Topgolf Callaway Brands Corp (MODG) 2004 Q2 法說會逐字稿

Good afternoon, my name is Erica and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Callaway Golf Second Quarter 2004 Financial Results Conference Calls. [OPERATOR INSTRUCTIONS].

Mr. Holiday you may begin your conference.

Thank you and welcome everyone to Callaway Golf's company's second quarter 2004 earnings conference call.

I am Brad Holiday, Chief Financial Officer of Callaway Golf's company.

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

During today's conference call I will provide an overview of our financial results and Ron will provide his thoughts on these results, plans going forward and an update on the forecast for the year.

We will then open the call for questions.

Before we begin, I would like to point out that any comments made about future performance, events or circumstances including estimates of sales, capital expenditures, cash flows, debt and earnings per share information for 2004, the estimated amount and timing of charges and benefits to be realized from the integration of the Callaway Golf and Top Flite operations, the implementation and benefits of sales programs and other future business initiatives and the elimination of losses from and profitability of the Callaway Golf brand ball business are forward-looking statements subject to Safe Harbor protection under the Federal Securities Laws.

Such statements reflect our best judgment today based on current market trends and conditions 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 10-Q filed with the SEC, as well as the company's other reports subsequently filed with the SEC from time to time.

In addition, in order to provide interested parties with additional insight into the company's estimated financial results, including consolidated sales, gross margins and earnings per share in 2004, we provided in today's press release additional information estimating these and other measures for the Callaway Golf business and the Top Flite business excluding integration charges on a stand alone basis and on a combined basis.

This information may include non-GAAP financial measures within the meaning of Regulation G.

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

The press release is available on the Investor Relations section of the company's Web site at www.callawaygolf.com.

Finally, unless we specifically state otherwise, any reference by us to Callaway Golf includes both Callaway Golf and Odyssey, and any reference to Top Flite includes both Top Flite and Ben Hogan.

With that I will turn the call over to Ron.

Good afternoon and thank you for joining us today.

We addressed you slightly more than one month ago with reduced financial expectations and discussed changes that we are implementing in our business strategy.

Today I would like to update you on the quarter and discuss some of the initiatives that we have put in place to position Callaway Golf to achieve its key objectives of regaining our wood market share, successfully integrating Top Flite and eliminating the losses and sustaining profitability in our Callaway Golf ball business.

The industry remains very competitive and while we don't have all the answers today I will share with you what we have accomplished since the June 15th conference call.

First, touching on the financial results for the second quarter on a consolidated basis, which includes results for both Callaway Golf and Top Flite as well as integration charges, sales for the quarter were $298 million, an increase of 23%, compared to last year with net earnings of $14 million compared to $34 million.

Fully diluted earnings per share were 20 cents versus 52 cents last year on a share basis of 68.4 million shares compared to 66.1 million a year ago.

On a pro forma basis excluding integration charges of approximately $7 million, net income for the quarter was $20 million compared to $34 million last year.

Pro forma fully diluted earnings per share were 30 cents compared to 52 cents last year with a guidance range we provided in mid-June of 19 to 23 cents.

The primary reason that we exceeded the guidance from our last conference call stemmed from the delay in time of expenses associated with the initiatives that we have outlined which will now shift into the third quarter.

While we are disappointed with our financial results year-to-date, there were some bright spots I would like to cover.

First, our Callaway Golf ball business has nearly doubled its sales to $56 million, improved its operating income by $16 million from a loss of $10 million last year to a profit of $6 million this year and nearly doubled its revenue market share to 10%.

Second, the integration with Top Flite is progressing well.

At this time one year ago, we had just announced the acquisition of Top Flite subject to approval of the bankruptcy court.

As you know, we completed the acquisition of the United States assets in September and the international assets in October.

We have physically consolidated all operations in Australia and Canada and will complete Europe this year.

We have shifted much of our ball manufacturing to Top Flite and have restructured both the Top Flite and the Callaway Golf ball operations, which will result in more efficient operations and lower operating costs.

The international and domestic actions should generate annual savings of nearly $9 million in 2005 and we are already seeing the positive impact of manufacturing efficiencies on the Callaway Golf ball business.

As we mentioned in our last update we discovered that there was more Top Flite Golf ball inventory pushed into the channel prior to our acquiring the company than we had thought.

