Topgolf Callaway Brands Corp (MODG) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Callaway Golf Third Quarter Results Conference.

At this time, all lines are in a listen-only mode.

Later, there will be an opportunity for questions and instructions will be given at that time.

If you should require assistance during the call, please press "star" then "zero."

And as a reminder, this conference is being recorded.

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

Please go ahead, sir.

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

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

Joining me today is George Fellows, President and CEO of Callaway Golf.

During today's conference call, I will provide an overview of the financial results and we 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 estimated effective tax rates, capital expenditures and depreciation and amortization expenses, the timing of the completion of the Top Flight integration and the estimated remaining integration charges as well as statements relating to the recently-announced restructuring initiatives and the estimated savings, reinvestment, and improved profitability related to such initiatives 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.

Actual results could differ materially from those projected in the forward-looking statements as a result of certain risks and uncertainties including delays, difficulties, change strategies or unanticipated factors affecting implementation of the restructuring initiative as well as the general risks and uncertainties applicable to the company and its business.

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 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 Top Flight operations and charges associated with the recently-announced restructuring initiatives.

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 site, at www.callawaygolf.com.

Now, turning to the financial results for the third quarter.

Consolidated net sales for the quarter were $221 million, the highest third quarter since 1997, and an increase of 72% compared to last year's sales of $128 million.

We reported a net loss of $5 million compared to a net loss of $36 million last year and a loss of 7 pennies per share versus a loss of $0.53 per share in the prior year.

On a pro forma basis, excluding integration and restructuring charges, a $5 million or $0.08 per share and $4 million or $0.07 per share for 2005 and 2004 respectively, we had a net profit for the quarter of $500,000 with fully diluted earnings per share of 1 penny compared to a loss of $0.46 per share last year.

Looking at sales by product segments, our wood sales were $63 million for the quarter, an increase of $49 million when compared to 2004.

This increase is due to the sales of our big Bertha 454 driver introduced earlier this year as well as the launch of our FT-3 Driver.

This increase also reflects an increase in the average selling price due to an increase in the mix of higher price products this year and less net down expense compared to last year, when we were trying to stimulate retail sales growth on several products.

Sales of irons were $60 million, an increase of 66% when compared to third quarter sales last year of $36 million.

These results were due to strong sales last year of $36 million.

These results were due to strong unit sales of our X-18, big Bertha Fusion, and X-tour model as well as higher average selling prices.

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

U.S. revenue market share through August according to Golf Datatech was 28.4%, up 6 percentage points compared to 2004 and more than double that of our nearest competitor.

Putter sales were $22 million, an increase of 44% compared to last year, reflecting sales of two new products in the line this year, the Odyssey white steel line of putters and the Hogan Ben (ph) putter.

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

Golf ball sales were $50 million for the quarter, a 23% increase compared to last year's sales of $41 million.

This increase was driven by the success of the HX 56 and the HX hot models introduced this year and the continued success of our HX Tour Ball.

This increase was offset by a decline in Top-Flite sales, due in part to the planned reduction of less profitable models from the product line.

Callaway ball market share achieved a record 10.5% revenue market share in the U.S. through August according to Golf Datatech and was the number two brand in the marketplace.

Top-Flite's market share was 4.8% for the same period, a decline of 2.4 percentage points from 2004.

Turning to our regional breakout, US sales increased 67% to $119 million compared to $71 million last year.

Our international sales were $102 million compared to $57 million last year, an increase of 78%, with increases in all of our regions ranging from 26% in Canada to 156% in Japan.

FX translation had a positive impact of $2 million on international sales.

Pro forma third quarter gross margins, excluding integration and restructuring charges, were 41% of net sales compared to 24% in the prior year.

Increased selling prices in 2005 due to a higher wood mix as well as lower product compensation charges were the key drivers for the improved margins.

Reported gross margins including integration and restructuring charges of $3 million were 39% of net sales compared to 20% in 2004.

Operating expenses for the quarter, excluding integration and restructuring charges, were $91 million compared to $87 million last year.

The year-over-year increase is due to increased commissions on higher sales and increases in promotional and tour expense.

These increases were partially offset by lower G&A and R&D expenses.

Integration and restructuring charges related to the OPEX category totaled $5 million compared to $3 million in 2004.

Our effective tax rate for the quarter was 45%, 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 is nearing completion, with the manufacturing of all balls now taking place at our Top-Flite facilities.

