Topgolf Callaway Brands Corp (MODG) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Callaway Golf Third Quarter 2006 Earnings Conference Call. [OPERATOR INSTRUCTIONS] Later, we will conduct a question and answer session.

As a reminder, this call is being recorded.

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

Please go a head.

Thank you and welcome everyone to Callaway Golf Company's Third Quarter 2006 Earnings Conference Call.

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

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

During today's conference call George will provide some opening remarks and 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 statements related to increases in fourth quarter sales and earnings per share, estimated fourth quarter gross margins and operating expenses, future gross margins initiatives or the amount or timing of the savings to be realized from such initiatives, restoration of the Top-Flite brand, future operating expense savings and reinvestment and achievement of three-year targets as well as the Company's estimated 2006 capital expenditures and depreciation and amortization expenses 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 applicable to the Company and its business.

For details concerning these and other risks and uncertainties you should consult our earnings release issued today as well as part one item one, item 1-A of our most recent form 10-K filed with the SEC, together with the Company's other reports subsequently filed with the SEC from time to time.

In addition, during the call, in order to assist interested parties with period-over-period comparisons, we will provide certain pro forma information as to the Company's performance excluding charges associated with the integration of the Top-Flite operations, the cost reduction initiatives announced in September 2005 and employee equity based compensation under FAS123 R. This information may include non-GAAP financial measures within the meaning of regulation G. The earnings release we issued today include 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's relation section of the the Company's website at www.Callaway Golf.com.

I would now like to turn the call over to George for a few opening remarks.

Thanks, Brad.

Greetings to all and thank you for your continued interest in Callaway Golf.

Before reviewing the year-to-date financial numbers for 2006, I'd like to review some of the major milestones that set the stage for 2007 and characterized the first year of my Callaway experience.

Results include both highs and lows but on balance reflect the fact that the Company is well on its way toward restoring its traditional position as leader in golf industry from financial trade and consumer viewpoints.

Starting with the lows, we're clearly disappointed with the time it's taking to stabilize the Top-Flite in Hogan businesses, and the financial consequences of these efforts.

While it has cost us materially in 2006, we believe we have for the first time a very credible restage plan for Top-Flite in place that will arrest its decline and set the stage for a future positive track.

Early trade acceptance and consumer testing would seem to support our optimism but clearly the jury is out.

Much must yet be done before we can consider this problem behind us.

We'll report more on our progress and outlook on our next call.

The core business, the Callaway and Odyssey brands have performed in a very solid fashion being up 7% year to date in '06.

September's brand shares versus January would support this picture with woods up 1 share point, putters up 2.3 share points, Callaway golf balls up almost half a share point and irons up 1.3 share points.

Callaway continues to be a strong number two in woods, a very strong number one in irons, very strong number one in putters and a solid and growing but yet distant number two in golf balls.

Restructuring initiatives announced last September have been successfully implemented with $44 million dropped to the bottom line versus the $25 to $30 million that we had promised.

There remains some more work to be done in 2007 but the bulk of the target has been delivered and will continue to pay dividends in 2007 and beyond.

Remapping of our new products process has allowed most of our 2006 new products to be delivered on time representing a significant improvement over our results in recent years.

We were not unfortunately totally without some problems but we expect even further improvement going into 2007.

No late launches in the third quarter of this year created the revenue imbalance versus 2005 reported in our press release.

Organizationally, we've added some very important talent and skill sets to our very solid management staff.

Bill Kenise our Senior VP of marketing has been with us eight months.

Thomas Yang the Senior VP of International has been with us for three months.

Dave Laferty our Senior VP of operations and supply chain has been with us two months and a new edition, Michelle Shanell who will be our VP of public relations is in fact joining us next week.

Each of these key managers has and or will make significant contributions to the Company's continued recovery.

Now, we have as promised in our previous earnings call embarked on the second leg of our drive through store profitability.

We have identified several margin improvement initiatives to date, that will contribute between 50 and $60 million over the next two years and they have been put in place.

With Dave's Laferty's leadership we will materially increase brand margins while improving our overall flexibility and response of this to market changes.

These will be spelled out in a few minutes by Brad with appropriate detail and will materially contribute to our progress toward the three year financial metrics that we detailed this past February.

Regarding that guidance, clearly the Top-Flite difficulties have impacted us by requiring us to start from a lower revenue base than originally projected.

However, based on the success of the restructuring initiatives and the magnitude of margin initiatives identified to date, we believe that most of the three-year metrics remain in tact albeit perhaps at the lower end of the ranges provided.

We are reiterating our intent to provide annual guidance going forward starting in 2007 and will plan to do so at the full year earnings call.

Further we are examining the extent of color commentary we can also provide to assist you in your investment assessments regarding our progress toward the three year metrics.

These additional commentaries will also come with the annual guidance provided at the full year call.

We will update and extend our three-year guidance through 2009, as well at a planned investor meeting that we currently have scheduled for mid-February 2007.

Now I'd like to pass the call back to Brad to further amplify our results and plans afterwards which we will have some Q and A.

Thanks, George.

In reviewing the financial results for the quarter we achieved consolidated net sales of $194 million compared to last year's sales of $221 million.

