top Flite integration charges, as well as information regarding the performance of the Callaway Golf and Odyssey operations and the Top Flite operations on a stand-alone basis.

This information may include nonGAAP financial measures within the meaning of Regulation G.

The earnings release we issued today includes the reconciliation of such non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with GAAP.

The earnings release is available the Investor Relations section of the company's website, at www.callawaygolf.com.

With that, I will turn the call over to Ron.

Thank you, Brad, and thanks to everyone today for joining us today for our 1st quarter 2004 earnings conference call.

There are several things I would like to cover today.

I will begin with by providing highlights on our first quarter results.

We were pleased to report record sales for the quarter on both a consolidated basis and for our Callaway Golf core business as well.

Also, after excluding Top Flite's integration charges, we delivered record first quarter net income.

Consolidated sales increased 34% to $364 million, and sales excluding Top Flite were up 9% to $297 million.

This is our highest quarterly sales level in the history of the company.

Net income was $41 million, which includes integration charges of $3 million after tax.

Without these integration charges, net income was $44 million, a record for a first quarter.

Importantly, there is evidence that the industry may be rebounding.

We have seen improvements in golf retail for the early part of this golf season, with used sales of woods and irons up from a year ago, and five consecutive weeks of increasing rounds played.

This is somewhat encouraging for us and others in the golf industry.

An improving economy and job market in the United States is helping overall consumer spending, and this is contributing to the strongest early season golf retail environment we have seen in years.

But this data is very thin, and small changes in absolute terms can make what appear to be big swings in percentage terms.

Many golf courses and full season golf shops are not open in the first quarter.

We will need to wait and see what happens in the second quarter before we can know that this will be a trend for the entire year.

At the beginning of 2004, we set three key objectives for the company, and we are making progress with each of them.

These objectives are: Growing the Woods market share that we have lost since 2002, driving profitability in our Callaway golf ball business and successfully integrating Top Flite into our company.

I will address each of these key objectives.

First, in Woods, we reported a 33% increase in sales compared with last year.

Retailers have responded positively to our new wood offering, spearheaded by the most advanced driver in the world in the EOC fusion.

This successful sell-in to the trade should result in improvements in market share as we drive consumer sales with advertising and tour support.

With the golf season just getting started around the country, we remain confident that our refocused effort in the Woods segment will enable us to recapture lost market share.

On the ball side of the business, total net sales were $72 million, an increase of $58 million versus last year.

Callaway golf products represented $27 million of the total, and $14 million of the increase, with Top Flite making up the balance.

I'm pleased to report that the Callaway golf ball business achieved profitability for the first quarter for the first time since we entered the business in 2000.

We promised you we would eliminate the losses, and we are on track to do that for the full year.

Underpinning our the success was a doubling of [INAUDIBLE] sales, and reduced costs, as a result of integrating most manufacturing operations into Top Flite.

Our newest and most technologically advanced ball, the HX 4 [PHONETIC], led this increase in sales.

Moreover, the positive feedback on the HX 4 has lifted sales of our entire Callaway ball line.

At this stage, we feel we are on pace to have a successful year in this category and eliminate the losses that have plagued this segment of the company since 2000.

Switching over to Top Flite, I am pleased to report that the integration is progressing nicely, and that Top Flite was profitable in the quarter, excluding integration charges.

We have started executing our plans to integrate the international operations, eliminate duplication of offices, warehouses and back office operations in each geographic territory.

When this initiative is complete, it will generate annual savings in excess of $5 million.

In addition, last week we took action to reduce staff at our domestic Top Flite operation to better align the infrastructure to support the golf business.

Recall, the infrastructure has supported the entire Spaulding business that included inflatable, footwear, and golf.

While this a difficult decision to make, we purchased Top Flite out of bankruptcy and certain changes are necessary in order to return it to profitability.

This action will yield annual savings of approximately $4 million.

Overall, I am very pleased with the results of the quarter.

They are in line with our internal targets we established during our 2004 planning process, and consistent with the annual revenue and earnings guidance that was provided in January.

I will now turn the call over the Brad, who will discuss in detail our financials for the first quarter.

Thanks, Ron.