This is a root cause for the increased loss projected at Top Flite this year.

The management team at Top Flite is working through these issues and has made progress since we spoke in June.

Our goal is to have retail inventory levels under control in advance of next year's golf season.

Next steps include the integration of information systems to a common platform and expect to have this phase substantially completed next year.

While there is still a lot to be done, we should not overlook the positive impact this acquisition has already had on our results.

With $12 million of the $16 million improvement in operating income for the Callaway Golf ball business attributed to cost savings achieved through this acquisition.

Third, in June we announced the acquisition of FrogTrader, our Internet partner that has been handling the Callaway Golf pre-owned program, which has been a critical part of our trade-in, trade-up program developed in partnership with our retail customers.

The net price for this acquisition was $9 million and will offer us opportunities to supplement existing relationships with Golf consumers.

We are excited about the platform that this acquisition will provide us in the future.

Later in this call, I will share with you some of the things we are already doing to drive our woods business.

But now I will turn the call over to Brad to review our financial results for the quarter and 6 month period.

Thank you, Ron.

First, I will review the quarter and then the 6-month period.

Since Ron has already covered the high level financials for the quarter, I will begin my comments on the net sales line.

Of the $298 million reported Top Flite contributed $70 million during the quarter, FrogTrader added $2 million and Callaway Golf accounted for the balance of $225 million.

Looking at product segments for Callaway Golf branded products only, overall wood sales were $74 million compared to $77 million last year and represented 33% of total Callaway Golf branded sales.

Sales of Irons and wedges were $71 million and represented 32% of total sales and declined 18% when compared to last year.

The successful introduction of our Big Bertha 04 Irons have not offset the declines we have seen in our X-16 models, which are in their second year as well as the Big Bertha 02 Irons, which were still in the line last year.

Putter sales were $28 million or 12% of total sales and were down compared to $46 million last year.

While the Odyssey 2 ball line continues to lead the market for the third year, it is down compared to last year.

Golf ball sales were $29 million, an increase of 81% versus the $16 million reported last year driven by the success of the HX Tour and the positive effect it is having on the entire line of products.

Turning to our regional breakout, our consolidated international operations have sales of $127 million, an increase of 28% and represented 42% of total sales.

Of this amount, Top Flite represented $27 million with a balance of $100 million coming from the Callaway branded products.

Sales trends for our larger regions were as follows: US sales of $171 million increased 20% or $28 million compared to last year.

Top Flite was $43 million of this increase with Callaway branded sales down $15 million compared to last year.

Europe sales increased 32% or $14 million to $58 million, Top Flite with $13 million of this increase.

Japan sales declined 22% to $17 million.

Top Flite sales were less than $200,000 of this total.

Canada sales increased 92% to $24 million with Top Flite accounting for most of the increase.

The rest of Asia, including Korea had net sales of $17 million, an increase of 11% compared to last year.

There were no Top Flite sales in this total.

Licensing revenue was approximately $1 million, compared to $400,000 last year.

Second quarter gross profits excluding integration charges increased 6% to a $143 million when compared to 2003.

Top Flite represented $23 million of this total with Callaway Golf business contributing $110 million down from $126 million last year.

Gross margins as a percent of sales were 45% this year, compared to 52% last year.

This lower margin percent reflects lower margins in the Top Flite business as well as 400 basis points drop in Callaway Golf to 48% to 52% last year due to lower selling prices and unfavorable shift in product mix.

Operating expenses for the quarter excluding integration charges were $99 million, an increase of $25 million of which $24 million was due to the addition of Top Flite.

Operating income for the quarter was $35 million, once again excluding integration charges, versus $52 million last year.

Top Flite was about break even with the balance coming from Callaway Golf.

For the six-month period on a consolidated basis, which includes results for both Callaway Golf and Top Flite as well as integration charges, sales totaled $662 million, an increase of 29% compared to last year with net earnings of $54 million compared to $77 million.

Fully diluted earnings per share were 79 cents versus $1.16 last year on a share base of 68.4 million compared to 66 million last year.

On a pro forma basis excluding integration charges of approximately $10 million, net income was $64 million, compared to $77 million last year.

Pro forma fully diluted earnings per share were 94 cents compared to $1.16 last year.

I would refer you to the supplemental schedule attached to our press release issued earlier today that gives a more detailed breakout of these financial results.

