Topgolf Callaway Brands Corp (MODG) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Callaway Golf second quarter earnings conference call.

I would now like to turn the conference over to our host, Mr. Brad Holiday.

Please go ahead, sir.

Thank you and welcome everyone to Callaway Golf Company's second quarter 2005 earnings conference call.

I am Brad Holiday, Chief Financial 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.

I would like to point out that any comments made about future performance, events or circumstances, including the Company's recovery, success, prospects or growth, the success of the Company's products, retail inventory levels, estimated effective tax rates, capital expenditures and depreciation and amortization expenses, the timing of the completion of the consolidation of the ball operations, and estimated integration charges, 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 the 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 two of our most recent form 10-Q filed with the 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 flight operations.

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 web sites, at www.callawaygolf.com.

Before I get into the details of the financial results, let me just comment in general terms on the trends in our business this year versus last year.

As you recall, last year at this time we were experiencing less than expected consumer demand for some of our products, primarily drivers, which resulted in a build up of inventory at retail.

In response to this situation, we worked with our retailers, and reduced our prices on some of these products in an effort to clear the retail channel, in anticipation of the 2005 product line.

We took a more conservative approach to retail inventory at the start of this season, and our recovery was planned to occur over the full year, not just the first couple of quarters.

If you review our performance over the first six months, our new products are being well received by consumers as evidenced by some of the increases we've experienced in market shares, and the favorable levels of inventory at retail relative to the respective market shares within each product category.

In the Woods category, our Big Bertha 454 Titanium driver, has been one of the best selling drivers for most of the year, and has exceeded our internal forecasts to the point that we have been managing some supply shortages due to the strong consumer demand.

Our hybrid clubs are ranked in the top one or two spots in the marketplace.

A solid position on a product line introduced late last year.

Our irons business has been one of the most successful we have ever seen, not only in selling record units, but in driving increased average selling prices with some of our new premium products.

Our Callaway Golf ball business continues to grow with improved margins and record U.S. market share, while Odyssey putters continue to be the number one brand in markets around the world.

We have seen several successes on the pro tour this year,with great performances by Phil, Annika, Michael Campbell, and other staff players around the world.

And we are excited about our latest new products, the FT-3 Fusion Driver, and Fusion Fairway Woods and the HX Tour 56 golf ball we just launched, and are encouraged by the great initial response we are receiving from both consumers and retailers.

Receivable DSOs have dropped to 67 days compared to 79 last year, a nice improvement, reflecting more normalized credit terms.

Inventory is higher year-over-year, primarily due to an increase in the number of new iron models and the addition of a new Ben Hogan line of woods, as well as the timing of sales in 2005 as compared to 2004.

Our operating expenses are higher this year, the result of additional brand spending, and the timing of marketing expenses associated with second and third quarter new product launches.

In general, we are pleased with the progress to date, and feel there is good momentum around our brands this year.

Now let me cover some of the financial highlights for the quarter.

Consolidated net sales were $323 million, an increase of 8% compared to last year.

Callaway Golf, including Odyssey accounted for $259 million of the total, and Top Flite including Ben Hogan accounted for $64 million.

We reported a net profit of $18 million, compared to a net profit of $14 million last year, and a profit of $0.27 per share versus a profit of $0.20 in the prior year.

On a pro forma basis, excluding integration charges of $2 million or $0.03 per share, and $7 million, or $0.10 per share for 2005 and 2004 respectively, our net profit for the quarter was $20 million, no change from last year, with fully diluted earnings per share of $0.30 for both periods.

Looking at sales by product segments, our Wood sales declined 8% for the quarter, due to lower average selling prices, partially offset by an increase in sales volume.

The decline in selling price reflects the absence of a super-premium driver this year, and a higher mix of lower priced products.

As I mentioned, the sales of our ti 454 driver and our Hybrids have been very good, and both products have established a solid presence within their respective categories.

