Topgolf Callaway Brands Corp (MODG) 2004 Q3 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to Callaway Golf's third quarter earning conference call. [Operator Instructions]

At this time, I would like to turn the conference over to Brad Holiday, Chief Financial Officer of Callaway Golf.

Thank you, Mr. Holiday; you may begin your conference.

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

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

Joining me today is William Baker, Chairman and Chief Executive Officer of Callaway Golf Company.

During today's conference call, I will provide an overview of our financial results and will then open the call for questions.

Before we begin, I would like to point out that unless we specifically state otherwise, any reference by us to Callaway Golf includes Callaway Golf, Odyssey, and FrogTrader, and any reference to Top-Flite includes both Top-Flite and Ben Hogan.

Furthermore, any comments made about future performance, events or circumstances, including the company’s success, prospects or growth, the success of the company's products, retail inventory levels, estimated capital expenditures and depreciation and amortization and estimated integration charges are forward-looking statements, 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 part one item 2 of 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, during the call, in order to assist interested parties with period-over-period comparisons, we will provide certain pro forma information as to the company's performance excluding charges associated with the integration of the Top-Flite operations, as well as information regarding the performance of the Callaway Golf operations and the Top-Flite operations on a standalone basis.

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

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

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

Today, I would like to review the quarter and discuss where we stand relative to the near term issues that have and continue to pressure our financial results specifically consumer sell-through, retail inventory levels, the pricing environment, and the timing of new product launches.

As you may have noticed, we have added additional financial detail to our press release this quarter.

Rather than reading the numbers on the conference call, I thought it was in all our best interests to provide the numbers in our press release and reserve my comments for discussing the detail and trends underpinning the numbers.

I will refer you to the tables in the press release for sales by product category and geographic region and will focus my comments on the appropriate areas.

First, touching on the financial results for the third 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 $128 million, a decrease of 16% compared to last year.

We reported a net loss of $36 million compared to a profit of $2 million last year, and lost $0.53 per share versus a profit of $0.03 in the prior year.

On a pro forma basis, excluding integration charges of approximately $4 million, our net loss for the quarter was $32 million compared to a profit of $2 million last year.

Pro forma fully diluted earnings per share were a loss of $0.46 compared to a profit of $0.03 last year.

Of the $128 million in reported sales, Top-Flite contributed $39 million compared to 5 million last year.

Looking at sales by product segments, our wood sales were the hardest hit during the quarter, declining 67% on lower volumes and prices.

This reflects the price reductions we implemented which in addition to reducing average selling prices during the quarter, also reduced volumes because of our practice of netting down current retailer inventory by providing additional product at no charge.

Sales of irons and wedges declined 35%, also on lower volume and average selling prices.

The decline reflects the tapering off of our older X-16 and X-16 Pro Series and reduced sales on the Big Bertha 02 irons partially offset by higher sales of our Big Bertha 04 irons.

This mix shift was the primary reason for the lower selling prices due to the lower price point associated with the Big Bertha 04 irons relative to the X16s.

Putter sales were down 42% versus last year on lower sales of the Odyssey 2-Ball line driven by lower volumes and price declines on those models although we remain market leader in this category.

We recently introduced the new White Steel line of putters, and anticipate revitalizing the line with this new product offering.

While still early, initial feedback on retail sell-through for this product is encouraging.

Golf ball sales were $41 million, nearly triple last year's sales of $14 million.

Callaway branded balls sales totaled $15 million compared with $10 million reported last year driven by the success of the Hex Tour as well as increases across the entire line of products.

Top-Flite ball sales were $26 million for the quarter.

The ball segment reported an operating loss of $5 million in the quarter versus a loss of $7 million last year.

Callaway Golf balls were breakeven for the quarter compared to an operating loss of $7 million last year while Top-Flite lost $5 million.

The Top-Flite results were due to lower sales because of excess Infinity inventory in the retail channel we've spoken of before, and efforts taken to address this situation.

Turning to our regional breakout, U.S. sales declined 8%, but were down 39% excluding Top-Flite.

Our international sales were down 25% including Top-Flite results but declined 40% excluding Top-Flite.

For Callaway Golf, all regions came under pressure due to volume and pricing issues I've already covered.

Third quarter gross margins excluding integration charges declined to 24% compared to 46% in the prior year.

Volume mix and to a lesser extent average selling prices accounted for the majority of the decline.