To date, we have incurred total expense of $62 million compared to our original estimate of $60 million to $65 million.

The final phase of the transition is converting the current facility here in Carlsbad back to usable space with estimated costs of approximately $3 million and will be completed in early 2006.

Moving to the balance sheet, we finished the quarter with a net cash position of $55 million compared to $68 million last year and no outstanding balance on our line of credit.

Consolidated net receivables were $142 million, an increase of $27 million compared to last year due to the higher level of sales recorded during the quarter.

Consolidated DSOs were 59 days compared to 81 days last year.

This decrease reflects more normalized terms this year compared to last year and is in line with historical levels.

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

Net inventories totaled $211 million, an increase of $50 million compared to last year.

This increase is due to a couple of factors.

First, it reflects additional products in our product line this year as compared to last year.

Examples include the new Hogan wood line this year compared to no woods offering in 2004 and an increase in the number of Callaway Golf and Ben Hogan Iron models in 2005 compared to 2004.

Secondly, last year's inventory level was lower, reflecting the compensation program we had implemented that provided free product to retailers, allowing them to reduce prices and accelerate sell through.

Lastly, we implemented a new supply chain methodology this year that frankly limited our visibility to incoming receipts of product.

As a result, as we tried to catch up on our supply shortages this year, we acquired more inventory in a few current product lines than we would have liked.

We have since corrected this visibility issue and with regards to the inventory, we feel the quality is good and are comfortable that we will be able to move it through our normal channels without any difficulty.

Looking forward, we would expect to see additional increases in our inventory during the fourth quarter, as we build inventories of new products to be launched and shipped in early 2006, and then start to decline as we move into the middle of next year.

CapEx for the quarter was $7 million, bringing the total for the year to $26 million.

Our forecast for 2005 is estimated at approximately $35 million.

We are finalizing our 2006 budget and don't have a firm estimate at this time, but directionally, I would anticipate that our annual CapEx will be lower in 2006.

Depreciation and amortization was $8 million for the quarter and is estimated for the full year to be approximately $40 million.

As with CapEx, I do not have an estimate for 2006 yet until we complete our budgeting cycle, but we would also anticipate this amount to be less in 2006.

Finally, as we announced on September 29, actions were taken to improve business processes and reduce overall expenses by approximately $70 million on an annualized basis by 2007.

Restructuring charges associated with these actions total $6 million pretax in Q3 and are estimated to be $6 million pretax for the balance of 2005 and into 2006.

As we stated, the positive impact in 2006 is estimated to be between $50 million and $60 million, affecting both costs of goods sold and operating expenses.

Some of these savings will be reinvested back into the business to generate growth, but a majority is expected to flow through to the bottom line.

These actions, along with the business process improvements we have taken and other initiatives currently underway, should position us for an improved 2006.

We would now like to open the call for questions.

(Operator Instructions) Our first question is from Rommel Dionisio with Wedbush Morgan.

Go ahead, please.

Hi, good afternoon.

Just looking on the putters business, could you just update us on the itracks launch, I know, that was (inaudible) .

Is that performing roughly in line with expectations?

I don't think you mentioned that on the call?

We did launch that under the Callaway name, and it has been out in the marketplace.

I'll tell you that it probably hasn't moved as quickly as we would like.

And we are kind of reevaluating the whole putter business.

But it is in the marketplace and I will tell you, it didn't really achieve the level of sales that we would have hoped for.

If then also, Brad, just with regard to the ball business, at what point does that SKU reduction in Top-Flight anniversary?

Well, I would certainly hope that as we go into next year, as we've firmed up, kind of, our channel strategy and as we have fine-tuned the SKU lineup, if you will, that next year we should, certainly, have anniversaried everything that we did going into this year.

But this year, certainly, we had reduced the SKUs going into this year.

Okay.

Thanks very much.

You bet.

Thank you.

We also have a question from Tim Conder with AG Edwards.

Go ahead, please.

Thank you, operator.

Brad, on the inventory, feeding off the previous question, is some of that or a large chunk of that weighted in some of these putters that you maybe had a little bit more expectations for and you are kind of readjusting those now?

And then just to, sort of, revisit a couple of items from late September in your announcement then, could you - maybe as we have had a little bit of time here -- has passed and then for you guys to look at it a little bit more, give us maybe an updated or an updated thought as to how much of those savings you anticipate accruing to operating profits?