On a consolidated basis, which includes results for both Callaway Golf and Top Flite, as well as integration charges, sales for the quarter were $364 million, an increase of 34%, compared to last year, with net earnings of $41 million compared to $42 million.

Fully diluted earnings per share were 59 cents, versus 64 cents last year, on an increased share base of 68.4 million shares.

On a proforma basis, excluding the pretax integration charges of approximately $5 million for the quarter, net income was $44 million, up 3% from last year, and fully diluted earnings per share were 64 cents, flat with 2003.

At the risk of providing more information about the financial results of our business to our competitors than we would like, we have decided to provide details of our operating results during this transition year to help our investors better understand our progress against the key objectives discussed earlier.

Included in our press release is a table with first quarter results broken out for Callaway Golf, which includes Odyssey, Top Flite, which includes Ben Hogan and integration charges.

As I mentioned, the press release and table are also available on the company's website.

Looking at the results for the quarter, sales were $364 million, of which Callaway Golf business accounted for $297 million, with the balance of $67 million coming from Top Flite.

I would like to mention that comparisons to last year for Top Flite are difficult until the fourth quarter ,when we start to anniversary actual results following the mid-September acquisition date.

As a matter of fact, sales will be the only comparison we can make, because costs were allocated to the many Spaulding products that existed before we acquired Top Flite, And we cannot validate that because we have no details to support these allocations.

Top Flite sales for the first quarter, compared to the data we have, increase approximately 11% versus 2003.

Golf balls represent about two-thirds of this amount, with clubs, accessories, and other products making up the balance.

For the total Callaway Golf business, sales, as I mentioned, were $297 million, or a 9% increase, and represent a record, not only for any first quarter, but the highest that we have ever shipped in any single quarter.

Overall, wood sales were $124 million, and increased represented 34% of the total [INAUDIBLE], and increased 33% compared to last year.

Callaway Golf branded products were $123 million of this total.

Highlights for the quarter include strong introductions of the ERC Fusion Driver, the Great Big Bertha II 415 VB Driver, and the Big Bertha Driver and Fairway Woods, more than offsetting the lower volumes on the Great Big Bertha II Driver that was introduced into the market in late 2002 and early 2003.

Sales of irons and wedges were $96 million, a decrease of 4% versus 2003, and represented 27% of our total sales.

Callaway Golf branded products represented $84 million of this total, with the balance of $12 million coming from Top Flite and Ben Hogan products.

Last year sales included the successful introduction of X-16 and the X-16 Pro Series, as well as carry-over sales on the Big Bertha 02 irons.

Our new Big Bertha 04 irons and Hogan Hybrid irons have been well-received, and so far very successful, but is not equal to sales of last year's two X-16 models, due in part to the lower price on Big Bertha irons and the limited supply of the Hogan Hybrids during the quarter.

Putter sales were $37 million for the quarter, down 18% compared to last year, and were 10% of our total net sales.

Top Flite and Ben Hogan, with [INAUDIBLE], represent $2 million of this total.

The two-ball putter continues to show growth, and along with the Ben Hogan Big Ben Putter, partially offset last year's introduction of the EFX line of Odyssey putters.

Golf ball sales were $72 million, and represented 20% of our sales mix.

Top Flite sales were $45 million [INAUDIBLE], with the balance of $27 million coming from the Callaway Golf line of products.

Callaway golf ball sales are double what they were last year, and reflect the early success of the HX Tour golf ball, as well as the relaunch of our entire line of golf balls with new packaging and advertising.

You may recall, we mentioned that the seasonality of the golf ball business differs from the seasonality in the golf club business.

This is a good time to review that.

Golf clubs are stocked and sold prior to the time of year when golfers are actually playing, resulting in large first quarter sales of golf clubs.

Moreover, retailers begin to manage their inventory and golf clubs downward starting in the mid summer, generally causing sharp sequential declines in the third and fourth quarters.

Golf balls, on the other hand, are most often purchased as the game is played.

Thus, the season for golf ball sales starts later in the year, and continues further into the fall, weather permitting.

We should be seeing this change in seasonality as we consolidate Top Flite sales and grow our Callaway golf ball franchise.