Sales of irons increased 28% when compared to the second quarter of last year, reflecting the successful launches of our X-18, Fusion and X-tour models, and the resulting increase in units and higher average selling prices.

These increases were partially offset by lower sales in our big Bertha 04 model, now in its second year in the market, and the X-16 model, which is being phased out of the line.

Putter sales increased 16% compared to last year reflecting sales of Odyssey white steel line of putters, and the Callaway Golf I-TRAX putter, both new in this year's line of products.

Partially offsetting these increases, were decreased sales of older white hot and DFX models of putters.

Golf ball sales were $71 million for the quarter, a 5% decrease compared to last year's sales of $75 million.

Callaway branded balls had an increase in sales driven by the success of the HX hot model introduced this year, and the continued success of our HX Tour ball.

This increase was offset by a decline in Top Flite sales, associated with the planned reduction of less profitable models from the product line.

For the quarter, the ball segment reported a profit of $6 million, compared to $4 million last year.

Excluding integration charges of $1 million and $5 million in 2005 and 2004 respectively, the ball segment would have recorded a profit of $7 million compared to a profit of $9 million last year.

The reduction in profit is due to incremental marketing spending against both brands, including a Top Flite brand, as we have re-launched it with a new logo and a NASCAR sponsorship this year.

Year to date results for the ball segment netting out integration charges, show a year-over-year profit improvement.

We are still manufacturing our Callaway Golf HX tour model here in Carlsbad as planned, and expect the production transition to be completed later this fall.

Turning to our regional breakout, U.S. sales increased 6% year-over-year to $181 million.

Our international sales were $142 million, an increase of 12%, due to increases in Japan and the rest of Asia, offset partially by a decline in Europe.

FX translation had a positive impact of $6 million on international sales.

Second quarter gross margins, excluding integration charges, were 46% of net sales, compared to 45% in the prior year.

Improvements in golf ball margins, positive FX impacts, and improved irons margins were partially offset by lower average selling prices in the woods segment.

Gross margins including integration charges were 45% of net sales, compared to 43% in 2004.

Operating expenses for the quarter, excluding integration charges were, $117 million, compared to $99 million last year.

The year-over-year increase is due to timing of marketing expenses this year around our second and third quarter new product launches, as well as increased spending against both brands -- excuse me -- against the brands in both marketing and tour, including additional win bonuses associated with this year's tour success by some of our staff players.

Operating income for the quarter was $31 million, once again excluding integration charges, versus $35 million last year.

Our effective tax rate for the quarter was 29.2%, including a reduction in reserves for previously accrued tax contingencies that are no longer required due to resolutions reached with the IRS during the quarter.

Based on our current worldwide mix of business, we expect our normalized effective tax rate for the balance of the year to be approximately 38.5%, excluding any unusual items or further resolutions to outstanding items.

The integration of Top Flite will be completed this year.

We estimate total pre-tax integration charges to be $63 to $65 million consistent with original estimates.

To date, we have incurred expenses of $60 million, leaving 3 to $5 million of estimated charges for the balance of the year.

Moving to the balance sheet, we finished the quarter with cash of $43 million, and have outstanding borrowings on our credit line of $50 million.

Consolidated net receivables were $238 million, a decrease of $23 million compared to last year.

Consolidated DSOs were 67 days, compared to 79 days last year.

The decrease is due to the more normalized terms this year compared to last year, and more in line with historical levels.

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

Net inventories totaled $193 million, an increase of $39 million compared to last year.

This increase is the result of a brand new Hogan Wood line, an increased number of Callaway Golf and Ben Hogan iron models, and timing of sales in 2005 compared to 2004.

The quality of the inventory is good.

CapEX for the quarter was $9 million, bringing the total for the year to $19 million.

CapEX for 2005 is estimated at approximated $30 to $35 million, an increase from our previous estimate, due to the acceleration of some 2006 projects into the second half of this year.

Depreciation an amortization was $10 million for the quarter, and is estimated for the full year to be approximately $40 to $45 million.