And then, George, also to somewhat revisit -- is your CapEx likely going to drop for next year?

I know you are focused on getting these issues and improving the profitability of the company, but it would seem with improving capital position and the stock, if you think the stock is undervalued, you may want to use some of that cash to step up a share repurchase plan.

Okay, we will take those in some order.

First, the first point, the inventory issue that Brad referred to really has nothing to do with putters.

The inventory on itracks (ph) is pretty much in line, and that really doesn't represent a problem.

The inventory that he was referring to was fundamentally some component inventory that happened to be for a current product and shouldn't be a problem going forward because all of those items are active, but it is higher than the level we would normally want to keep.

As far as dropping some of the savings through to profitability next year, I'm really not in a position to give you much more color on that from our statements on the 29th.

We are really in the middle of reviewing the marketing plan.

I can just reiterate that the majority of it will, in fact, fall through.

Exactly how much of it will be reinvested in some additional marketing programs at this point is not finalized, so I can't give you a number there.

As far as CapEx is concerned, we've had some additional CapEx expenditures relating to some ball technology and that sort of swelled our numbers as far as this year is concerned.

Brad's estimate that we will probably fall back to more traditional levels next year, I think, will hold.

The only caveat on that would be, as I indicated, we are going through a great deal of review on possible automation opportunities and things of that sort.

There is a possibility that some of those projects may, in fact, come to fruition earlier than we think and they may entail some CapEx, although I'm not in a position to tell you that.

If the question is whether or not some of the money is going to be reinvested in share repurchase, that is, in fact, being looked at by the board and is pretty much on the table all the time.

But we are not in a position to tell you whether or not that is going to happen next year.

Okay.

And, Brad, could you just remind us on a year-over-year basis, the dollar has rallied relative to the euro especially for the fourth quarter, can you just update us where you stand on currency hedging looking out into '06?

We are not hedged on any anticipatory transactions at this point, Tim.

I mean, it's been kind of all over the board this year.

We do, as you know, balance sheet hedging.

So anything that we would ship over there, we cover any kind of an inter-company balance sheet transaction.

And that's all we are hedged on right now.

We've been kind of sitting back watching the dollar to see what it would do.

Okay.

Great.

Thank you, gentlemen.

You're welcome, Tim.

And for any further questions or comments, please press "star, one," now.

It's hard for me to believe that we answered everybody's questions, but I'm really happy to hear that.

Bradley Holiday.

Wait.

I think we have another one.

We have another one.

Just one moment, please, for the next question.

And we'll go to James Young with AIG.

Please go ahead.

Thank you.

I just have a question about your component of raw material costs in its current environment, if you could make a comment, please?

Right now, our raw material costs are pretty much under control and contained, and we are certainly covered through this year.

The uncertainties that are, sort of, on the horizon for '06 are, in fact, that.

You know, some of our products are, of course, petrochemical-based.

And we will have to see how our oil costs go.

There is also some uncertainty as to exactly how the market would or would not bear a cost pass-through.

So that's something that we are looking at very carefully as well.

At this point in time, our view is that our margin situation for '06 is probably going to be pretty good.

Now, if something untoward happens, if we have another hurricane in the middle of December, God knows -- but at this stage, I think we are pretty well covered as far as our cost expectations and our margin planning, I think, is looking positive for '06.

Have you received any kind of pricing pressure from your component suppliers, whether it be shafts or grids or anything like that?

We typically lock our prices in well in advance.

So like our prices were pretty well fixed for this year, as we had our product lines, and have negotiated all of the pricing on them.

I think, going forward, there will be some obviously upward pressures on some of the raw materials.

Titanium is one that has kind of been raised to an issue here of late.

But to George's point, I mean, the things that we've seen, at least indications, right now, are things related to the ball business.

Okay.

And I think you touched on it really briefly, but how have the hurricanes kind of impacted you?

I know consumer sentiment is a little bit down.

Well, they have affected us to some degree, obviously, in the low part of the country, where they have been pretty seriously affected.

The overall impact on sales has not been that substantial.

I mean it is certainly measurable, but not of a nature that will materially impact our results.

Clearly, rounds are going to be down in that region and to some degree some purchases are going to be down.

But thankfully, it hadn't affected a broad enough geography to really materially impact our results.

Okay.

Thank you.

Your next question is from Bill Dobbs with Merrill Lynch.

Please go ahead.

Hi.

If we could just back up to that, I think, it was Tim Conder or someone's question about the potential share repurchases.