On a year to date basis for Callaway branded products that made up $525 million of the $662 million just mentioned, overall wood sales were $197 million, represented 38% of total Callaway branded sales and increased 16% compared to last year.

Sales of irons and wedges were $155 million and represented 29% of total sales, putter sales were $63 million, down compared to $91 million last year and were 12% of total sales.

Golf ball sales were $56 million, up 91% compared to last year, and were 11% of total sales.

Turning to our regional breakout, our consolidated international operations had year-to-date sales of $273 million, an increase of 23% and represented 41% of total sales.

Of this amount, Top Flite represented $49 million with the balance of $224 million coming from the Callaway Golf brand products.

Sales trends for our larger regions were as follows: US sales of $389 million increased 33% or $96 million compared to last year.

Top Flite was $88 million of this increase.

Europe increased 33% or $31 million to $125 million.

Top Flite was $23 million of this increase.

Japan net sales declined 11% to $48 million, Top Flite sales were less than $200,000.

Canada net sales increased 78% to $44 million, Top Flite was $18 million of this increase.

Rest of Asia, including Korea had net sales of $33 million, a decease of 1% compared to last year.

There were no Top Flite sales in this total.

Licensing revenue was approximately $2 million, compared to $1 million last year.

Year-to-date gross profits excluding integration charges increased 15% to $303 million compared to last year.

Top Flite was $47 million of this total with Callaway Golf business contributing $256 million, a 3% decline when compared to last year.

Gross margins as a percent of sales were 46% compared to 51% in 2003.

Top Flite margins were 34% and Callaway Golf brand margins declined 200 basis points from 51% to 49% again due to lower selling prices and unfavorable product mix offset slightly by proved golf ball margins.

Operating expenses year to date excluding integration charges were $200 million, an increase of $56 million, of which the addition of Top Flite represents $47 million.

The balance of the increase, or $9 million, is primarily due to increased tour expense in the Callaway Golf business.

Year-to-date operating income excluding integration charges, was $104 million, of which Top Flite was once again about break even.

Callaway Golf operating income of $104 million was down compared to $121 million last year.

The integration of Top Flite is proceeding at or ahead of plan with pre-tax charges year-to-date of approximately $16 million.

As you may recall, our original estimates of total interest interrogation charges with $60 million with $25 million impacting 2003 results and an estimated $35 million for 2004.

Our current estimate has these charges totaling between $55 and $60 million with approximately $25 to $30 million impacting 2004 with a balance of approximately $5 million impacting 2005 results.

Moving to the balance sheet, we finished the quarter with cash of $36 million and an outstanding balance on our line of credit of $20 million.

We had targeted to have the line paid off by the end of the quarter.

However, the acquisition of FrogTrader and $6 million of share repurchases delayed us in achieving this target.

As of today, we have paid this credit line off and have no outstanding balance.

Our net working capital at quarter end was $328 million and we have no long-term debt.

Receivables were $261 million, an increase of $65 million, of which $56 million is due to the addition of Top Flite.

DSOs for the Callaway Golf business were 85 days compared to 77 days last years while Top Flite DSOs equaled 71 days.

The increase in the Callaway Golf DSOs is due to the more aggressive terms we have offered in response to market conditions.

Collections on AR remain strong and the overall quality of our AR is good.

Capex for the quarter was $5 million, bringing the total for the year up to $8 million.

We estimated Capex to come in at approximately $25 million for the year, with depreciation and amortization of approximately $45 to $50 million.

During the quarter, we purchased 353,000 shares for approximately $6 million and have $8 million remaining on our May 2002 authorization of $50 million.

I would now like to the call back to Ron.

When we came to you in June, we commented on a number of challenges that we were facing, specifically price competition in the middle wood segment and a faster than anticipated shift to larger head sizes in the driver segment.

We also told you that the senior management team was committed to rebuilding its market share and identifying initiatives to help us achieve the goals that we have set for the company.

I am certain that you all want to know how we intend to turn our business around and reestablish growth in our core business going forward.

I don't have all the answers today, but we'll share with you some of the actions we are taking now.

I caution you that there is no short-term fix and that it will take sometime for these initiatives to gain traction and for us to gauge their relative success.

Other actions will come at the appropriate times.

I would caution you that the golf equipment industry remains very competitive.

Our team is focused and working hard developing plans to achieve our goals.