Finally, on June 23rd, the Company issued a press release in response to some speculation in the marketplace regarding the possible sale of the Company.

I would like to reiterate relative to that press release, that the Company is continuing its search for a CEO, and will issue updates on this search as appropriate.

In addition, the Company confirmed that it has received unsolicited indications of interest from various parties from time to time.

No substantive discussions are currently underway.

The board of directors has hired the investment banking firm of Lazared, and is currently conducting a full review of the strategic alternatives for the Company.

I have no further comments other than these prepared remarks on these subjects today, but we will keep you posted as appropriate in the future.

I would now like to open the call for questions.

And we have a question from the line of Mr. Tim Conder from A.G. Edwards.

Please go ahead.

Thank you.

Brad, you talked a little bit about Top Flite being down due to reduction of less profitable SKUs.

Can you talk about how that is -- how that looks in the channel?

Are you basically done?

Is the channel clearing out, and again how is that looking?

And then can you talk a little bit about your overall mix as it relates to the back half of the year and then at this point how you would see it for so 06 versus so 05?

And then one other question related to geographic sales.

Japan was up very sharply as noted in your press release year-over- year in the second quarter.

Is that just because it was going again such an abysmal comp, or is there something else going on in Japan?

I think let me start at the beginning there Kevin.

I might have missed the second part of that question, but the first one is with regards to Top Flite and the channel.

Let me tell you generally the inventory levels of Top Flite balls in the channel are actually pretty good.

I don't think there are any issues with inventory out there right now, not like we were experiencing after we acquired the Company.

What we did is made a conscious effort going into this year to actually eliminate some SKUs that were in the lineup that frankly as we looked at the profitability, were pretty marginal from a profitability perspective.

What we were putting out there and the pricing that was being charged just didn't make a lot of sense, so we scaled back on those unprofitable models.

And that's what I meant when I talked about the reduction in SKUs.

I'm not sure I understood about your question, balancing of the year mix, I'm not sure mix of what?

Yeah, you're overall product mix, woods, irons mix and I don't know.

In the mid-point of last June in response to what was going on in the market, you instituted some pretty steep price reductions on product, and now we basically anniversary that.

So factoring in your woods, iron mix, and then I guess your ball mix, and than now you've already anniversary those sharp price cuts.

How do you see your overall product mix?

Richer, leaner, about the same in the back half of '05 versus the back half of '04?

You would expect it would be richer, and then any comments at this point you would have, same question '06 versus '05 on a full year basis.

Well, first of all Ken, a lot of the discounting didn't occur until third quarter.

So I think what you'll probably -- well, for sure what you'll see is you will not see the compensation or discounting the second half of the year that we experienced in the second half of last year.

As you know, last year we shipped the majority of our new products in the first quarter.

This year it's been a little bit more evenly spread in terms of the products that we've introduced throughout the season so far, and now going into the balance of the year, we do have the FT-3 and the Fusion, the comparable Fusion Fairway Woods that we just are launching into the marketplace, as well as another SKU of a golf ball in the HX 56 golf ball that we just introduced.

So I would tell you that generally, if you just look at our business to date, I mean, we haven't had as rich of a woods line in the first half of the year as we had last year because we really had the ti 454 and the Hybrid clubs.

We've now added to that the Fusion Fairway Woods and the F T-3 Fusion Driver.

The irons have been stronger all year because we've had more models not only of Callaway but of the Hogan, and the golf ball line on the Callaway side has been richer in terms of SKUs and the amount of energy around them, and then of course we have scaled back on the mix of -- or the number of SKUs in the top flight line.

So kind of take that for what it's worth.

I think we're going to see a continuation of the mix we've seen in the first half of the year, augmented by the launch of a new line of driver and Fairway Woods and another golf wall.

Okay, and then on Japan.

In a sharp year-over-year increase in the second quarter, again versus a very abysmal comp or anything else going on there?

I think a couple of factors there, Tim.