Can you go over again what's your current authorization availability into that?

We still have an outstanding $8 million authorized by the Board of Directors.

That hasn't moved in the last year -- over a year.

And I think, to George's point, we talk about this usually every board meeting with the members of the board, and it's a topic that gets discussed.

And they have always been supportive of any actions we have taken in the past.

All right. $8 million is -- I know, you guys have bought back stock in the past.

So $8 million, though obviously, in -- when is your next board meeting?

November.

November.

But, they have always kind of authorized us in trenches as they found appropriate.

Yes.

I mean, it seems to me $8 million - you could go through that in a couple of afternoons.

So, just speaking as a shareholder, if you know, if potential transactions aren't interesting to us, you know, in the high teens because it -- because they undervalue our company -- I think speaking as a shareholder, I wouldn't mind seeing you putting -- the board putting authorization and actual repurchases down here at $13.34 -- would actually demonstrate that you, you know, followed through with that.

So for what it's worth, that is shareholder's two cents, so.

It's more than two cents.

We appreciate the comment and, obviously take it very seriously.

You know, our focus at this point in time is to drive that value.

But clearly, if it seems advantageous for us at a particular point in time to exercise that authorization by the board, we'll indeed do that.

Okay, great.

Thanks a lot.

We will now go to Mark -- I'm sorry -- Casey Alexander with Gilford Securities.

Please go ahead.

Hi, good afternoon.

Have you committed to the PGA show for 2006 in Orlando?

Yes, we have.

Okay.

And 2007 is still up in the air, right?

Yes, it is.

Okay.

Are you renegotiating any of your tour contracts in order to get some cost savings out of that area?

We are re-looking our tour strategy, for sure.

And undoubtedly as I'm sure every year, there will be some changes.

What about future acquisitions?

You know, this industry is in a great deal of flux, if you think you have things stabilized here, you know, is there anything interesting coming across the transom (ph) and then could you get some integration cost savings out of future acquisitions?

Well, the first part of your comment, I think, is very appreciated, but I don't think we have got everything totally under control as yet.

And I think it would be prudent for us to make sure that we have got our backyard cleaned up before we started looking actively for acquisitions.

Once having done that -- and I anticipate that's not going to be an extremely long period of time, you know, we would certainly decide what our future would be and whether or not acquisition would be a significant part of that and we would then be on the lookout.

But right now, the vast majority of our energies are focused on fixing up the problems that Brad alluded to in his comments and that we talked to in our conference call on the 29th.

There was a statement earlier that the costs savings are going to come out of, you know, both the expense side and the cost of goods side.

But on the last call, it was said that what would come from cost of goods sales would be marginal, not meaningful.

Where is the distinction there?

Is it marginal or is there meaningful cost of good sales savings to be had or is most of this going to come from below the gross profit line?

What I think we said and perhaps we weren't as clear about as we might have been, but the vast majority of the $70 million that we talked about in the call on the 29th were operating expenses.

There were some - some small portion of that which did, in fact, come out of cost of good but that was not the bulk of it.

The bulk of it was from operating sense expenses.

What we indicated was that Phase II of this exercise was to go aggressively against cost of goods and our focus at this point in time will be at the gross profit line, and we believed at this stage that there are measurable savings to be had at the gross profit level as well, but that would be above and beyond the 70 that we talked about last call.

Well, at the gross profit line, is that going to have to be through some type of process improvements then, because I would think that the materials side and the cost pressures on the material side is working against you there?

That's correct.

I mean, the material side probably will be.

But again that presumes that the materials used in the future are the same as the ones we are using now, and I'm not certain if that's necessarily good assumption.

But beyond that, you are absolutely correct.

I think we have lots of areas in process, in automation, and in sourcing that we believe can yield fairly significant savings at the gross profit line, and we are going after those fairly aggressively now.

Is it possible that, you know, not just sourcing, but assembly and things of that nature could be moving to the Far East?

Is that under consideration?

That's certainly one of the things we are looking at, but we are also looking at some technologies that perhaps make the entire assembly operation more efficient and it would make it perhaps unnecessary to move more over to the Far East.

I think our attempt will be to try to come up with the best combination of low-cost assembly and supply chain issues.

Obviously, when you go overseas, there may be some cost savings on the labor side, but then you have some work in capital issues - a longer supply chain, inventory impacts things of that sort.