In addition, Top-Flite reported a gross margin of 23% during the quarter compared with 25% for Callaway.

Operating expenses for the quarter excluding integration charges were $87 million, an increase of $17 million of which $15 million was due to the addition of Top-Flite.

Operating expenses on an absolute basis were up slightly at Callaway, on higher G&A due to legal expenses associated with the recent successful completion of our Dunlop litigation.

Operating loss for the quarter was $56 million once again excluding integration charges versus $340,000 of income last year.

The integration of Top-Flite is proceeding at or ahead of plan with pretax charges year-to-date of approximately $23 million.

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

Our current estimate has these charges totaling between $60 and $65 million with approximately $30 million impacting 2004 with the balance of approximately $5 million to $10 million impacting 2005 results.

To recap our integration progress to date, we have consolidated operations in Canada, Australia and Europe, reduced head count and moved the majority of our ball manufacturing to the Chicopee manufacturing facility.

Moving to the balance sheet, we finished the quarter with no outstanding debt and cash of $68 million down $5 million compared to last year.

The lower cash balance is due to the acquisition of FrogTrader and our lower third quarter results.

Receivables were $115 million, a decrease of $21 million compared to last year.

DSOs for Callaway Golf business were 96 days compared to 71 days last year while Top-Flite DSOs equaled 63 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.

Inventories totaled a $161 million, an increase of $20 million.

Top-Flite added $18 million to the total with Callaway inventory flat year-over-year.

CapEx for the quarter was $8 million bringing the total for the year to $16 million.

We estimate CapEx to come in at approximately $25 million for the year with depreciation and amortization of approximately $50 million.

We issued a press release slightly more than one month ago where we suspended guidance due to the recent change in our CEO and to give Mr. Baker a chance to review the business and develop his thoughts on actions required to address short term business needs and plans to drive long term growth for the company.

One of the first actions the company has taken which contributed to the decision to suspend guidance was to delay the introduction of some new products that had been scheduled for release during the fourth quarter.

No decision has been made at this time regarding the status of providing guidance in the future.

I would now like to open the call for questions.

[Operator Instructions]

Your first question comes from Carole Buyers of RBC Capital Markets.

Two key questions, one, I was wondering if you can shed a little light on the international market which seems to be down significantly more than the U.S., and then what consists of other foreign countries?

I notice that business was up.

And then I was wondering, Brad, can you clarify the rollout of your product you mentioned that you were going to delay some of the products introductions but yet the fourth quarter you said you are going to have four new product introductions.

Can you just clarify that as well?

Yes.

First of all, I think Carole, if you take a look at the other portion of international that includes Canada.

That's why it's bigger than in the past.

We just lump it in to other.

Okay.

With regards to the international business, I mean it's down basically for the same reasons as I mentioned before, which is you know the product, the declines in pricing as well as the compensation programs.

So really not anything different internationally than it is from the U.S.

Has Japan heated in competition much more so than everywhere else just because of their demand for product introductions?

I'm sorry.

What was the first part of your question Carole?

Well is Japan's weakness - is it related more to the lack of product introductions in Japan because that seems to --?

Well, certainly that has an impact on it.

Japan as a market, though, despite the fact that the economy has started to recover, the golf industry or market in Japan has actually weakened this year.

The last time I saw it was down 10 to 15% so the whole market over there has been off in that particular country.

So certainly not having the right product as well as just a weak market has contributed to Japan.

With regards to the new products, we have delayed some new products into '05.

The products that we have brought for the fourth quarter are the new Callaway Hybrid clubs as well as the White Steel.

The White Steel Putter from Odyssey, as well as the ERC Fusion irons.

In all cases, we felt that the market was ready to accept new products like that.

In the case of the putters and the hybrid products, those are the kinds of products that do well at Christmas time and would do well, we thought would do well in the marketplace.

And then you have basically cut prices about 20% since May is what we estimate.

Yes, about 20% since May.

And there has been some competitive response.

Can you talk about more current trends; you know we only have data through August.

Has anything improved in September?

Are you starting to see the program gain traction?

Well, you know the feedback that we're getting from the marketplace right now is that the inventory has picked up and that in many cases, inventory at our retailers has actually improved to the point where they feel good about inventory, so I think we've made a lot of progress with the action that we took in reducing pricing.