Obviously, last year wasn't a very strong year for Japan compared to prior years, but I think from a product perspective, this year the Fusion iron has been very successful in Japan.

We've had the ERC hot golf ball, which has been -- has met with great success, and we launched the Japan version of the FT-3 in the April time frame, and I think what you're seeing there is, if you introduce a good product with technology into that marketplace, it can be received very well.

So I think it's probably more leaning towards, we have some pretty good products in the marketplace, coupled with the fact that last year was a little bit weak.

And then in your statement, in your press release, and I believe you made it in the pre-release also, you said that you anticipated the third quarter being up significantly in both sales and earnings.

Now, in earnings, obviously that's not -- to be honest with you not saying much as you had quite as you've already stated, the price cuts.

Any type of direction there that you can help us with, because historically, and you're doing a product launch is different this year, but historically, the first half, has been you either make it or break it in the first half.

But now you've got some richer products and product mix here in the back half of the year.

So anything more than you can say here because again it's really not saying much against the horrible quarter you had in the third quarter last year.

Tim you want to tell me I won't give you guidance, I gave you guidance this year.

We're going to be up.

I would say this Tim, as I was trying to point out in the beginning of my comments that as I look at where the Company is this year in the marketplace versus where we were last year, we are in a much healthier situation.

I think inventory at retail is very much in line with where we should be relative to our market share, which is -- the converse was true last year in terms of where.

I'm not going to comment in terms of sales, other than we would expect that having a premium driver and some golf balls that are being received pretty well is certainly going to be a positive when compared to last year, where we really weren't selling a lot of woods, if you will, in the marketplace.

We were selling some other products.

But I'm not going to make any comments about specifically or directionally.

Certainly from a profitability perspective, we will not have the compensation issues we had last year, and that's about as far as I'm going to go on guidance.

And again, would you expect to be profitable on an EPS line?

You know, I'm not going to go there, Tim.

I just think that as we've always said, this is a tough business to forecast, and the further you get into the year, it becomes more and more of a re-order kind of a business.

And I just think it would be inappropriate for me to even comment at this time, so I will just tell you we gona be better than we were last year, and I know that's not saying much, but that's where I'm going to leave it.

Okay.

Final question here. something that's been a little bit of a struggle to figure out and I'm really puzzled by.

In your 8K filings back in October, most of the senior executives received stock options, I think a $100,000 each, which is fine, and Mr. Baker as chairman and interim CEO received $500,000.

Again, nothing at all out of the ordinary.

But the main question is, in relation to Mr. Baker's employment contract and those options, in particular, which I think the strike price was around 11.60, 11.70 for everybody.

It had a very unusual statement is that in the event of a change of control, his options would not see an accelerated vesting.

Why would that be in his agreement, and again somewhat unusual, everybody else would not have that?

What type of reasoning was behind that?

You know, I would have to defer that to our compensation committee Tim, and I frankly don't have a lot of insight into what they were thinking at the time, but that's the way they structured the deal.

I think what it would probably tell you is that they were trying to make sure that there was no windfall profit in any kind of an interim situation, so I think it was really more to protect the shareholder value from that perspective.

And another side though, you could argue that he has no incentive to sell in the near term, and that may or may not be in the best interests of shareholders.

Wouldn't it be best to let the shareholders decide that?

Well, Tim, one person is not going to make the ultimate decision.

I mean, it's really -- the Company is managed by the board of directors, and there's a lot of input from a lot of different people.

So once again I will defer to the compensation committee, but I believe more than anything they were performing their duties to make sure that they would avoid any kind of windfall profit to anybody.

Okay.

I don't know if Mr. Baker or McCracken is there.

Would they have a comment on that?

Neither of them are here, so I guess they can't comment.

Okay, thank you.

You bet, Tim.

And our next question comes from the line of Mr. Michael Fox from J.P. Morgan.

Please go ahead.

Hi, good afternoon.

Hi, Michael.

My first question, you probably mentioned this in the prepared remarks, I missed a couple lines.