So it's not just simply the pennies to put it together but rather the total usage of our fund.

Oh, okay.

One last question, the one thing that was identified on the last call was the rationalization of the sales force.

How far along are you in that process and to be delicate to the, I'm sure, other people are listening to this call - you know, what percentage of the sales force ultimately is likely to be rationalized?

Well, the process is completed, so the rationalization is done.

I will say that the early and, in fact, the newly structured sales organization is out selling right now what we call the full run, which is the introduction of new products for next year, the initial response from the marketplace has been extremely positive.

The accounts appreciate having one resource to call on as opposed to having self salespeople call on to the same products.

So the efficiency of the organization but also the customer service implications are all pretty well received.

So we're fully into that new structure.

What percentage are you down to as opposed to the number of salespeople?

I won't ask raw numbers because I don't think that's fair but if before the call it was 100% of your sales force, what percentage of your sales force is it now?

Well, it -- if the question -- let me see if I can answer the question this way.

The sales organization currently is larger than the sales organization that Callaway had previously.

Some proportion of the Top-Flite sales organization was retained and integrated into the Callaway sales organization.

The territories were restructured to be smaller, therefore requiring less wasted time for travel.

And the duplication in terms of having two salespeople call on the same account versus one under the current circumstances has made it a whole lot more efficient under the current circumstances.

So the net is, yes, a portion of the Top-Flite sales organization became redundant, but the total sales organization we now have working against the trade is measurably larger than it was originally.

All right, I'll try that one again later on.

Thank you very much.

Fine.

We will now go to Mark Travis (ph) with Grace & White (ph).

Go ahead please.

Thank you, good afternoon.

I just want to go back over the raw materials.

I guess there was some mention in the press a couple weeks ago regarding certain rubbers and plastics, especially in ball production.

Have you had any curtailments of deliveries?

No.

As Brad indicated, we covered forward fairly substantially.

You're talking largely Surlyn which was interrupted to some degree by the storms.

But our supply was more than adequate because we had anticipated and covered it forward, so we really had no interruption.

Terrific.

Also I guess on the Surlyn side of the business, have you picked up any more range in that business?

Yes, we have as a matter of fact.

Our sales organization is meeting with a fairly good degree of success in getting a larger range ball business which as you know is a great seed for regular ball business.

So the overall ball opportunity looks very attractive.

Terrific.

Thank you very much.

You're welcome.

We also have a question from Bob Grudges with Sterling Capital Management.

Please go ahead.

Good afternoon.

Relating to the cost savings that are going to be realized next year, you have got a seasonal business, how should we expect to see the flow and the increase on your operating margin as the year progresses?

Is it going to be a back-end loaded or somewhat ratable through the year?

It should be pretty ratable through the year.

I would expect it to fall roughly the way the volume falls because most of the operating expense items are fundamentally calendarized.

I mean, they fall the way they fall.

So no, they are not back-ended at all.

Right.

Thanks.

You are welcome.

Once again, if you have a question or comment, please press "star, one" now.

And we will go to the line of Linda Parker (ph) with Reeds Associates (ph).

Please go ahead.

Hi, yes, thanks for taking my call.

I'm trying to get a better sense for what we should be looking for in the December quarter.

I don't think you have talked about that.

No, we didn't, and we probably won't.

As you know, we are not giving guidance, and so we are going to be somewhat limited in terms of how much forward-look we can give you.

But I'd be happy to try to address any question you have.

Linda, this is Brad.

One thing that I would comment on is that we will have less new products launched in the fourth quarter this year than we did last year, and I think you should take that as you try to consider the fourth quarter.

Okay.

Last year fourth quarter is when business got sort of tough, though, right?

So it was sort of a difficult quarter?

No, it got tough in the second and third quarter when we were compensating a lot of free product into the marketplace to try to lower the pricing.

But fourth quarter, we came out with, I believe it was the Fusion irons and the white steel line of putters and than we also came out with Hogan Wood.

So we've launched the new products that, you know - once again there is pipeline built towards the end of quarter.

I'm just telling you this year we really don't have that many products targeted right now for fourth quarter.

Okay.

And what about on the ball side?

So you have some good momentum with balls and just give us a sense for whether the season is sort of extended a little bit with mild weather in the north of the country this year?

Well, you know, we are always subject to the weather to some degree.

As you realize, we really look at the business in sort of two phases, you have the Sunbelt, the sort of year-round golf portion of the world, and the northeast or the northern tier, I should say.

