Topgolf Callaway Brands Corp (MODG) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, welcome to the Callaway Golf fourth quarter results conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Brad Holiday, Chief Financial Officer, please go ahead.

Thank you, and welcome everyone to Callaway Golf Company's fourth 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 Company's 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 2006 capital expenditures and depreciation and amortization expenses, the estimated remaining Top-Flite integration charges, as well as the estimated remaining charges relating to the restructuring initiatives announced at the end of third quarter 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 the completion of the Top-Flite integration or restructuring initiatives 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 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 Top-Flite operations and charges associated with the restructuring initiative.

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 fourth quarter.

Consolidated net sales for the quarter were $155 million, the highest fourth quarter for the Company since 1997, and an increase of 7% compared to last year's sales of $144 million.

We reported a net loss for the quarter of $19 million compared to a net loss of $28 million last year and a loss of $0.27 per share versus a loss of $0.42 per share the prior year.

On a pro forma basis excluding after tax integration and restructuring charges of $3 million or $0.05 per share for both 2005 and 2004 we had a net loss in 2005 of $15 million or $0.22 per share compared to a net loss of $25 million or $0.37 per share last year.

Looking at sales by product segments our wood sales for the quarter were $43 million, an increase of $18 million when compared to 2004.

This increase was due to the sales of our FT-3 Fusion and Big Bertha 454 drivers introduced earlier this year as well as the launch of our FT-3 fairway woods.

This increase also reflects an increase in the average selling price compared to 2004.

U.S. revenue market share through November for woods according to Golf Data Tech was 18.6% compared to 20.1% last year.

Sales of irons were $37 million compared to fourth quarter sales last year of $39 million.

These results include strong sales of our X-18 and X Tour models, offset by lower sales of our Fusion irons which were introduced during the fourth quarter of last year as well as lower sales of the Big Bertha '04 and the X-16 models.

U.S. revenue market share through November was 27.3%, up 5 percentage points compared to 2004 and more than double that of our nearest competitor.

Putter sales were $21 million, an increase of $2 million compared to last year's $19 million reflecting the launch of the Odyssey Dual Force II model in the fourth quarter of 2005.

Partially offsetting this new putter introduction were decreased sales of older White Hot and DFX models of putters.

U.S. revenue market share through November was 36.4% down 1.7 percentage points versus last year, but 70% higher than our nearest competitor.

Golf ball sales were $35 million for the quarter compared to last year sales of $44 million.

This decrease was due to lower Top-Flite sales, partially offset by increases from the Callaway X56 and HX Hot Models introduced this year and the continued success of our HX tour ball.

Callaway Ball Market share maintained a 10.5% revenue market share in the U.S. through November and was the number two brand in the market place.

Top-Flite's market share was 4.6% for the same period, a decline of 2.3 percentage points from 2004.

Combined, the two brands are number two in the marketplace and represent 15.1% in market share down 7/10 of a percentage point versus last year.

Turning to our regional breakout U.S. sales were $77 million for the quarter compared to $86 million last year.

International sales were $77 million compared to $59 million last year, an increase of 31% with strong results in Asia and South Pacific.

FX Translation had a negative impact of $3 million on international sales for the quarter.

Pro forma fourth quarter gross margins excluding integration and restructuring charges were 32% of net sales compared to 28% in the prior year.

Positive volume or positive sales volume and mix trends more than offset negative ball manufacturing variances due to lower volumes.

Reported gross margins were 31% of net sales compared to 27% in 2004, including integration and restructuring charges of approximately $1 million for both years.

Pro forma operating expenses for the quarter excluding integration and restructuring charges were $76 million compared to $84 million last year.

The year-over-year decrease reflects lower selling and advertising expenses as well as the positive impact of the cost reduction initiatives taken late last quarter.

Integration and restructuring charges related to operating expenses totaled approximately $4 million for both 2005 and 2004.

Let me very quickly review the results for the full year.