Turning to our regional breakout, our international sales were $146 million, an increase of 19%, and represent 40% of total net sales.

Of this amount, Top Flite represented $22 million, with a balance of $124 million coming from the Callaway Golf branded products.

Sales trends by region were as follows: U.S. sales of $218 million increased 46%, or $59 million, compared to last year.

Top Flite was $45 million of this increase.

Europe increased 34%, or $17 million, to $67 million.

Top Flite was ten percent -- or excuse me, was $10 million of this increase.

Japan net sales declined 4 percent to $32 million.

There was less than fifty thousand dollars in Top Flite sales in Japan.

Canada sales increased 63% to $20 million.

Top Flite was $8 million of this increase.

The rest of Asia, including Korea, had net sales of $16 million, a decrease of 10% compared to last year.

There were no Top Flite sales included for the rest of Asia.

Licensing revenue, which is included in net sales, was $1.1 million compared to $600,000 last year.

Gross profits, excluding intergradation charges, increased 23% to $170 million when compared to 2003.

$146 million of this amount can be attributed to the Callaway Golf business, with the balance of 24 million coming from Top Flite.

Gross margins as a percent of net sales were 47% this year compared to 51% last year.

This reduction reflects lower margins in the Top Flite business, reduced pricing on some older Callaway golf products, a shift in the irons business from higher margin graphite shafts to lower margin steel shafts, offset partially by higher wood margins and improved margins on the Callaway golf ball business.

Consolidated operating expenses, excluding integration charges, were $101 million, an increase of $31 million compared to last year, and represented 28% of net sales.

$23 million of this increase was due to the addition of Top Flite, including its Tour staff, which includes both Rider Cup Captains, Bernard Ronner [PHONETIC] and Hal Sutton, as well as reigning U.S.

Open Champion, Jim Furyk, and other top professionals.

The balance was in the Callaway Golf business, driven by increased investment in regaining driver presence on Tour, an increase in our foreign subsidiary expense due to negative currency effects, and increases in accounting fees and DNO insurance premiums.

Income from operations, excluding integration charges, was $69 million, an increase of $1 million versus last year.

Callaway Golf made up $68 million of this, with Top Flite contributing $1 million.

We are encouraged that we were able to reverse the operating losses in the Top Flite business in the first quarter, excluding this impact on the Callaway golf ball business, after taking the company filed bankruptcy last year.

We credit our management team for taking decisive actions to reduce headcount after the acquisition was completed.

We are further streamlining Top Flite, and as Ron just mentioned, we took additional steps last week to further reduce overhead in the U.S.-based Top Flite operations as we aim to right size the infrastructure and better align it with the golf business we acquired.

And as Ron also mentioned, we are taking actions internationally, eliminating duplications in warehousing, office space and back office operations.

We have successfully moved our Callaway two-piece golf ball production to Chickapee, as well as the core for our three-piece balls, and are enjoying the low cost manufacturing benefits of Top Flite.

This enabled us to record a profit in our Callaway ball business this quarter.

Overall, the integration is on track, and we remain excited about the potential of this company and brands.

With will see some of the benefits of these actions in late 2004; however, we are still predicting break-even or a slight loss in Top Flite operations for the full year.

Another positive [INAUDIBLE] is the overall golf ball profitability.

Callaway Golf ball line generated operating income for the quarter of $1 million, compared to a loss of $5 million last year.

As Ron mentioned, this is the first quarter of ball profitability since we entered the ball business, and puts us on track to achieve our commitment to eliminate ball losses in 2004.

The HX Tour ball already has gained 2.4 market share points, and is generating momentum around our entire ball line, which was relaunched this year with improved products and packaging.

Overall share for Callaway golf balls is improving versus last year and last month as the product line gains momentum.

Other income for the quarter was $300,000 compared to a loss of $1.2 million last year.

Moving to the balance sheet, on a consolidated basis, we finished the quarter with $21 million in cash and $53 million outstanding on our $100 million line of credit.

As you know, we established a credit line last year after the acquisition to fund working capital needs as necessary.

We have net working capital of $313 million and no long-term debt.

Receivables were $298 million, an increase of 51% as compared to March 2003, due to the inclusion of Top Flite and higher sales for the Callaway Golf brand.