Unless I can predict weather better than the next guy, I really can't tell you how mild or how long the seasons are going to be extended going forward.

Okay, but we are already through October and it seems like it has been -- I mean, we don't even have leaves on the ground here in the northeast yet.

It has really been unusual.

So can you say, you know, so far, this quarter there has been a higher incidence of rounds played or anything like that?

Well, in the northeast, actually, on a year-to-date basis, the northeast is down in rounds played.

And, you know, for August it was positive.

So I think it reflects probably some of your, maybe, mild weather but on a year-to-date basis, it's actually down.

The total U.S. in rounds played for the month of August was actually up 0.6%.

That is 6/10 of a percent, so slightly better than even.

And on a full year basis, the U.S. was down 6/10 of a percent.

So fundamentally, the rounds played are pretty even.

And we don't have any better data since August?

No, the latest report that was issued, in fact just recently came out was through August.

Unfortunately, that is as close as we can get to it.

I would tell you that given the storms and the activity in September, my presumption would be that rounds will be down in September, but that's just a guess based on the weather reports that both of us hear.

Okay.

It looks like business in Japan has improved quite a bit.

Is there anything that you can talk about, you know, sort of anecdotally there?

Well, we've got very successful driver launches, as I think we have mentioned before.

The comparisons to '04 to some degree are little unfair. 2004 was not a very good year for us.

We had a lot of mechanical issues that I think interfered with our business in '04, some of which extended into '05.

I think as we go out of this year and into '06, we'll get a better sense of the health of the business.

All of the signs that we look at are quite positive.

And we are actually looking forward to a pretty good forward-look.

I will just tell you that so many atypical things happened between '04 and the beginning of '05 that most comparisons, I think, would be questionable.

Okay.

And then just one more, you commented that you had implemented some new systems and it gave you some low visibility on your inventory flows, I don't quite get what you mean on that?

Well, there were -- there is a process called lean con baum (ph) that was tried at the early part of this year.

Unfortunately, while the concept is good, its application to our business was less than ideally made, and as a consequence, sad to say, we did not get any of the benefits associated with that kind of a system, but we sure got a whole lot of trouble.

And it allowed our inventories to get somewhat out of whack.

It certainly created the supply problems that we had particularly with the FT-3 driver this year.

Our people jumped on it and eliminated that process and went back to some more tried and true things that we had done in the past.

But, unfortunately, we suffered the consequences of moving into a system that just didn't work for us.

You know, there is no other way to say it other than the fact that we did not do well with it.

But what was the timing?

When did you move into it and when did you move out?

I think we moved into it very late last year and then moved out of it probably at the end of the first quarter, first part of the second quarter of this year, and we have really been struggling to catch up ever since.

The struggling part of it is sort of a good news-bad news story.

It's unfortunate that we got into that situation.

The fact that the recovery lasted so long was actually a reflection of the fact that the products that we launched were particularly well-received by the marketplace, and so we were chasing very substantial volumes and, unfortunately, because we had the difficulty to start with, it took us quite a while to get out from under.

Do you feel like timing-wise you're okay or did you miss a window with those highly demanded new products?

Well, you know, I would be crazy to say that we didn't leave something on the table.

Of course we did.

I think we are taking some steps now, because the technology that we launched with the FT-3 driver particularly, is outstanding and the product is really, really very good, probably certainly from our point of view the best driver in the business.

So we are going to be taking some aggressive actions this fall to sort of re-stage that business and give it its second shot.

We certainly don't want to walk away from a technology that is as good as that one is.

So we think we'll be able to recoup much of, but certainly not all of, what we perhaps lost during the early part of this year.

Okay.

Thank you.

You are welcome.

Your next question is from Scott Surer with Global Capital (ph).

Go ahead please.

Hi, guys.

I can't recall, George, did you guys say, when you announced your restructuring to take $50 or $60 million (inaudible) out of the business, did you say what was your three-year goal was in terms of the operating model?

That being EBIT margins, return on capital, inventory returns?

You know, things that need to be - did you kind of lay out that framework?

No, we didn't lay it out at that call.

We are in the process of going through a three-year strategic plan outlook right now where we will be establishing those targets for ourselves over the course of the next several weeks and/or couple of months.

So we are certainly going to add those targets and we certainly have the projects that we are trying to put in place that will help us get there, but we did not broadcast those at the last call.