Did you talk about kind of the initial sell through of the FT-3, and then also I was wondering if you can tell us how widely that's been distributed now, because I know I saw it in a couple stores, but I don't know if it's in the green grass stores yet.

And then also, I understand that usually the business is pretty hard to predict as you go through the year, but given that you've spread out your product shipments this year, you would think that the third quarter would be a lot easier to predict because it's really not as much reorders, especially on the driver's side.

Is that true?

And then also I was wondering, given that the leadership of the Company's been -- you haven't had a permanent CEO in a while, and the business has been kind of tough.

Can you talk about what morale is like at the Company?

Thanks a lot.

Well, let me just talk real quickly about the last one.

I mean, we have a lot of really hard working employees here who have been working diligently to move the Company forward.

To do the best we can for both the brands as well as the products we introduce, and taking care of our retailers and customers.

So I would tell you that the employees are focused, and I would tell you morale is generally very good, and we're very focused on trying to move the brand forward.

And I think as evidenced by the success that we're seeing from an overall branding, the strength of the brand and the energy around the brand, I've had one of our major accounts make the comment to us that he doesn't think he's seen our brand this strong for several years.

So I think the answer to your question is, people are extremely motivated.

They're working very hard, and we're doing everything we can to keep the business moving forward.

And reposition ourselves in the marketplace where we need to be.

With regards to the ability to forecast third quarter Michael, about the only advantage that I would see this year versus other years is by launching some new products you get a little bit of a pipeline fill, and that's a little bit more predictable, but third quarter frankly is all reorder, and it actually makes it more difficult not easier.

The third question I guess which was probably your first was with regards to sell through.

First of all, the product that you're seeing now in the marketplace here is the product that we shipped in Japan, only in a hotter version and slightly different cosmetics, and that has done very well in Japan.

And to Tim Conder's earlier question, one of the reasons Japan is having such a great year so far.

The initial feedback that I have heard on the FT-3 is extremely positive.

And when you put it -- take it to a demo day and you put it on vector launch monitors, it has been outperforming every other product that we have out there.

We have limited number of units that we had to get out.

I mean, it was just -- it's a premium priced product and we were trying to get as many built as possible.

We tried to give a little bit to as many people as we could, so to answer your other question, it should be in all channels, and we'd like to get more of it out there, and we're working very hard to try to get caught up with some of the demand.

We haven't seen a lot of sell-through numbers yet, just because it's only been out there for a week or two, but we'll keep you posted as we get it.

Okay, thanks.

I just had one finality question.

I know last year you guys had some issues with too many SKUs on the Top Flite ball side, and you kind of cleaned that up.

I was wondering now on the Callaway Golf ball side, you have eight -- I think it's eight different models out, and I've heard some - from some retailers that the HX hot ball is cannibalizing a little bit the HX red and blue.

I was just wondering what you thought of that, and if you're seeing it or if it's just a limited amount of retailers, and then if you think that eight is the right amount of SKUs or if it's too many or too little.

Thanks.

You know Michael, good question, and I would just tell you that our product group is constantly looking at the mix of products and how they're performing in the marketplace.

We're going to continually look at new products to bring to the marketplace.

We will look at consolidation of SKUs if it makes sense.

You know, optimal for us is obviously to have just the right number of SKUs that meet the demands of the consumer without confusing them.

So if we see opportunities to consolidate, we will.

That was the strategy with Top Flite, is to try to eliminate the number of SKUs and there were several in addition to looking at some of the less profitable.

So I think in answer to your question, we will always look at our product mix, and we will constantly bring new products, and if there's an opportunity to bring a product that maybe crosses over where there were a couple of models, we'll take a look at that.

That's just -- that makes sense for us and our retailers, because we can manage inventory better.

Okay, thanks a lot.

Thanks, Michael.

And our next question comes from line of James Hardiman, Midwest Research.

Please go ahead.

Good afternoon.

Two questions.

First. you talked about the dynamic of pre-released expenses leading up to your July 4th product.