First, as I said on our last call, we will no longer sit by idly and let our market shares continue to decline.

We are taking immediate and aggressive actions.

To that end, this week we announced price reductions on our wood products.

We are reducing our pricing on all drivers to a price point that should stimulate more consumer interest and, hopefully, purchases.

We have reduced ERC fusion, wholesale prices that should impact retail prices by about $100.

We are able to aggressively re-price this product because of cost reductions achieved as we move up the manufacturing learning curve.

Our Great Big Bertha II 415 CC driver should also drop at retail by about $100 and our Big Bertha driver should drop by about $50.

In addition, we are currently driving a promotion of a free dozen golf ball with the purchase of any of our titanium drivers.

And finally for those loyal customers who bought ERC fusion driver at the original price, we will give them two dozen HX Tour golf balls free to compensate them for this drop in price.

On average these price adjustments amount to a 24% reduction in our woods wholesale selling prices all of which is was factored into the revised earnings guidance we provided in June.

We also launched new print advertising focused on our fusion technology this week and have more advertising programs including co-op advertising plans going forward.

We expect these pricing actions, promotions and new advertising will generate some additional excitement at retail and build some momentum around our wood products.

However, it will take some time before we get a read on the success of these programs.

Second, to ensure that we deliver the right products more timely we took action last week to restructure our research and development organization in order to become more nimble to market working in concert with our supply partners.

With this change we announced the elimination of 42 positions resulting in annual savings of approximately $3 million.

We have begun working with our suppliers and are able to push much of the development work downstream into our supplier's organizations where they have both the capabilities and resources to perform this function.

We will invest in the research side of the equation here in Carlsbad and have quality assurance personnel in their plants to assure quality control on our products.

We will continue to invest as in prior years towards designing and developing break through products and technologies.

Furthermore, we realigned our research and development organization with our product management organization.

They will now be one central person responsible for coordinating consumer research, product development and introductions and marketing for each product we develop.

We are doing this to better align our new product development with when the market and our consumers want so we can more readily identify and capitalize on shifting trends in the marketplace and avoid the product missteps that beset us this year.

Third, to further these efforts last month we announced a planned partnership with a new advertising agency, Young and Rubicon.

We are excited by their energy, ideas and creativity and many work with them to help us improve our branding, marketing initiatives and product introduction strategies.

Our first execution of this work hit the trade magazines this week.

Fourth, in addition to streamlining Top Flite operations we are focused on rebuilding the Top Flite brand and extending the success of the Ben Hogan brand.

The management of Top Flite has been working hard to reposition the brand and recapture the former equity with a more price conscious consumer, a segment of the market that is complementary to the Callaway Golf brand.

Keep in mind we acquired Top Flite in October 2003, so 2005 is really the first year the new management team can exert full control over product introduction, retail program and marketing strategy.

Lastly, Japan, the second largest golf market in the world, has been a disappointment for us this year with our own business down nearly 20% in local currency.

What we are seeing is that despite the beginning of a turn around in the Japanese economy the golf industry has actually experienced decline rather than growth this year of between 10% to 15%.

We are evaluating our business model, product development programs and our cost structure associated with Japan to ascertain the best way to compete in this market and still generate reasonable profit.

I will also keep you posted on our progress here.

We are examining other areas of our business for potential opportunities to improve productivity and efficiency.

We will share these with you when we can.

There is a lot to do but we are focused on working hard to make the necessary changes to become a stronger company and evolve the marketplace.

Our full year outlook has not changed from what we provided in mid June.

It is our best estimate at this time but could change depending on the impact of the programs we are just beginning to initiate.

Let me remind you what we said in our last call.

Net sales should be in the range of $975 to $990 million with a fully diluted earnings per share range of 15 cents to 25 cents, including estimated integration charges of approximately 25 cents per share.

This annual guidance includes expected losses at Top Flite of between 10 cents and 14 cents per share.

While we exceeded our earnings estimate for the quarter I would caution you not to think the positive results are additive to our guidance from last month, rather they represent a shift and the timing of expenses that were already included in our full year guidance.

We expect a third quarter to generate sales of $150 to $160 million with a loss per share and a range of 37 cents to 42 cents excluding integration charges.

I would refer you to the attachment to our press release entitled "Supplemental 2004 Forecast Information".