DSOs for Callaway portion were 75 days versus 67 days last year.

This increase was due to slightly longer terms on receivables versus last year, offered on a limited basis, in response to competitors' programs.

The quality of our outstanding receivables remains very good.

Capital expenditures for the quarter were $3 million, with depreciation and amortization of $14 million.

We estimate Cap Ex to come in at between $15 and $20 million for the year, below our previous estimates, with depreciation and amortization at approximately 40-45 million dollars.

We did not purchase any stock during the quarter, and have the $14 million remaining on our May 2002 authorization of $50 million.

Now l me turn to full-year guidance.

As mentioned earlier, our first quarter results are in line with our internal targets for the year, so we have no reason at this time to change our full year guidance that we gave you in January.

To reiterate this guidance, full year sales are targeted at $1.03 billion, plus or minus 3%, with fully diluted earnings per share between 82 cents and 97 cents.

This excludes the integration -- or excuse me, exclude the integration charges -- or excluding the integration charges, which estimated to be $35 million, or 33 cents per share.

Let me rephrase that.

That includes those integration charges.

Excluding these charges, proforma diluted earnings per share are targeted at $1.15 to $1.30 on an estimated share base of 69 million.

This is an increase in the share base from what we estimated in January, and it's higher due to the impact of higher share prices.

Our full year guidance is supported by analyst internal projections.

While it is our policy not to comment on quarterly earnings, we [INAUDIBLE] note that there are variables that need to be considered resulting in the majority of the earnings improvements compared to last year, coming in the second half of the year.

Some variables to consider are that the seasonality of golf ball sales that I have already discussed, together with the expected improvement in Callaway golf ball margins, should benefit the second half.

Also, Top Flite lost 13 cents in the fourth quarter of 2003, and we would expect this loss to narrow.

Lastly, we expect to have fewer sales of close-out products in the second half of this year compared to last year.

All of these considerations net to an estimated second half earnings of a slight loss to perhaps break even, a marked improvement when compared to the the 22 cent loss incurred last year.

Finally, quarterly estimates and comparisons are going to be challenging this year, given last year's acquisition of Top Flite, so we would urge everyone to soften their positions on quarterly guidance as we have done, and instead, look at how we are tracking for the year.

This concludes my remarks.

I would now like to turn the call back over to Ron.

Thanks, Brad.

In summary, I feel very good about the results we delivered for the first quarter.

We are on track to begin the process of regaining our Woods share.

We not only eliminated the losses on the Callaway golf ball business, but generated positive operating earnings, and have created quite a buzz in the market place surrounding our newest product, the HX Tour ball.

With Top Flite, we have moved quickly to integrate and take advantage of the synergies between the two companies, and are taking actions to improve this profitability.

One quarter does not make the year, despite how good we feel about it.

The second quarter is always the most volatile for the club business, because it is dependent on sell-through and reorders.

We don't have any reason at this time to change our full-year guidance, as Brad mentioned, and are working hard to make sure we are servicing all our retailers so they, in turn, can service the [INAUDIBLE] consumers.

I too would echo what Brad said about full-year guidance.

We are on track to fall within our predicted ranges, which now reflects significant growth in earnings and revenues..

When we hit our guidance, the results will be very well-received.

We do not see any [INAUDIBLE] reason to try be even more optimistic than that this early in the year

You have my commitment that we will provide you with updates of this guidance as we continue throughout the year and gain additional feedback from the market place.

That concludes our prepared remarks.

I would like to thank you for participating in today's conference call, and your continuing interest in the company.

We will now open the call to questions.

Thank you.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad.

We will pause for just a moment to compile the Q&A roster.

Your first question is from Alexander Paris from Barrington Research.

Good afternoon.

Hi, Alexander.

First of all, one thing.

When you're talking about the ball break up profitable in the first quarter, you are just talking about the Callaway ball part, right?

Yes.

Okay.

Secondly, in terms of -- can you say anything about how far you are in the integration of Top Flite?

You have done a lot -- in terms, say by the time we get to the end of the year, what proportion would you say, of what you think you have to -- to do in terms of consolidations and so forth would you be through with?