Consolidated net sales were $998 million, a record for the company and a 7% increase compared to 2004.

We reported net income of $13 million, our fully diluted earnings per share of $0.19, compared to net loss of $10 million last year or a net loss per share of $0.15.

On a pro forma basis excluding after tax integration and restructuring charges of $13 million or $0.19 per share for 2005 and $17 million or $0.26 per share for 2004, we had net income of $26 million or $0.38 per share compared to net income of $7 million or $0.11 per share last year.

Highlights of sales by product segments include wood sales for the year of $241 million, compared to $239 million in 2004.

Iron sales were $317 million, up 22% from last year's $259 million while putter sales increased 9% to $109 million.

Golf ball sales were $215 million compared to $231 million in 2004, a decline of 7%, and accessories and other sales increased 11% to $116 million.

Pro forma gross margins excluding integration and restructuring charges were 42% of net sales compared to 40% in the prior year.

This improvement is due to positive product mix and favorable foreign exchange impact partially offset by lower average selling prices for woods this year.

Reported gross margins were 42% of net sales compared to 38% in 2004, including integration and restructuring charges of $8 million in 2005 and $16 million in 2004.

Moving to the balance sheet, we finished the year with $49 million in cash and no outstanding borrowings on our line of credit.

This compares to $32 million in cash last year and borrowings on the line of credit of $13 million for a net cash balance of $19 million.

Consolidated net receivables were $98 million, a decrease of $7 million compared to last year despite the higher level of sales recorded during the quarter.

Consolidated receivable DSO improved to 59 days compared to 67 days last year and is in line with historical levels.

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

Net inventory totaled $242 million, an increase of $60 million compared to last year.

This increase is due to a couple of factors.

First, as I mentioned last quarter it reflects additional products in our product line this year as compared to the prior year.

Examples include the new Hogan line of woods 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.

This overall inventory increase also includes a year-end build up of new products to be launched and shipped in early 2006.

Inventory levels should start to decrease as we complete our new product pipeline fill, but will most likely remain higher than 2005 due to our decision to maintain higher levels of inventory this year to assure we have sufficient product availability during the season for our customers.

Overall networking capital increased year-over-year by 9% to $298 million, reflecting this increase in inventory partially offset by higher payables and the improvement on accounts receivables.

Capital expenditures for the quarter were $9 million, bringing the total for the year to $34 million in line with our forecast of $35 million.

We estimate 2006 capital expenditures to be in the $20 to $25 million range.

Depreciation and amortization with $7 million for the quarter and for the full year totaled $38 million.

Compared with our last estimate of $40 million.

Our estimate for 2006 is a range of approximately $25 to $30 million.

Finally, as we look forward to 2006 we are off to a good start.

We have several new products across all of our product categories that we have already started shipping and have additional new products being introduced at the PGA show in Orlando.

Response from our customers on our new products so far has been very positive and along with the initiatives we have taken to address the supply issues we experienced last year, we feel 2006 will be a better year from an overall customer service perspective.

Since George has joined the Company there have been significant improvements made on forecasting and product development processes as well as in our supply chain that should improve our year-over-year performance.

We have committed to higher levels of core inventory to assure we can achieve forecasted demand in 2006.

We have also taken steps as we announced last September to reduce operating expenses, which will positively impact our results in 2006 and are focusing on additional initiatives that will positively impact our gross margins.

There are a couple of things to keep in mind from a financial perspective in 2006.

First, as we mentioned in September when we announced our restructuring initiative, our estimate of charges associated with these initiatives was approximately $12 million with $8 million impacting 2005 and the balance of $4 million to occur in 2006.

We have not revised our total estimate at this time and we will keep you updated as appropriate throughout the year.

In addition to these charges, we estimate additional charges of $2 to $3 million to complete the restoration of the ball manufacturing plant here in Carlsbad that we shut down near the end of 2005 when we transferred the balance of golf ball production to our Top-Flite facility in Massachusetts.