Let me conclude by comments that our key objectives have not changed.

They are to regain our wood market share, successfully integrate Top Flite and eliminate the losses and sustained profitability in our Callaway Golf ball business.

Furthermore even as we face the challenges this year our business remains on strong financial footing.

For '04 we expect to generate operating cash flow of $55 to $60 million and end the year with no debt, even after spending $9 million to purchase FrogTrader and $6 million to repurchase stock.

Our clean balance sheet and strong cash flow generation gives us the flexibility to make strategic acquisitions such as Top Flite and FrogTrader, as well as repurchase shares of our stock.

We will continue to evaluate the best use of our cash flow so that we can generate long term returns to our share holders.

This concludes our prepared remarks.

We will now open the call for questions.

[OPERATOR INSTRUCTIONS].

Your first question comes from the line of Ed Aaron with RBC Capital Market.

Thanks good afternoon just a couple of questions for you.

First I was just wondering if you would comment a little bit on the retail market environment since your last conference call.

Have you seen any changes between then and now especially in the woods category?

No, we haven't.

It seems to have stabilized at the movement down to the lower price points that we talked about a month ago.

OK.

And then maybe comment a little bit on the fusion, I know that seemed to be a brighter spot for your wood business, on your last conference call that was performing in line with expectations.

Has that changed at all?

It has not changed.

And we had set the expectations relatively low in terms of the total quantity of the drivers that we expected to sell.

The actions we just announced that we are taking is intended to draw a broader audience into this technology and get it cemented in the industry.

And then lastly, I was wondering if you could just break down maybe what you expect your total golf ball loss is for the year, if you combine your overall operations to the total segments?

We're not really providing segment information for the total year forecast

Hey Ed, this is Brad.

I would tell you though that we expect to generate a profit on the Callaway Golf ball business side and as you know overall with Top Flite we still expect to have a loss of 10 cents to 14 cents, so we would expect to see a loss on the Top Flite side of the business.

OK.

Thank you very much.

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

Thank you, a couple of questions.

Brad just doing the math here on net basis, the expenses delayed from the second to third quarter or back half of the year are approximately 6 million on a net basis, is that fair?

On a net basis?

Yes.

All did I was -- you reported 30 in the mid point of your 20 to 22 guidance, so I took the 9 cents multiplied by the 68.

I think that's close, Tim.

OK.

And then FrogTrader, how much on the increase and receivables inventories was related to this?

Almost zero on receivables.

They do mostly credit card types of transactions and inventory was very minimal.

I don't know if I have that at my finger tips here but it was pretty minimal.

OK.

Any impact from FX-in the quarter, revenues, operating margin on a net basis?

I can tell you that the total FX impact from a revenue perspective was -- you want it for the quarter?

Yes, please.

On a sales perspective it was $9.7 million.

Positive impact.

OK.

Yes.

And then on an operating, on a net income basis?

You know, that's so hard, that almost becomes theoretical when you do-

OK.

It's really difficult, you have to make so many assumptions so we're just going to give you the sales.

OK.

OK.

And then a couple other questions here.

The integration charge remaining for the year, how do you see that being split between third and fourth quarter or just approximately?

You know, I would just at this point in time just give you the second half and just know that right now I guess it would probably be half and half, the best guess I have at this point in time.

OK.

And given you did some repurchase in the second quarter it looks about $17 a share roughly, could we expect you now with your debt down to zero and Ron, your comments could we expect you to be in the market now and post the earnings release here and through the balance of the year?

I think we will probably be waiting a little bit to watch what happens with the programs we have just introduced and get some comfort that in fact we're going to be able to deliver the cash flow that we expect to deliver and once we see that happen then we'll have this conversation with our board.

OK.

Final question, finished good inventories and your inventory reserve I guess finished goods on a gross basis, I mean your inventory reserve, Brad for the second quarter where do those stand?

Finished goods was $92 million and reserve about $14 million.

Great.

Thank you.

You are welcome.

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

The 9 million for FrogTrader, I mean since these guys were basically business partners of yours, how come the deal had to be for cash?

Why wouldn't they have taken stock for that deal?

Hello?

Yes, Casey, well, they had outside investors that were interested in getting a cash receipt.

OK.

You know, seeing as how you're turning to bat on the hatches down on the cost side of business, do you have any different thoughts about how you might approach or not approach at all the PGA merchandise show next year?