Well I think -- let me respond, Alexander.

We have done all the planning on the international side, and tomorrow we are moving the operations from Brisbane to Melbourne.

And so that piece of the integration will be in the first stages of being integrated and completed this weekend.

We will then move to Europe and Canada for the remainder of that.

And that will be fully completed this year, with the exception that there may be some holdover on systems that won't be completely integrated until sometime in 2005.

But the people relocations for the most part will be behind us, and the buildings relocations will be behind us.

Ongoing in 2005, if we continue to have the success that we are seeing with the HX Tour golf ball, we will probably, most likely, be continuing to have some production come out of Carlsbad, because I'm not willing to shut that down to move it when we have an opportunity to take share, which is what's happening, and that's very exciting for us..

That aside, we would expect to have that done -- the rest of the stuff done in 2004.

Just talking about your Carlsbad plant, I think you're still doing some balls there, but that's a pretty big plant and state of the art.

And at one point, you were putting your club and your ball operations together.

Is that still the case?

Is that just one manufacturing facility?

No, we have -- we have two manufacturing facilities in Carlsbad.

The club operation is in one, and the remaining portion ball operation, which is very small, is in the other.

We do eventually plan on moving that part of the operation to Chickapee, and when that is completed, we have plans for this facility.

Could you convert that to club manufacturing?

I wouldn't want to.

We have a great manufacturing plant, I think the best in the world, where it is.

We could convert it to distribution, we could convert it to office spaces or other uses.

There will be consolidation of buildings, Alexander, that's what we hope to do.

Okay, just one thing.

In Japan, that's starting to come back.

Is your ball business as popular in Japan as your club business?

No, it's not.

And the reason being is that In Japan, we have different competitors, and we have both Bridgestone and Dunlop that have a long history of success in the ball business in Japan.

And they have a stronger presence in that market than they do in the U.S. market.

Okay, thank you very much.

But we have opportunity there.

Right.

Thank you.

Your next question comes from the line of Carole Buyers with RBC Capital Markets.

Hi.

Good afternoon.

Hi, Carole.

I'm still trying to get a sense of why gross margins were down, given the strength in the club business.

Was there anything that -- I know you put a list of margins up, but was there anything else that we're missing to explain it?

No, there really wasn't, carol.

I mean, I think we tried to cover most of it.

I mean, the Woods certainly were positive, the balls were positive,

We did have increases in the amount of close-outs year over year, and we had the -- there has been kind of a market shift in the industry in the irons business from graphite to steel shafts, and those typically tend to be lower margin product sales.

I mean, what were the increase in close-outs?

Pardon me?

Can you give us a number in close-outs as percentage of sales?

It was small relative to the total sales, but it was an increase year over year, so it did have a small impact on margins.

Okay, and then can you break out on the receivables for Top Flite?

Could you break that out as a percentage of the receivables [INAUDIBLE] related to Top Flite?

Of the total receivables, we had -- 242 was Callaway, and 56 was Top Flite.

And then the currency benefit?

Can you help quantify that?

On what line?

I mean, on the --

On the -- the net line.

On an earnings basis.

I don't have it for the net.

I can tell that, you know, we saw a benefit on the top line and a hit on our expense line.

I don't have the net in front of me here.

We could probably [INAUDIBLE].

Thanks.

Thank you.

Your next question comes from the line of Casey Alexander with Gilbert Securities.

Hi.

Good afternoon.

Do you think that we're looking at kind of a permanent change in the gross margin, just due to the nature of the Top Flite business?

Well, I think in the total consolidated mix, for a little bit of time we're going to see a change in what we have historically looked at in gross margins.

But it would be our long term plan to make improvements to include those margins, Casey.

Okay.

Are you willing to talk at all about the deal with NIKE to produce some NIKE balls in Chickapee?

I will only confirm what Nike has confirmed, that we have in fact entered into an agreement to supply at this point range balls for them, and it is reflective of one of our strategies.

Okay.

And I'm just kind of quizzical, because, you know, the range ball business and the business that Spalding is in, you know, I mean, are you helping somebody to take some of your own business away from you?

It just kind of seems a little conflicting for me.

Well, it depends on how you look at it.