How much of this was timing of these expenses, and how much was the magnitude?

And can you give us some soft of quantification of the swing that took place there?

Well, I'm not going to get into the details there James, but within - you're talking about how much was related to the early Q3?

Is that what you're saying?

Right.

I would tell you this, that if you take a look at when we launched products this year versus last year, a majority of our new products launched in Q1 and a higher percentage of our spending really occurred in the first quarter versus this year, where we've had products in the first quarter, the second quarter and now the third quarter.

And if you've been watching any of the publications, you will see that we had a lot of FT-3 teaser ads and things in various publications during the second quarter, in advance of any sales because we hadn't shipped any products.

So I think if you kind of look at Q2 relative to last year, we were heavier off the new product launch marketing than we were last year, that's what I was trying to point out.

Right.

So, I mean, relative to a normal product lawn launch, it seems like I'm not sure if I'm reading this right, it seems like this -- the pre-released marketing was actually more than it was last year, and also there's that whole issue of the expenses took place in Q2, the benefit's going to take place in Q3.

I guess I'm trying to figure out what's the bigger issue there?

Well, I think it's a combination.

I think you have to look at all elements under kind of that marketing, if you will.

Part of it as I mentioned, is we've had some good tour success and some win bonuses that we frankly didn't have last year.

Some of it is incremental, just investment spending around the brand.

I mean, we wanted to come into this year and make sure that the brand regained momentum, and then the third one has to do with some of the elements of timing around the launches of products relative to last year.

I wouldn't tell you that we are spending inordinately a lot more on a pre-launch advertising campaign, I hope it's more focused and more efficient.

But I would tell you we're probably spending more dollars this year just around the brands in general.

Okay.

In general I guess, how do pre-release expenses typically compare to, I guess your maintenance related expenses?

I mean, with this July 4th, these three new products, is the majority of the expenses surrounding those already behind you or is there a lot more to come?

Well, it depends on the product.

And if it's new technology, for example, we're going to be spending more money trying to educate consumers on what the technology is.

And it obviously depends on kind of the overall type of product it is and the costs and what we can justify in spending.

So there are a lot of different variables that we have in terms of determining.

I would tell you that typically from a maintenance perspective, there is a fair amount of prelaunch to kind of get people aware that it's coming, and then there's a period of time, obviously, where we are launching during the prime season, and then as the season starts to tail off, we typically tail off our spending.

So we're not spending when people are not out buying.

So we try to line up with seasonality.

Now the uniqueness to that is we've got a new driver out there now, that frankly we're going spend some money against because we think it's a fabulous product.

There's some good sell-through on it now, and we want to make sure that buzz carries into the fall season.

And the beginning of the opening of the sun belt.

Great.

And second question.

You talked about how demand exceeded the Company's ability to supply some products.

Obviously, you had some really hot products in the second quarter.

But beyond that, how much of this is a result of being incrementally conservative in terms of what you're willing to sell at net retail, and how much is a matter of manufacturing being maybe slower, less responsive than you would have liked?

Well, I'll just tell you on the 454 product, we exceeded our internal forecast by a big amount.

And I would tell you that from a manufacturing perspective and from a supply base perspective, I think they responded very well, but even with this huge increase over what our internal forecast was, we couldn't keep up with demand.

So I think that we're trying to be as nimble as we can with products.

We're trying to kind of manage all elements, Retail, inventory as well as our own inventory and making sure that the product we're building is the product that, are not going to get -- have any issues with down the road from an object lessons perspective, but I would tell you that we were pretty nimble and reacted to the demand, and frankly demand just continued to outstrip our capabilities.

That happens.

I mean, sometimes -- I can think back to the two ball putter when we brought that out.

I don't think we caught up on that for over year.

We just couldn't keep up with it.

Great.

Thanks.

You bet.

Thank you.

Our next question comes from the line of Mr. Rommel Dionisio, from Wedbush Morgan.

Please go ahead.