So I think we feel pretty good at this point in time that by the end of the year that inventory will be in much better shape than it was as we entered into the fall.

Is there any way you can quantify inventory at the retail level?

You know the best we have Carole is Datatech and as you know it's on a month lag so the best data we have right now is August.

We hear anecdotal information from our sales force on a weekly basis, and I'm basing my comments on some positive comments I've seen on those reports as of late on overall inventory.

Okay.

Great.

Thank you.

You're welcome.

Our next question comes from Tim Conder with AG Edwards.

First of all, let me say thank you, Brad, and everybody, for the extra detail in the press release regarding the numbers.

Makes it a lot easier.

Brad, could you comment any on the impact of ForEx that it had on sales, gross margin or operating margin in the quarter?

And then if you could just remind us where your receivable terms are on average now versus in the past?

And then do you see those terms moderating after you get the channel cleared?

FX for the quarter was negligible, Tim, so really -- not much of an impact on either sales or margins.

With regards to our terms, we're kind of working our way through some 120-day term programs that we had.

You know with regards to where that's going to go into next year is really dependent upon what the market dictates and what our competition does.

I mean, I would like to sit here and tell you we would like to get our terms back to a lower level than where we are now, but I think it really depends on the market conditions and what competition does.

Okay.

As far as the channels, Brad, how is the US inventories relative to the international inventories?

Geographically, is one heavier than the other?

And then within the US, what channels do you view has still, you know, maybe the best to the worst as far as level of inventories?

I would say, Tim, that across the globe, as I talked to our subsidiary heads, I think generally the inventory has improved quite a bit since our pricing actions.

So I don't see a big difference from one country to another.

I would tell you within the United States, in reading the market reports that I read on a weekly basis, that if there's any area where there might be still just a little bit too much inventory would be some of the northern tiered state green grass accounts where their season started to shut down but that as we get into off course and more in the sun belt, that inventories are in pretty good shape down there.

Okay, and obviously the whole industry is impacted by the hurricanes.

And we haven't seen that on the rounds played, because we haven't seen the September numbers yet but we saw some of the effect in August.

If you have had to exclude the hurricanes, and I know this is a guess, how would you term your inventories excluding the lack of selling that you had there for several weeks due to the hurricanes?

You know, Tim that is almost impossible to quantify, to be quite honest with you.

It would be just a pure speculation.

So I don't know how to measure that because I read a few numbers on Florida but I have no idea what the impact was in all the other states down in southeastern United States, but I'm sure it was fairly impactful.

And just a couple others if I may.

It sounds like your inventories are clearing up on the channel from what you have just commented on.

Depending on wherever that magic level is, could we see December, January, some announcement of some of those additional delayed products or could you delay those products as much as mid-season?

You know, I think we will wait and - I mean it's possible we could delay them if we don't think it's the right time.

Our plans are as we enter into the year that we have certain dates that we've kind of targeted to start shipping products.

We have some products that we will announce at the PGA show so it will be post the PGA show.

But in all situations and cases, we will take a look at and evaluate the marketplace to determine and make sure that we're comfortable bringing the products at that point in time.

Okay.

And then once you do get those products in the market, how aggressive will you be in targeting, regaining wood share?

I mean, obviously if the products are far superior than others, and that's the ideal scenario, but if not, how aggressive will you be on price or another way to phrase it is, how important is regaining some of that wood share in ‘05?

Well, I think that our ultimate goal here is to drive profitability for our company and our shareholders, and we will monitor how the market reacts to our product.

Hopefully we are going to bring some very strong products into the marketplace and our goal is really to put the right amount of product at retail that will sell through.

I think this last year you know we got a little bit of a false positive from the retail market in terms of their ordering of our products and we were little bit surprised in second quarter that it wasn't selling through.

So our ultimate goal is to make sure we have the appropriate levels of inventory in the marketplace and that they're priced competitively and that we can drive good profitability for the company.

If we're lucky enough to sell a lot of products and regain the market share position we had in the past, that would be great but we're really looking at profitability.

Okay.

Maybe this is a question more for Bill.

How -- versus the previous administration, how would you -- your outlook on R&D, I think R&D has been kind of ramping down.

Will we see that becoming more aggressive in order for the company to regain its -- what it has established, its reputation on, that being as an innovative leader?

Well, we have an active R&D program.

We're not intending to ramp it down.