This will bring the total charges for the Top-Flite integration to $68 million, slightly higher than the $60 to $65 million we had originally estimated.

Lastly, FAS 123 R which deals for the accounting for stock based compensation takes effect at the beginning of our 2006 fiscal year.

We will provide detail throughout the year surrounding these charges to allow you to make the appropriate year-over-year comparisons.

We would now like to open the call for questions.

Thank you. [OPERATOR INSTRUCTIONS] And our first question is from the line of Alexander Paris from Barrington Resources, please go ahead.

Good afternoon.

Hi Alex.

You mentioned new products, I know you've, by my keeping track you've introduced or announced three recently.

Are those the ones that you're talking about already shipping and then there are others that you're introducing at the show or are those one and the same?

No, there's some additional products that will be introduced at the show tomorrow when the show opens, Alex.

I see, thank you.

Just one other thing, in the decline in the ball sales in the quarter in the year, was part of that or was it a significant part of that reducing SKUs or no?

Some part of it was in fact reducing SKUs particularly -- well, across the line actually.

We found that I think we were over SKU'd and the objective was to bring it more in line with the market.

The Callaway ball business was in fact very strong and increased substantially over the prior year.

Because of the integration issues with Top-Flite that brands ball sales suffered somewhat, but we anticipate that that will fall back into line in '06.

Just one other thing tied in with balls.

The rounds played, the most recent one, what was that November, was that still down?

No, it was up about 10%.

I think when you take a look at the full year it's going to be pretty much flat.

So I think the long-term slippage if you will in rounds played has essentially played itself out.

I would expect that--again it's hard to predict obviously the weather, but I would expect that flat would be the worst we should do next year.

Alex, this is Brad, it was up 10.4% in November and to George's point it was up just 4/10 of a percentage point on a year to date basis so fairly flat on an annual basis.

And you just said you thought at worst it would be flat, not knowing what the weather is going to be.

That presumes that you have determined the long string of declines was explainable.

Well, it's tough to explain things like that, but fundamentally the demographics are still working in favor of this business as more and more people get into that retirement and heavier golfing period.

So whatever some of the underlying and hidden reasons for rounds played being down I think we will more than offset them by the demographic trends.

Thank you very much.

All right.

Our next question is from the line of Rommel Dionisio from Wedbush Morgan, please go ahead.

Good afternoon.

With the rest of the supply constraints or the capacity constraints you talked about, Brad, in your prepared comments, is it possible to quantify what impact that had in the quarter and what businesses that might have impacted?

Well, the quarter, the fourth quarter really wasn't much of an issue as much as it was for the full year, Rommel.

As you know we were constrained kind of during the peak season on some of our key products, 454 is one that comes to mind and the Fusion driver.

So those are the ones that I was really referring to, it was really on an annual basis.

Fourth quarter we were in pretty good shape.

And also, what extent did raw materials impact the quarter on the share prices on gross margins?

Negligible, we have seen some upkicks we talked about last quarter on golf ball as petroleum based products have spiked up, we certainly saw some of that, but most of the time we have a lot of those costs locked in for the year, but we are seeing upward pressure on the ball related raw materials.

Right now you are?

Yes, and looking into '06.

Right, okay thanks, Brad

Our next question comes from the line of Tim Conder from AG Edwards, please go ahead.

Thank you operator.

Several questions here, Brad and George, as usual.

Brad, could you give us a little clarification, you talked about foreign exchange in the fourth quarter, was that 3 million, was that on a revenue line or were you talking EBIT or gross margin.

That was on revenue, Tim.

Do you have the number for the year as a whole, Brad?

It was a positive 9 million I believe.

We'll confirm that, but I'm pretty sure it was 9 million.

Okay, positive on the revenue line.

Do you have that for the EBIT?

I do not.

Okay.

That gets a little bit harder to calculate, but it was 9 million top line.

Okay, and just a follow up on one of the first questions there, the stock out or the supply issue problems that you had on the 454 and the Fusion, any way to quantify or ballpark sales maybe, dollars that you missed as a result of that?