I really believe that while Top Flite is in the range ball business, they're not going to get 100% of it.

And if we can with another [INAUDIBLE] and take it away from [INAUDIBLE], good for us.

Okay.

All right.

Thank you.

Thank you.

Your next question comes from the line of Tim Condor with AG Edwards.

Thank you.

Brad, to return to a previous question, the foreign exchange benefit.

Do you have the impact on revenues or gross margins on [INAUDIBLE] on 4 X for the quarter.

It was $15 million on sales, and the gross margins, you know, probably roughly half that was the impact that we saw there.

That was just some.

And then we've got some operating expenses that we took a hit on also.

I would caution you, Tim, that $15 million is if you do a straight translation and say, what if nothing else changed.

But in fact, there are other market forces that we react to regarding competitors that could cause us to change in certain periods, our end price to the consumer, which is to remain competitive, which would reduce the effect of those foreign exchange conversions.

So it's a mathematical calculation.

I don't think it has much value as an economical calculation.

Okay, and what were you saying, Brad?

It equates to about $7.5 million, just on the straight mathematical calculation?

Not quite that high.

It probably was -- and that was just the cost of [INAUDIBLE], and then you've also got some operating expenses on SG&A.

You know, I probably would probably net down in kind of that -- oh, I don't know, maybe $4 million economic in the bottom line.

Okay, okay.

And again, and we may need to return to a previous question on margins, can you give quantification on how much closeout [INAUDIBLE] for sales totals, and -- or another way to ask it maybe, how much of the close-outs percentage-wise were related to Callaway, and how much to Top Flite?

It was all Callaway, Tim.

And it was more than we did last year, which impacted margins, because, you know, with closeouts, the timing varies year to year.

It's just depends on what we have, what makes sense to put out in the marketplace, what our retailers want.

Sometimes they want close-out products.

And it's just part of our, you know, strategy to manage our overall inventory.

Okay.

It had an impact.

I'm not telling you it was the entire impact, but it did have an impact.

The gross margin decline, any percentage of that?

No, I wouldn't -- I mean, that's just too much detail.

We wouldn't share that with you, Tim.

Okay.

Nike.

Any sales in the first quarter?

And then, Ron, do you see that realistically expanding this year or next year into more than range balls?

Well, there were modest sales in the first quarter, Tim, and if we do a good job, I think we will be able to bid against their other suppliers for the rest of their business.

Would that be potential '04 or more of an '05 probability?

Well, that would be up to them.

I would hope that -- well, I know we're going to do a good job, so I would hope that they'd come back looking for us bid some products quickly.

Okay, okay.

Also, if I could ask, just refresh us, Brad or Ron, on raw materials, and then, any delivery issues, any issues of you being able or not able, to make delivery on any products during the quarter?

Are you seeing any issues looking in the second quarter related to raw materials, prices, or looking, as far as [INAUDIBLE] ability to make delivery for different products?

Tim, I'll take the first one, I think you're asking in inventory, do we have a breakdown between whip and finished business, is that what you're asking?

Well, yeah.

If you want to give that, but more specifically, Brad, actual, you know, steel, resins, titanium, those types of prices.

Are you seeing any negative impact to your margins currently, or is that anticipated in your guidance going forward?

Tim, what we do is work with our major suppliers on looking at annual requirements, and we bid those out, and so we negotiate the prices.

And any effect of raw material increases would be included in our guidance as we have given them to you.

And to answer the other part of your question, we were constrained somewhat with ERC Fusion Drivers in the first quarter and Hogan Hybrid irons and HX Tour golf balls.

And we're starting to catch up to the demand side on all of those.

Okay.

Was that more on your initial deliveries or reorders, Rod?

Well, most everything at this point in time is initial delivery.

Okay.

And then Brad, the breakdown of inventory?

Yeah, of the total, the [INAUDIBLE] reserve, we had $75 million in raw, $8 million in whip, and $108 million in finished.

Great, okay.

Thank you.

Thank you.

Your next question comes from line of John [INAUDIBLE] with Oppenheimer.

Yes, gentlemen.

Can you talk a little about your brief comment about the terms with some of your customers versus the competition causing that to stretch?

What's that about?