We reported a net loss for the quarter of $12 million compared to a loss of $5 million last year and a loss per share of $0.18 versus a loss of $0.07 per share in the prior year.

On a pro forma basis, excluding 2006 after tax charges of $0.03 for employee equity based compensation expense associated with FAS 123 R, $0.01 for restructuring charges and $0.01 for Top-Flite integration charges and 2005 after tax charges of $0.02 for Top-Flite integration charges and $0.06 for restructuring charges our pro forma loss per share for 2006 was $0.13 compared to net income per share of a penny in 2005.

The decline in net sales was primarily due to the timing affect associated with new product introductions.

In the third quarter of 2005 we launched several new products that included the FT 3 driver, the Hex 56 golf ball, the fusion fair wood and the X18 Japan model driver which represented approximately $35 million in sales for the third quarter of 2005.

This compares to no new major product introductions during the third quarter of this year consistent with the changes we have implemented in the new product development process this year which generally aligns new product launches to the market purchase seasonality.

For the quarter the biggest decline in sales was in the Callaway brand with some declines in the Top-Flite and Ben Hogan brands.

However, I would like to point out that through the first nine months the Callaway and Odyssey brands combined have generated 7% in sales growth exceeding our mid single digit three-year target.

Partially offsetting this growth were declines in the Top-Flite and Ben Hogan brands.

For the Top-Flite brand, golf balls represent the majority of sales and as we discussed before, while some of this year's models are performing well at retail, our higher price point products did not perform at expected levels.

Our focus is on stabilizing and restoring the Top-Flite business, which includes liquidating remaining inventory with a relaunch of the brand for 2007.

The relaunch includes the introduction of our new product the D2 golf ball with new cover technology into the market in January.

This ball will sell for a more competitive price for $15.99 for a 15-pack.

We will be supporting the brand with new marketing and promotional efforts and are expanding distribution in 2007.

We have been in the market prebooking for 2007 and are encouraged with the reception of this new product from both customers and consumers who have tested the new ball.

Taking a quick look at overall sales by product segment.

Our wood sales were $44 million compared with $63 million in 2005.

This decline was due to the new product launch timing I mentioned earlier most of which impacted the Callaway brand.

Year-to-date global sales of our woods category was increased 15% compared to 2005 which has translated to a 1 percentage point increase in U.S. revenue market share since January.

Total sales of irons and wedges were $54 million compared to third quarter sales last year of $60 million.

The decline was due to fewer new models in the line this year compared to 2005 and a lower price point on our big Bertha '06 model compared to the S18 model which is in its second year at retail.

Year-to-date sales of our irons and wedges have declined 11% but remain number one in U.S. revenue market share at nearly double that of our nearest competitor and has grown by more than one percentage point in the market share since January.

Golf ball sales were $43 million for the quarter compared to last year's sales of 50 million.

This decrease was due to the fact that we have no new Callaway products launched in 2006 compared to last year's introduction of the Callaway Hex 56 golf ball, as well as lower Top-Flite sales this year.

Year to date the sales of the Callaway brand have grown 12% with U.S. revenue market share increasing 11%.

This increase has been offset by Top-Flite resulting in our overall ball category sales declining 7% compared to last year.

Other sales for the quarter were $23 million, a slight increase compared to $22 million last year.

Year-to-date putter sales have declined 3% due primarily to the supply issues we experienced earlier this year on our SRT line of putters.

Overall putters have increased in revenue share in the U.S. this year by more than two percentage points since January.

Turning to our regional breakout, U.S. sales were $103 million for the quarter compared to $119 million last year.

International sales were $91 million compared to $102 million last year.

Foreign currency positively impacted the third quarter by $2 million.

Year-to-date U.S. sales are $471 million, a decrease of 3% with international sales increasing 1% over last year to $367 million.

Foreign currency has negatively impacted cumulative sales by $2 million.

The decline in Top-Flite sales has had a more significant impact on our U.S. region due to a higher percentage mix of Top-Flite sales compared to our international region.

Pro forma third quarter gross margins excluding integration, restructuring and employee equity based compensation charges were 36% of net sales compared to 41% in the prior year.

As mentioned in pre release, approximately four percentage points of this decline was due to the lower mix of higher margin wood products sold during the quarter compared to last year.

Approximately one percentage point was due to lower margins of our irons which included our lower priced Big Bertha '06 model compared to last year's higher priced X18 models.

Approximately three percentage points was due to initiatives to clear Top-Flite inventory and increases in golf ball raw material costs.

These declines were partially offset by approximately three percentage points due to higher volumes and margins associated with Odyssey putters, X Tour wedges and Callaway branded accessories.

Year-to-date pro forma gross margins were 41% of net sales compared to 44% in the prior year.

This decline was primarily due to lower iron margins as well as the lower margins on Top-Flite products, offset somewhat by higher margins on woods, Callaway golf balls and accessories.

Pro forma operating expenses for the quarter excluding FAS 123 R cost reduction and integration charges were $81 million compared to $91 million last year.

This reduction is primarily the result of the cost reduction initiatives taken in September of last year.