Do you think at that point you will be prepared, let's say by the spring, to have an analyst meeting or on a conference call kind lay it out for investors as to what those metrics are and what you are going to feel like you are going to be holding yourself accountable to in time compensation to?

Is that -- you know, is that a venue you think it would be appropriate at that point to discuss these issues?

I don't think that's unreasonable.

I think that we are going to set some fairly clear targets for ourselves.

I think, hopefully, they will be stretched but achievable, and I think perhaps this spring if we feel comfortable enough that we have gotten all of the things in place that we need to have in place, I think we could probably share some of those with you.

I think that would be very helpful and so go a long way to qualm some of the issues that are being raised on the call.

Certainly, there were some about stock buybacks and other issues, and certainly, whether -- it doesn't matter who you are, $15.50 or $16, whatever the number may be -- to the extent, there was a formal offer.

Some people prefer bird in the hand.

So, in order to justify turning that offer down, management has to be able to get to something with a two in the first digit within two years in order to justify that.

You need to be able to sort of generate about 30 to about 50 worth of earnings, which means you kind of have to get to 13% or 15% EBIT margins.

So I think, it will go a long way fairly quickly to lay out for people how we are going to get there.

One of my guesses, in subsequent conference calls, you will begin to continue to hear people suggest they are not quite sure why we didn't take the bird in the hand.

I understand that, and the point is well taken.

In fact, I've written down the numbers that you have given me, and we'll work our way towards them if I can.

Thanks, Scott, and that'll be great.

We look forward to hearing about it.

Good deal.

Thank you.

And we also have a question from Teddy Fueng (ph) with CSFB.

Go ahead, please.

Hi, good afternoon.

How do raw materials contribute to your total cost of goods sold in terms of on a percentage basis?

Hello?

Yes, give us a moment here.

I'm sorry.

All right.

It's fairly significant.

The only reason I'm pausing is because obviously by product, the labor content is substantially different.

In the ball business, obviously, it's a significantly automated process, so raw materials are a very significant portion of that cost.

In the case of Clubs, and again, depending on which club, the labor content gets to be substantially higher, so raw materials become a smaller proportion.

So I can estimate an amount for you.

But I tell you, to do fairness to your question, if we can get back to on that, I would feel a whole lot better because I could give you more accurate estimates.

But I would think that raw materials are certainly well north of 50% of the cost of our products and probably closer to 60%-plus.

So, if that's the case, going into next year, I mean, are we potentially seeing kind of like at least a 10% rise across the board on the raw materials or...

No, I think that's significantly higher than we would anticipate and certainly significantly higher than we're seeing.

And as for like OpEx cost savings, will you start seeing some of that in the fourth quarter?

We are going to see some minor amounts of it in the fourth quarter, yes.

Don't forget to the extent that some of those things related to headcount issues, the severance charges, et cetera, all hit you now.

So the net as far as the P&L is concerned, would not be that apparent.

We'll start seeing a good portion of that begin in the first quarter obviously.

Okay.

And lastly, what is kind of like, incentive structure like for your new sales force?

I guess what I meant by that is that given kind of your new sales force will be selling across all products and all brands -- is there a risk where they are satisfied with just selling kind of X amount of woods and left-off selling the amount of irons and balls and what not?

No, I think that's a fair question.

But obviously, in order to avoid any tendency to go in that direction, you set up the compensation structure so that pieces of it are against each individual segment of the business, so that one can't compensate for a failure in one with over-performance in another.

Okay, great.

Thanks.

You are welcome.

We have no further questions, Mr. Fellows.

Please go ahead with your closing remarks.

Thank you very much.

Again, I appreciate the interest, and I appreciate your involvement with us.

We have been somewhat restricted in terms of the amount of information we can give out specifically in terms of guidance, and I hope you appreciate the reason that we really are not in a position to do that right now.

But as we indicated, as we get further along in our process of restructuring the company and making the savings that we are targeting, we will hopefully be in a position to share with you some of the targets that we have established for ourselves.

We will also be in a position to reveal some more of the savings that we are currently working very aggressively against.

And I think we will leave it to you to determine at that point what the appropriate valuation for the Company might be.

But in the meantime, again, thank you for your interest.

And we look forward to your continued participation with us in the coming quarters.

Thank you.

And ladies and gentlemen, that does conclude our conference for today.

Thank you for your participation and for using AT&T Executive Teleconference.

You may now disconnect.