That was associated with some prebook orders that we took in the Fall for first quarter deliveries to secure for ourselves the appropriate amount of shelf space for our entire extended product line.

It's a one-time sell-in, set of terms that will not be repeated as we go throughout the year.

[INAUDIBLE] just kind of to get shelf space, in other words, under a normal retail circumstance?

That's right.

Okay.

And could you talk about the selling expenses in the quarter?

They seemed quite high, of course, but including comp sway.

What should we be expecting for -- as the quarters go forward?

Well, a lot of the increase, as I pointed out, was Top Flite.

On the Callaway side of the business, we were up about $8 million overall.

Part of that was an increase investment in tour expense to regain our presence on the PJ2 [PHONETIC] while on the tours around the world.

And we had some additional higher expenses just in kind of stuff that adds up, things like DNO insurance premiums, accounting fees.

Sarbanes-Oxley is not coming cheap to any company these days, so all that other stuff kind of added up to the $8 million for the Callaway branded products.

Should we be anticipating around that 20% kind of level throughout the year?

Well, I think it will vary depending on the sales by quarter.

It's not all variables.

There are business levels that are 60 cents with employee head count.

But, I mean, this is in the range that it will probably be.

And you mentioned in your opening comments that typically, you have higher sales of the clubs in the first quarter, and then ball sales as the year follows on.

And yet, your results for the quarter are kind of the flip flop reverse of that.

Why would have the iron sales been lower versus last year if this is the quarter where we should have seen them be higher?

Well, the iron sales are lower because we introduced only one product, the Big Bertha 04 Iron, versus last year's two products, which are very strong -- the X-15 and the [INAUDIBLE] World Series.

So year over year, we're not really comparing an applicable product introduction, but on the ball side, you know, I think the good news there is we saw increases in both the Callaway Golf golf ball business and the Top Flite business.

And while we would expect that the first quarter is lower in seasonality as a percentage of business than the club business is, I'm encouraged by the amount of golf ball business we actually were able to ship in the fourth quarter.

I think -- if I saw those golf balls correctly, you said 100% increase in the Callaway side of it, so it would have been going from $14 million to $28 million, is that correct then?

And then Top Flite would have been $44?

That's right.

How does that compare Top Flite then year over year?

Top Flite I think in the total business is up about 15%, and we're a little queasy about giving out more detail than that, because we weren't in control of the numbers.

So we're looking at a lot of proforma numbers before we own the business.

Sure.

Great.

Thanks, guys.

Thank you.

Your next question comes from the line of Michael Fox with JP Morgan.

Hi, I still have a few questions.

Given the reason that you talked about the irons, do you expect a decline for the year in irons?

And then second question is, I assume that the Hogan Hybrid irons would have come out without acquisition, given the R&D that has to go into it, just confirming that.

And then I was wondering if you could talk about your -- the tour expense at Top Flite, how it compares to the amount of tour expense at Callaway.

Thanks.

Well, in regards to guidance on product line, we don't provide that, Michael, so I'm not about to play that card for the competition.

Relative to tour expense, for Top Flite, as a percentage of their revenues it's a significant cost, but as relative to total Callaway's expense, it's lower.

I don't have the details of that.

And quite frankly, I'll be honest with you, that tour expense is now co-mangled, because we have Top Flite and Hogan players that are now playing Callaway drivers.

And so some of the split between businesses is a bit arbitrary and allocated.

Okay.

And I forgot what your other question was.

It was just about the Hogan Hybrid iron.

That would have come out without the merger, right?

I presume they would have brough it, but it definitely would have been processed before we bought the company.

Okay, thanks a lot.

Once again, I would like to remind everyone, if you would like to ask a question, please press star then the number one on your telephone keypad.

You have a follow-up from the line of Alexander Paris with Barrington Research.

I'm sorry, I just finally saw your statement, your quarterly report come out.

The -- going into this year, of the $60 million charge related to the merger, there was another $35 million, I think you were talking about for 2004, and now you talked about the first quarter $3 million integration.

I'm sorry, is that $3 million part of that $35 million?

35 is the full year, Alexander.

Yes, for the full year 2004.

It is, and that's pretax.

Right.