Quite to contrary we're going strong with new products.

We have some wonderful new products hitting the market in 2005 and we have got a lot more on the drawing board, so I'm very pleased with the R&D effort.

Okay, so we should anticipate that as a percent of sales going up, then, is what we should read into that?

Well, I would hope not, I'd hope that price would go up and percentage would go down.

I would hope that the cost would go up for R&D and the percentage of sales would go down.

Okay.

Our next question comes from Michael Fox of JP Morgan.

Michael, are you there?

Mr. Fox, your line is open.

Hi, can you hear me?

Hi, Michael, I can hear you now.

Sorry about that.

The first question kind of follows up on some of the stuff that Tim was asking.

It seems to me that unless the industry growth really turns around, and if the competitive landscape continues as it is with the heavy discounting from some of your competitors, it seems you would either have to choose kind of a volume driven strategy or sacrifice volume and share and really make the business a little bit smaller but focus on profitability.

Do you see that as a choice you have to make or do you think that -- or do you see it another way?

And then I have a couple of follow-ups after that.

Can you hear me, Michael?

Yes.

Okay.

I'm getting some feedback from you there.

You know what, I think it's a fair question, but I think that we will address it as we get into the year.

I mean, we certainly would like to maintain our pricing and kind of look at what kind of volumes we are going to be able to sell through at retail.

And if the market would bear the prices that we're going to price our products at, then certainly we would stick with that.

If competition gets very aggressive, then that is another issue that we will have to address as we get into the year, but our goal is not to get in there and drive volume/market share at all cost.

It just doesn't make sense for us long term.

We really want to try to drive the appropriate levels of volumes and maximize our profitability as best we can.

I can't give you the pure answer right now because I don't know how competition will react next year.

Okay, but let's say if competition was very competitive, would you kind of hold back on shipping, amount of volumes and hold the profitability even if you have to sacrifice significant market share?

I think that we would evaluate with our retailer what the appropriate level of inventory.

What we don't want to get into a situation where a product gets shipped and it's not selling through retail.

That doesn't do our retailers any good and it doesn't do us any good, so we will manage our inventories appropriately to respond to whatever the market conditions dictate.

And once again, I mean we are going to manage hard to make sure we can do this as profitably as possible.

Right.

Okay.

And then on the Fusion irons, I saw what the MSRP was.

Can you -- do you know what they'll end up selling for at retail, and I was wondering if you can give us any type of indication on the retailers' feedback from those, if it's not too early?

I believe they're priced MSRP on them, I believe, is 999 in steel and 1199 in graphite and I'm not sure where they'll end up but I assume it'll be in that kind of a price point area.

And the feedback from initial reaction from the retailers has been very positive.

The performance of the club is very good.

And they're quite excited about that product.

But we also recognize at that price point it's not the biggest part of the market but it certainly demonstrates the amount of technology that we can bring to the market in new products.

Okay.

Thanks a lot.

You are welcome, Michael.

Your next question comes from Casey Alexander with Gilford Securities.

Hi.

Good afternoon.

Hi, Casey.

Hi.

You know with $325 million a year of SG&A, I mean focusing on profitability, is there anymore work that can be done to you know kind of scrimp and save on those lines to improve some of the profitability ratios given the competition in the business?

Casey, I would tell you, yes;

I think there is still some more room.

I think you'll see some of the benefits as we get through the integration phase here with Top-Flite where we will start to generate some of the savings for actions that we took this year and we're also looking at just additional opportunities as we look at other areas of the business to see how we might be able to combine the entities and the leverage, duplicate resources, if you will.

So I think there's some room for some movement there, yes.

Okay.

Well, obviously with 14 million in wood sales for the quarter you are doing a lot of work to help the retailers you know get the channel cleared out there.

But I didn't hear much discussion other than an allusion back to the previous situation that was disclosed with Infinity.

What are you hearing on the Infinity side?

Are we starting to get some relief in the channel from there also?

Yeah.

The last I talked to the guys there last week; at Top-Flite well they are making good progress on the Infinity inventory at retail and feel that by the end of the year that the channel will be cleared for them so as they bring new products into next year, we will start with kind of clean slate at retail.

Okay.

Also do you have some sort of schedule that you can share with us for sort of rolling out Mickelson as a Callaway player, spokesperson , ad program etc, and how are we going to start to feel him in, you know, the sales effort?