Fred, in your prepared comments, you talk about raising the CapEX guidance, if you will, from 30 to 35 to what I believe is $25 million.

Can you provide us with some granularity with that?

I think you talk about accelerating some 2006 projects.

Can we read into that, that you may look to accelerating the new product launch schedule more towards the Q1 events in 2006, or is that more in response to just being capacity constrained on things like the 454?

It's -- we had some CapEX associated with some of the technology around the new HX-56 golf ball.

And basically had planned for some additional capacity early '06.

We're going to move that forward, and that's part of it.

Some of the other stuff has to do with some IT projects that we're pulling forward that we want to complete this year, so that we can get everybody on common systems as quickly as we can.

That's been a project that we've been working on since integration.

I'm sure you can appreciate with a worldwide operation that you kind of pick one region at a time, and we're getting very close to the end, and we wanted to accelerated some of those projects.

That's the bulk majority of the increase.

Okay.

Thanks very much Brad.

You bet.

And our next question comes from Mr. Dennis McAlpine, McAlpine Associates.

Please go ahead.

Thank you and good afternoon.

One simple question: Do you count Hybrids as irons or woods, and are they significant?

They're woods.

We consider them woods.

We consider them woods because the Company that does all of our market share data counts them as woods, and relative to the overall mix, they're not a -- obviously a majority of it, but they do represent a significant share now as we've kind of reached our share position that we have right now.

And what it does do is they're lower priced than normal products so they have had a tendency to -- because it's a lower price point, lower the average selling price.

Okay.

Last year, when you ran into your problems, there was a lot of price cutting because of the excess inventory.

Given the success that you had this year, do you see anything coming from the competition where they may be in a similar position, and would react the same way driving prices further down?

You know, I can't sit here and predict what our competition will do.

I would tell you so far in the marketplace, I haven't seen a lot of it year to date.

But I can't predict what's going to happen over the balance of the year.

And then lastly, you had talked about laying off R&D.

And it looks like you're running about even with where you were last year.

Are you getting some success with that or is this just sort of being a slow growth?

Well, I'm not sure whan you say that I talked about laying off R&D, I don't think I said anything in my comments about that.

No, this was going back several quarters.

You said you were going to push R&D to the suppliers.

And we have done some of that in terms of some of the product development and commercialization, we have done that.

I would tell you, that if you look at our R&D expense today versus historically, we have done more of that, and I would tell you we are running a more efficient R&D operation, and frankly has had no impact on our ability to bring great products into the marketplace, and I think you can just look at the products we have in the marketplace this year, and we have not seen a slow down in the kinds of products coming out of R&D.

Good, thank you.

You're welcome.

Thank you, and our next question comes from the line of Mr. Matt [inaudible], from [inaudible] Capital.

Please go ahead.

Good afternoon.

Hi, Matt.

Hi.

Just going back to third quarter earnings, I know you don't want to give guidance, but this is a pretty wide range of possibilities here given the number last year.

So the street's said %0.01.

And I look back at 2000, 2001, and 2000 and you did in the third quarter, $0.29, $0.20 and $0.53.

What has changed in the industry or your Company that would not allow you to do something meaty like that, versus say $0.01 or versus what you're saying which is better than -- what the loss was of $0.40 or whatever it was last year?

Well I think Matt, you need to take a look.

I'd have to go back in each one of those quarters and find out what kind of products that we had launched.

I remember whan I started, third quarter, I believe - actually it was more fourth quarter of 2000, we launched the ERC-2 and the Hawkeye VFT.

It really is dependent upon what products get launched in, or in the case I remember one year, where we had a very slow start to the season, but that the season extended well into the fall and so we got a lot more sales that kind of carried over there.

There are just a multitude of variables that can impact the third quarter.

And then my other question is on Top Flite cost benefits.

Where are we on that?

How much more will we see benefit, say, the quarterly profitability once you get done with whatever you're doing to integrate and reduce costs?

Well, I would tell you we captured an awful lot of the benefits already.