Okay, so we really experienced $5 million pretax in the first quarter of '04 of that 35.

Okay so it's 5 of the 35?

That is correct.

And is that 35 -- I guess that's not an estimate, that's what your [INAUDIBLE] said the charge would be when you first made the acquisition?

Well, no -- it's an est -- is an estimate, because accounting rules now, it's always an estimate.

But you expense it as you incur it.

But that's our best guess at this time what the charges will be throughout the year of 2004.

You said the -- just one other question.

In the first quarter, you had -- I think it was a $1 million operating income for the Callaway balls?

Yes.

Did you say what the corresponding year ago quarter was in terms of the loss?

A loss of $5 million.

5 million.

So you have picked up $4 million there.

You're kicking out these nonrecurring change if earnings were about this unchanged for the year.

64 cents versus 63, or 64, right?

Yeah, that was pretty flat for the quarter.

Well, actually, earnings were up, and the earnings per share were flat because of the increase in the number of shares.

Okay.

Net income was up a bit.

Right.

Right.

So that the -- cost savings from going from red ink to black ink in the ball business was offset somewhere else then aside from the charges?

Yes.

We're making investments in tour and in other marketing costs to attempt to regain our market share in Woods.

And we're happy with the increase in quarter over quarter sales of Woods.

All right.

Thank you.

Thank you.

You have a follow up from the line of Tim Conger with AG Edwards..

Thank you.

Brad, where do you stand on that 53 million in your letter of credit or line of credit now?

Where does that stand now, and do you expect to be down at the end of the second quarter or paid off?

First question.

Send question is, would you anticipate Top Flite showing a year over year sales growth in ' 05?

And then on a working capital perspective, looking at fourth quarter working capital, would you anticipate seeing as a percentage of the sales progress in receivables inventories and so forth looking at year end versus year end of '03?

In terms of the line of credit, Tim, we think right now we're at about $70 million on our line of credit, and we believe we will have that paid off by the end of the second quarter, or pretty close if we don't have it paid off.

Not prepared to talk about '05 guidance at all for Top Flite.

I mean, we're still digesting them in '04 here, and we've got a lot of work to do, and I think that's a little premature.

You know, with regards to working capital, I think that, you know, we're trying to do what we can to work with Top Flite and how they manage inventories and receivables.

And certainly we would expect to see our DSOs improve.

To Ron's point, you know, the program we put in place for early in the year was a one-time program.

And we should start seeing the DSO's drop as that program rolls off.

Okay.

How are you going -- I know last Fall, Top Flite was a little heavy, with them trying to survive.

But how is clearing the channel going?

Is that -- we're hearing maybe a bit more than expected on the Top Flite side?

Are you talking about inventory and retail for Top Flite?

Yes.

And you're saying that it was heavy last year?

Yes.

I guess I'm not aware of inventory being any higher than where we would want it to be.

Ron, I don't know if you have any comments on it.

But I think we're in pretty good shape in retail last time I talked to the floor folks at Top Flite.

Well Tim, I think if the inventory and retail were heavy, the retailers wouldn't have been buying considerably more than they bought a year ago.

But sales -- our sales to them are up 15% on Top Flite.

So if they are concerned about inventory, they've just bought some more of it.

Okay, okay.

Point taken.

Final question here, there have been some significant changes over at Tailor Made, down the street there from you.

And we're hearing that maybe dictated by their parent, that they're -- they could have had a change of heart in how they focus, and may be going through things that Callaway went through back in '98, switching more to an MP, IP plan to help their margins, the retailers and in turn, the industry Can you make a comment on -- or that off base from kind or what we're hearing?

Tim, we don't reply to rumors about Callaway. [INAUDIBLE] We're not going to reply to rumors about Tailor Made.

I'm sure you hear things in the industry, so I just wanted to ask your perspective on it.

I don't have one.

Okay.

This concludes the Q&A session.

Are there any closing remarks, sir?

Thank you, everyone, for joining us today.

We're delighted that you continue to have the interest in our company.

We're excited about the results we've delivered for the first quarter and our guidance for the full year, and we look forward to talking to you at the end of the next quarter.

Thank you.

This concludes today's conference.

You may now disconnect.