Well, we don't have anything that we would talk about publicly with regards to the plans to utilize Phil.

As you are aware, we're working with him right now to get him into our products and that takes a little bit of time to get somebody you know comfortable with switching into our products, but we are, working hard on that.

And I would expect to see that Phil would start next year with most of our products in his bag and certainly we are going to use him as our marquee player on the tour and we are going to utilize him as much as we possibly can.

But I don't have any specifics I would share at this time.

Okay.

All right.

Thanks very much.

You're welcome.

[Operator Instructions].

Your next question comes from John Moran, Ryan Beck & Co.

Hi, guys.

Just a quick question.

If you could give me some color as to how the hybrid club, the Heaven wood is doing at retail?

I guess it's been out there since the beginning of October.

We started shipping it in October.

What I heard so far John is it is selling through very briskly at retail.

As a matter of fact, I think we're probably just a little bit behind trying to get shipments back out.

So it's been very good reception at retail so far.

Okay.

Great.

And then just a quick question on distribution over in Asia.

I saw that you guys are going with the same distributor you used for the Callaway products with Top-Flite and Ben Hogan over there.

When does that stuff start to ship?

Is that an event for this year or more of an ‘05?

More of an ‘05.

Okay.

Yes.

And then just quickly on some of the kind of key inputs in terms of materials, I am hearing a lot of anecdotal evidence that suggests that Titanium steel and plastics and also some hard evidence that the prices of those things, those key materials are up substantially versus a year ago.

I am wondering if you could quantify what percentage of the cost of goods sold is that materials for you guys.

Well, you know what, that I don't have that off the top of my head, John, with regard to those particular materials.

I would tell you typically when we deal with our suppliers, while there have been some pressures, we typically will contract with them and fix the price at the beginning of the program.

So products that we had in the marketplace this year were pretty well price protected.

I think as we get into new products, I have not heard any specifics from our procurement department that have indicated that there are any red flags going up on the costs over there but that's a follow-up I can do and find out if there's any new information but I'm not aware of any major red flags at this point in time.

Okay.

Great.

Thanks very much.

Our next question is from Mark Ravit (ph) of Grace and White (ph).

Hi, good afternoon.

Good afternoon.

I was just going to ask questions about the cost.

So I won't ask you again.

In the prior quarter, were there any severance payments made?

I believe in the integration charges there were some severance charges.

Okay.

And also, you did purchase some stock back in the quarter or not?

No, we did not.

How much stock do you have remaining in your authorized buyback?

We have about $8 million remaining in our last $50 million authorization.

Any reason why you have not been active?

Well, you know, with all of the actions that we've taken, frankly, on the price reductions, we really want to get the base business kind of right-sized if you will and back on track and then maybe down the road we might reconsider it but we're more concerned about getting the business you know back in an area where we are comfortable and generating the kinds of cash it has in the past.

So, we should not see you in the marketplace after this quiet period?

You know I wouldn't comment on that at this point in time.

Okay.

Thank you very much.

Okay.

Your next question comes from Andrew Mathis(ph) with Mathis Capital Management(ph).

I was wondering if you had any color kind of on how long Phil Mickelson is signed with you guys and kind of what that's going to do to your tour expenses on a year-to-year?

Andrew, we really don't discuss individual contracts with our tour players.

But I would say that you know we are excited about our relationship with Phil and we hope it's going to be long one.

We are really excited to have him on the team and I think he is excited to be on our team.

And I would tell you as we look at our tour expenditures, we always try to balance our tour expenditures, and as we develop our strategy going forward, obviously having a marquee player on our team now, we'll kind of go through and rethink our overall expenditures.

But I think from a cost perspective, we like to try to manage our expenses elsewhere in tour so that we can once again try to drive the maximum profitability for the company, get as much leverage out of Phil and the other great tour players that we have and make sure we're trying to return as much as we can to our shareholders.

So does that mean that your tour expenditures next year shouldn't go up appreciably from this year?

You know what, we aren't giving any guidance.

I really wouldn't comment on that.

But suffice it to say we are certainly looking at our total tour expenditures to make sure that we can keep them in check, if you will.

Okay.

Thank you.

You're welcome.

Your next question comes from Hardin Faye (ph) with (inaudible).

Hey, Brad, how are you?

Good morning or good afternoon, I guess.