Well, not really, because I mean clearly we lost some sales because we didn't really get current on the FT-3 shipments until November frankly.

And at that point in time I think clearly some sales might have gone to some of our competitors.

It's very hard to put a specific number on it, but that's exactly why we have sort of changed our inventory philosophy against the new products introduction to insure that is not the case in the coming year.

And, George, would you guess, would that be the majority of the reason despite the success of these new products that you saw continued erosion in your wood share this year?

Yeah, frankly we think that was the major factor.

If you take a look at the success that the brands had, that 454 and the FT-3 had from a consumer point of view you clearly would have expected different results on the share.

If we had been able to provide the quantities that were being demanded.

While we're now caught up and we are obviously hopeful going into '06 we're unfortunately chained at what we left on the table for '05.

Okay, and then any thoughts, gentlemen, here or explanation of why Japan, Asia, so strong this year, maybe you had a little bit of depressed in '04, but so strong this year and type of trend line from what you're seeing at this point, expectation for '06 for those geographic areas?

The products were extraordinarily well received in Asia this year.

And even with the supply shortages they did extremely well.

We are seeing fundamentally a similar acceptance on the products that we have launched so far for '06.

So our expectation is that Asia will continue to be strong going into the year.

Okay.

And, Tim, on that, just so you know, I mean the FT-3 version, the Japan version of that we launched before we launched it here in the United States and had a fair amount of supply, that's one of the reasons we had a shortage in the United States is we had a successful launch and that was a very popular driver to George's point.

We also launched the ERC Hot golf ball which was extremely popular over there so it boiled down to just very popular products in Japan.

Okay, and Brad, could you just refresh us on the third quarter what you outlined on the savings for '06 and '07, what you expect to realize in '06 and '07 and then as a part of all of that directionally the components of your operating expenses as a percent of sales or absolute dollars, when you look at selling, and G&A, and R&D, trends directionally, again, there's a percent of sales or dollars however you want to discuss it would be helpful?

Well, what we said is that with the initiatives that we took in September, late September, that we would recognize overall savings of approximately $60 to $70 million by '07.

By the end of '07.

Yeah, and about $50 to $60 million of that in 2006.

And what we said was a majority of that would fall to the operating line, we didn't get specific.

Obviously there will be some reinvestment back into the businesses and obviously there will be some inflationary points with wages and things like that.

But generally a majority of it would fall to the bottom line.

With regards to just general trends, I won't give you specifics within the operating expense category, but I think you can expect to see operating expenses drop in terms of dollars and as a percent of sales.

Okay.

And then finally, the board, you had a little bit of authorization left on your share repurchase, the board bumped that up in the fall, and still didn't look like you really did anything at all.

Maybe now you had a nice swing and your net cash position, would you expect to be more aggressive in '05 -- I'm sorry in '06 versus '05 on share repurchase as a whole?

Compared to zero, I think so.

But I think, just to be clear, Tim, basically what the board did with any of our residual that kind of got wiped out and they authorized a $50 million amount and that's what we announced.

That's how much we have as available.

We did not use any of it post that announcement, frankly because we were entering our blackout period.

We just, we're fairly conservative on that, from that standpoint.

So we have not been in the market.

But certainly compared to where we were this year, if the price remains where it is we would certainly like to be in the marketplace.

Okay, and last question, I promise, stock options, Brad, you really didn't give anything, but could you maybe refresh us, just kind of summary in the disclosures that you have in each of the queues I know, but on a full year basis here what that would have been for '05, and maybe if that would probably be directionally what we should be thinking also for '06?

I really don't have that at my fingertips here, Tim.

We could follow up later on that.

Yeah, maybe we will do that later.

Okay, thank you gentlemen.

Yeah.

[OPERATOR INSTRUCTIONS]

And we do have a follow up from Alexander Paris from Barrington Resources, please go ahead.