We're doing a few more things that we've got out there.

We just recently completed the consolidation of a Nordic warehouse that we acquired through the Top Flite acquisition, and consolidated that operation into our Chessington England operation.

As we bring our systems, the last piece there is the top flight domestic.

As we bring the rest of the systems on board, we will see some efficiencies in terms of elimination of duplication, of some back office type of positions, if you will, that we have.

And then as we get towards the end of the year, and actually get all of our golf ball manufacturing moved out to Chicopee, then there will be additional savings there.

Those are the big ones remaining.

Thanks.

Congratulations on a great product sales and a great turn around from last year.

Hey, thanks, Matt.

I appreciate that.

Thank you.

Our next question comes from the line of Mr. Casey Alexander.

Please go ahead.

Good afternoon.

Hi, Casey.

Hey, I'm sorry I came on late so maybe there was some discussion of this, with the new Tour 56 coming out, how are you going to handle the juggling act of marketing the HX Tour versus the 56, and eventually do you phase out the original HX Tour, or are you going to try to run with two premium balls at the same time?

And if I'm being redundant, I'm sorry.

And the second question I have is: How is the retailer environment and the distribution channels that you sell into changing?

Are the retailers becoming a little bit more efficient?

Because it seems like with golf galaxy planning to public, the thicker getting bigger.

Is it becoming easier to service your distribution channels than it had been in the past when it was so fragment?

Well, certainly, we have our key accounts, our strategic partners, if you will, and it's more efficient for us to be able to have our team here work directly with those stores and their buyers to manage their businesses.

They tend to have more sophisticated POS systems.

We tend to do more EDI kind of reorders, and then lots of times we can ship into one warehouse for them and then they just ship it out to their individual stores.

So I think it's easier to work with them and it's easier for us to help go in and talk to them about brand presentation and how we want the brands to look and feel in their stores.

And so that certainly is, I think, easier than dealing with 15,000 other accounts.

But the other accounts are extremely important to us, and so we obviously still have to maintain and help them manage their business the best that we can with the resources that we have.

I think to answer your other question Casey, with regards to the -- what we're going to do going forward, I mentioned on the golf ball business, somebody asked if we were going to look at fewer SKUs going forward, we're constantly looking at our new products. 56 is new.

It's kind of been deemed the Phil Mickelson ball.

The HX Tour ball is frankly doing extremely well, and I just talked to one of our reps today and he said in many accounts it's the top selling ball, that ball and the Hx Tour combined are the premium selling golf ball.

So I think we will just watch sell-through and demand from consumers, and determine what the appropriate mix is at that high end, and we'll hopefully have the right mix of products as we go on to next year and beyond.

Okay, well congratulations on the turn around.

I don't think there's anybody who thought that you guys could pull it off that quickly.

Thanks a lot, Casey.

We appreciate that.

Thank you Your last question comes from a follow-up from Mr. Michael fox, J.P. Morgan.

Please go ahead.

Just one quick follow-up.

On the 454, I know you guys said that it exceeded your internal expectation.

I'm trying to interpreted what that means, because we're not privy to that information.

I was wondering if you could give us some context on the volume, how it did with, compared with some of the drivers that you've had in the past.

You know, I don't have those in front of me, Michael.

I would tell you it's been a very successful product at the price point where it is, I mean, we have sold a lot of products.

And I just don't have in front of me any history of what we did in some other units, but I would tell you it's been a very, very popular product for us.

Okay, thanks a lots.

You bet, Michael.

If there are no further questions, operator?

Mr. Holiday, there are no more questions.

Please go ahead.

Okay I would just like to once again thank everybody for joining us today for the conference call, and as I mentioned before, we are very excited about where we are this year and the products that we've placed at retail and the response we've gotten from retailers and consumers, and we appreciate all of the support that we have from each and every one of you.

Thank you very much.

That does conclude our conference for today.

Thank you for your participation and for using AT and T executive teleconference.

You may now disconnect.