Question related to charges was asked maybe two callers ago.

Is there any charge for Ron Drapeau leaving the company?

Yes, there is.

We did book some of those in the quarter.

Okay.

Is that all of it or is there -

There will probably be some additional charges as we go forward.

Okay.

Can you quantify that?

No.

That's a level of detail we wouldn't get into.

Okay.

You mentioned in your release, normal policy for the board to vote on the dividend at their next meeting.

Is there any intention by the board to change the dividends?

Maybe that's a question for your CEO.

We look at the dividend each quarter as it comes up and there has been no decision to suspend the dividend.

Okay.

I guess the last question;

I'm trying to get a sense for the remaining inventory opportunity that you see kind of at retail.

I know it's kind of a hard number to get a handle on of inventories at retail, but can you maybe frame where you have come from and where you are think you're going in terms of where you need to be?

The way we typically would like to look at our inventory at retail, I mean, I think Odyssey is probably a good example of in the past where we used to have you know in the mid 40% market share, we would typically only have about 30% of the putter corral inventory which would tell me we were under inventoried in that particular brand.

We typically try to gauge our market share of inventory commensurate with what our market share is in the product.

And so in the case of Odyssey, if we were 45% of market share, we would try to talk to our retailers about making sure we have about 45% of their available inventory.

We obviously mid-summer recognized that product was not selling through at the pace that we wanted it to sell through and we were over inventoried, relative to our market shares and the reason we made the decision to do the pricing at the time we did was really to support our retailers and give them a chance to sell through the product while there was still a golf season going on.

And I would tell you that our actions were, I think, pretty well received by our retailers and they recognized that we were trying to help them through a difficult time also.

And I would tell you that as I mentioned earlier that indications are that product has moved, that inventories are in considerably better shape than what they were in mid-summer when we took this action and we feel good that by the end of the year it will be in good shape for us to bring products beginning of '05.

I guess related to your own inventories, well, actually, DSOs and inventories, so from a working capital perspective, what kind of opportunity do you think Callaway has to improve upon its own working capital?

Well, I think from an inventory perspective, our inventories are actually in pretty good shape relative to the summer we went through and even compared to prior years.

The inventories for Top-Flite are pretty flat compared to where they were a year ago, so we haven't seen any degradation to our internal inventories.

We manage it pretty closely, and we have an outlet with our FrogTrader group where we can liquidate inventory if we need to through their online services and so that's a great outlet for us.

I would tell you on the receivable front like I mentioned I believe was to Tim Conder earlier that you know certainly we would like to get terms back to little bit more historical levels and we will have to wait and see what the market dictates as we get into next year, but it would be our goal that if we can do that, we would like to get our terms back to where historically we have been in the past.

Fair enough.

Thanks Brad.

You're welcome.

You have a follow-up from Michael Fox of JP Morgan.

Hi.

This is a question for Bill.

I'm wondering if you could talk about your view on spending on tour and whether you think you'll spend more or less than the last CEO and how your opinion may be similar or different from his on spending on tour, besides the way you're spending on Phil Mickelson.

Gosh, Michael, I'm sure glad you asked me that.

Those were very tough questions.

What we're trying to do with the addition of Phil is evaluate our tour expenditures as we go forward so that we can maximize the benefit both in quality of player and in exposure.

And that's not an easy one.

Now we have some substantial number of long term tour commitments that I don't have the ability to change overnight.

We feel very fortunate to get Phil and we're very pleased with the tour players we have now.

We're not going for count but rather for quality.

So I think it will take us probably a couple years to get our tour plan revitalized and reworked and we're working very hard to do that.

Okay.

Thanks a lot.

Your next question comes from Alexander Paris, Barrington Research.

Hi.

How are you doing?

Hi, Alex.

Bill, now that you've been here for a little bit, have you made any decision on whether the golf industry is still a growth industry?

Are you losing, do you think, golfers long term or have you just lost them cyclically?

How far are we along on the consolidation of the industry?

Do we still have positive demographics?

Any guesses?

I have exact answers for all those questions, of course.

I will say this, though.

I've had a couple of sessions with Golf 2020 since joining the company full time.

They're looking forward to the building of a golf market through the year 2020.

And I think they're planning great progress.

So I think we are seeing a continued interest in golf through the Phil Mickelsons and Anika Sorenstams of the world so the TV presence for golf has gone up.