Just another question related to the one of why Japan was so strong, I think you explained that away, but as I look at the quarter you've go Japan up 86%, the rest of Asia up 66%, the rest of the world up 20% and Europe and the U.S. both down in the quarter.

Is that all timing of products or weather or are you putting more marketing efforts maybe and new offices in these areas that you're seeing that disparity?

Well, no, Alex, I mean really a lot of it has to do in Japan and some of the other Asian companies with the products.

Also keep in mind as we saw declines in the Top-Flite business there really isn't much Top-Flite presence in the Asian country, so most of that did hit the United States for example.

Okay.

All right.

All right, thanks.

And we do have a question from the line of Casey Alexander from Gilford Securities, please go ahead.

Hi, good afternoon.

Can you kind of give me an idea where the decline in golf balls is taking place, I mean is it majority at the Top-Flite line?

It's entirely on the Top-Flite line.

Is there an inventory problem out in the channel?

No, no.

The simple fact is I think that the integration of Top-Flite took much longer than I guess we would have liked and wasn't as smooth as we would have liked and as a consequences I think the business lacked for certain attention during part of the year.

I think we have to take the blame for that very clearly.

But the business I believe is quite capable of being stabilized and we believe that the '06 picture will look a lot more positive.

The Callaway Golf golf ball business was quite positive all year.

We are making further in roads at the higher end of the marketplace.

As you know the Top-Flite balls tend to be at the mid to lower range in pricing.

So we really have to treat them quite differently from both a trade point of view and a promotional point of view.

We're going to put plans in place for '06 to be able to reflect that.

Would you be willing to share what percentage of sales was Top-Flite for the year?

Of the sales of golf balls.

We don't usually break it down to that level between brands any more Casey, we just break out total ball segments.

Okay.

Have you identified where all of the cost savings are going to come from?

When you rolled this out in the third quarter you said that this was your plan, but you hadn't really identified where it was all going to come from.

Have you nailed it all down now?

Are you talking about from a margin point of view or from an operating expense point of view.

You said you hadn't identified where the 60 to 70 million was all going to come from.

That's quite specifically laid out, we had that quite laid out back then as a matter of fact.

What I thought you were referring to was the second initiative we talked about and that was a substantial initiative against cost of goods in margin.

In that particular case we're still in the process of pulling together the projects that we're going to be pursuing aggressively.

We have quite a list in front of us, I think the expectations that we had for the margin area that we reflected back in the third quarter are every bit as strong today as they were then.

It's a little premature to be specifying the exact projects, but we are quite bullish about the amount of money that we think is available to us in the margin line.

Casey, on the original 50 to 60 million a vast majority of it was in the operating expense line, but there was some up in the margin line.

Okay.

That's all I have for now.

Brad, I'll have more for you later.

Okay.

Thank you.

[OPERATOR INSTRUCTIONS]

We do have a question from the line of Bob Bridges from Sterling Capital Management, please go ahead.

Brad, could you maybe tick off the items that account for the Delta and the lower D & A from '04 to '05, I imagine a lot of that is the ball operation moving to Massachusetts.

Most of it was the accelerated depreciation that we took in '05, that we're done with now, so it was for the ball facility

Nothing else was hidden in there.

No.

Okay, great, thanks,

There are no more questions, I would like to turn the call back over to Mr. Fellows.

I would like to thank you very much for your participating with us.

I think the projections that we have for the business that we discussed back at the last conference call are very much intact.

We're feeling cautiously optimistic because the business is in fact developing along the lines that we had anticipated and that we're planning.

We think that '06 will in fact begin to reflect a great deal of the improvements that we have seen in the operation and certainly the early reactions that we have had in the marketplace to the new products would give us some confidence and some positive feeling about how the volume line is going to react as well.

So we ask you to stay tuned.

We think the Callaway story is going to be quite a positive one going into '06 and we look forward to having our next conference call with you in a quarter.

Thank you again.

Thank you.

Ladies and gentlemen that does conclude our conference for today.