We plan on attending the show.

OK.

Your third quarter revenue estimate is almost like a pre-Top Flite level.

Is this basically just going to be sort of our inventory of retail flushing period?

I mean is that what we're looking at here?

That's what we're expecting and you know with the programs we just announced and cutting the wholesale prices there was some inventory leveling that needed to happen.

OK.

How do you -- do you have any feel for how you see the putter business working out the balance of the year?

I mean the drop in the putter business has been maybe more than any of us might have expected.

Is this a trend or just a one quarter effect?

Well, that's hard to say, Casey.

I would tell you this, we would expect to bring new products either late '04 or early 2005 to reinvigorate our putter share.

If the Callaway Golf ball business were to still standalone, as if Top Flite would never have happened, based upon the amount of business that you're doing, what kind of results would it be having now, you know, if Top Flite had never happened?

We would be losing in excess of $5 million.

OK.

Versus what about 26 before?

No, I think it was about $10 million for the six months, yes, about 26 on an annual basis.

But of the $16 million improvement for the first six months we attributed $12 million to cost savings of Top Flite.

OK.

Alright, thank you.

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

Good afternoon.

I was wondering if you could break out the annual revenues and earnings impact of FrogTrader if you have?

I was also wondering, on your last conference call you talked about you didn't think it was a good idea to have a premium price, you talked about the Infiniti Top-Flite ball.

I was wondering why you guys re-branded Strata as the Top-Flite Strata and what impact that had on that business.

I know it's pretty small.

And then also I was wondering if there's going to be any new products that are coming out before the winner to get into this golf season.

Thanks a lot.

OK Michael, FrogTrader on an annual basis is doing about $20 million in revenue and about $2 million pretax earnings.

The re-branding of the Top-Flite Strata ball and getting the signage of Top-Flite on the players and as the predominant brand name I think has been received positively.

It's going to take a little bit of time to ensure that people understand that Top Flite is back on tour and it is a good, staple brand in golf, and our view some of that money was wasted in past years on Strata.

I think Strata by itself is doing well as a Top-Flite model rather than as a brand by itself.

And with Infiniti we are still challenged to figure out how to move that product in the marketplace and that's somewhat -- in fact the majority of our issue with Top-Flite under performing to expectations this year is that the Infiniti ball did not sell at the premium price point and we are being forced to do something to move it.

And then regarding new products, you can expect that we will introduce new products sometime late in this year.

OK.

Thanks a lot

In all the brands and all the ranges.

OK.

Thanks a lot

Your next question comes from the line of Steven Chin of Aerial Capital.

Good afternoon, gentlemen.

Two questions.

First one is for Brad.

What would you see as a good run rate for CAPEX as a percentage of sales going forward into '05 and second question and this one is for Ron, can you please expand briefly and give us some insight on the current Callaway strategies in the declining Japanese market.

Thanks so much.

You know, I think on the Capex instead of as a percent of sales I would tell you that probably the run rate going forward is going to be in that $20 to $25 million range.

OK.

Thank you.

Steven, regarding Japan, I would tell you that that's one of the areas where we're not prepared today to tell you what we are going to do.

We have a lot of alternatives we're studying.

Japan today delivers a nice contribution to our results.

It does not deliver the contribution it had in the past and we need to fully understand that that's a blip in the market there are or whether it's something more permanent that we need to address in a different way.

So we're not rushing to act because we have just an off year in Japan.

That's been a good performing unit of ours.

How is it done, sort of compare previously to your relationships with Sumitomo.

Was much better contribution in absolute dollars and percentage of sales than what we had a distributor.

Thank you very much

[OPERATOR INSTRUCTIONS] Your next question comes if the line of Tim Condor of AG Edwards.

Yes John, just one follow-up.

Ron, you commented that you would continue to be aggressive in regaining share and I think what you used back in June was using your margins and strong balance sheet, which you are doing here.

Could we anticipate that and just to clarify anticipate that carrying through into '05?

I think the pricing strategy that we have announced this week is permanent.

OK.

Thank you.

At this time there are no further questions.

Mr. Drapeau are there any closing remarks?

Yes.

Thank you.

Thank you everyone for joining us today on the call for your questions and for your interest in our business and we look forward to reporting on our results of the action plans we have initiated in the upcoming quarter.