Usually usage tends to follow that.

So I think we feel very good about the future of golf.

I think the number of golf courses has slowed down a little bit, which will increase the amount of play on the existing courses, so I think we feel good about it and I think Golf 2020 does.

They're looking very hard at kids and ladies and various other efforts to expand the sport.

I am down in the Florida checking it out, we lost a few courses around here for a while at least.

Well I must tell you that you've done a terrible job with the weather in Florida.

Is there any evidence that the younger golfers are coming in?

It seemed like they were coming in for a while and then they, whether it was a Tiger Woods effect or what, and now it seems more like lately like they are slowing.

Well you know we've not heard that.

You know we have think the younger golfers are where the strength of the sport is and there are various kids for golf and various other places that are being worked on on first tee programs and so we see a great future in the younger golfer and we're told at 2020 that it is growing this year.

Okay.

Thank you.

We have a follow up from Tim Conder of AG Edwards.

Yes.

Just a couple of more questions.

Brad, any comments on your foreign exchange hedging looking out?

And then Bill, a couple of items, from a CEO search standpoint, when do you see that potentially occurring or are you planning to stay on here for a while, a little while longer as things get further stabilized?

And then, also, if you could just talk about your plans for cash as that recovers.

And then within that context of that question, should we view when you start repurchasing shares, as evidence that you internally view things as bottoming out?

I'll tell you what, I'll take the first one, Tim, on FX hedging and then I'll let Bill answer and if he wants to allow one back he can.

But I think on FX there is not a lot different in where we are today than where we were a year ago.

We monitor each currency, we make sure that all of our intercompany balance sheets transactions are hedged.

We have been a little bit more conservative probably overall with our anticipated transactions just because there's been a lot of volatility.

But I mean we kind of evaluate it you know day-by-day, week-by-week and I wouldn't tell you there's a tremendous amount of difference.

We're probably little bit less hedged this year than where we were last year.

Bill, do you want to take the -

I don't know quite where to start.

The question is, as you recall, I was initially set forth as interim CEO.

The reason for that was to preserve my independence in the event I would turn the CEO's job over to someone else.

The board at their last session removed the interim, so I will be the CEO of this company for the foreseeable future.

Okay.

We have a great staff of people here.

I've never had the pleasure of working with the quality of people we have here at Callaway Golf.

So I'm excited about our future.

We're trying to plan our future and we will man for that future accordingly.

That's what the board has commissioned me to do.

So we don't have a search going nor do we intend to start one.

Okay.

And then the plans for cash and then should we view the when you do start repurchasing shares as evidence that you internally are viewing your business as bottomed out?

Well in terms of cash, we're reviewing our line of credit to where we have doubled the line we had in the past or greater.

So we have no cash problems.

We have no debt at the moment.

And we have a sufficient amount of cash that we don't see cash as a problem in our future.

And what was the other question?

In regards to cash, more the uses of share repurchase, acquisitions, I guess from your kind of a more a philosophical priority and then with share repo should we see that as evidence that you're viewing the business as bottoming out?

The business or the -- well, first of all, we have no immediate plans to repurchase stock at any level.

We just have not made any decisions on that regard, we still have some flexibility.

We do plan to use cash for appropriate acquisitions as they may appear.

Okay.

So that would be the first priority, then, of cash at this point?

Well, we are going to meet our expenses and pay our dividends and we have not prioritized cash but we don't have a plan to do any heavy share repurchasing at the moment.

Okay.

Thank you, sir.

At this time, you do have a follow-up from John Moran with Ryan Beck & Company.

Hey, guys.

Just a quick question on FrogTrader.

I'm wondering how much in revenue that contributed to the quarter.

Do we have that?

Minimal.

You know what?

It was 6 million, John.

Okay, 6 million and then was there licensing revenue in there as well?

We did have some licensing revenue.

It was probably a million dollars or less maybe.

Okay.

I don't have it at the top of my head.

It was about a million dollars.

Okay.

Great.

Thanks, guys.

You're welcome.

At this time, there are no further questions.

I turn the call back over to management for any closing remarks.

Well, this is Brad and I would just like to thank everybody for joining us today and thank Mr. Baker for also being here and the opportunity to answer some of your questions and we look forward to a good 2005.

So thanks again.

This concludes today’s Callaway Golf third-quarter financial results conference call.

You may now disconnect.