Our targeted gross savings from these initiatives were 50 to $60 million or approximately 25 to 30 million net of reinvestment opportunities.

We have recognized savings for the past 12 months of approximately $44 million net of reinvestment which exceeds our original estimate.

Some of these savings will continue to be reinvested back in the business in 2007.

Included in our reported 2006 operating expenses our integration, restructuring and FAS 123 R pretax charges of $3.3 million in 2006 and integration and restructuring charges of $5.3 million in 2005.

Moving to the balance sheet, networking capital decreased 10% compared to last year.

This decrease was driven by an increase in our short-term borrowings and payables along with a decrease in receivables partially offset by an increase in inventory.

Consolidated net receivables were $138 million compared to $142 million last year.

Consolidated DSO increased to 66 days compared to 59 days last year.

This increase is primarily due to a shift in timing of sales during the quarter and collections compared to last year.

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

Net inventories were $242 million compared to $211 million last year a variance of $31 million compared to last quarter's year-over-year variance of approximately $40 million and consistent with our expectations discussed last quarter.

The overall dollar increase can be attributed generally to plan higher levels of inventory to avoid the supply issues experienced last year, an increased of a number of product models this year, including additional models of higher value wood products and additional inventory associated with our custom club in opt to fit program, introduced this year.

The quality of our inventory is good with appropriate levels of reserves.

In looking towards the end of the year, inventories will remain higher than 2005 to protect our customer service capabilities but the year-over-year variances will continue to narrow consistent with what we have said on earlier calls.

Capital expenditures for the quarter were $8 million.

We estimate 2006 CapEx to be approximately $35 million consistent with our forecast last quarter.

Depreciation and amortization was $9 million for the quarter.

Our estimate for 2006 is approximately $30 million, consistent with previous guidance.

During the quarter we repurchased 773,000 shares of stock for $10 million at an average price of $12.89 per share.

Through the first nine months we have repurchased 3.5 million shares of stock for $53 million at an average price of $15.29 per share.

I would like to elaborate a bit on the gross margin initiatives George mentioned in his opening remarks.

This next phase of initiatives we have begun involves improving our gross margins and is being led by our new head of manufacturing and supply chain, Dave Laferty.

This is multi fastened project that we expect will positively impact primarily gross margins over the next two years or out through 2008.

More specifically the initiatives will focus on several different areas, including procurement of direct materials, procurement of indirect goods and services, manufacturing and distribution process rationalization and value engineering and automation.

Let me discuss these in a little more detail.

The first area, procurement of direct materials includes all components we buy that are used in our finished products.

This initiative focuses on three key areas.

The first and most impactful is collaborating with our supply partners to evaluate external manufacturing processes, eliminate redundancies and create value.

We are streamlining the handoffs within the processes such as how we deliver forecast and order products to increase efficiencies, shorten lead times and maximize value within the supply chain.

The secondary is target opportunities to develop alternate sources of key raw materials, components and manufacturing processes.

The third area aggregates total expenditures and leverages pricing through competitive bidding where appropriate.

Targeted savings over two years for this initiative are estimated at approximately 20 to $25 million.

The second key area of focus is targeted procurement of indirect goods and services meaning those that aren't used in our finished products.

They include fragmented purchases of good and services such as travel, temporary labor and printing and duplicating services throughout the entire company.

We are working with an outside firm that utilizes proven methodologies in this area and would include aggregated costs and focusing on the biggest categories of spending.

We would then leverage our purchases through a competitive bidding process to lower our overall costs.

Estimated savings for this initiatives are approximately $15 million over two years and will impact gross margins as well as operating expense.

The third key area we have focussed on is streamlining and driving efficiencies within our internal manufacturing and distribution processes.

We have several projects currently underway that will illuminated redundant activity and supporting resources.

We have also challenged where we produce our products geographically which creates value through consolidation opportunities, cost advantages and proximity to markets.

This also addresses how we distribute components and finished goods worldwide stream lining the movement of product between facilities, regions, suppliers and markets.

The estimated two year savings are approximately $10 million.

The last area we are focussed on is value engineering and automation.

This includes strategic capital investments to automate processes and create efficiencies within our operational area.

It includes projects that will automate our club assembly as well as the design of future products that would align with this automation where appropriate.

Savings in this area are estimated at approximately 5 to $10 million over two years.

These initiatives are estimated to generate savings of approximately 50 to $60 million over the next two years with approximately 20 to $25 million impacting 2007.

There will be some one-time investments associated with capturing these savings that we currently estimated about 5 to $10 million in expense and 10 to $15 million in CapEx over the next two years.

We will identify these cost separately in future earnings reports to assist you in your analysis of our business.

We will also provide periodic updates on our progress against these initiatives and total projected savings at future conference calls.

As we stated in our press release we estimate our 2006 annual per forma earnings per share to be up over 20% as compared to last year which means the fourth quarter will generate a smaller year-over-year loss.

There are a couple for this improvement, first we expect a slight increase in sales due to the increased Callaway momentum we've had this year along with a couple new products being introduced during the quarter specifically the X hybrid and X hot fairway wood, compared the ERC hot fairway wood and odyssey dual force putter introduced last year.

Secondly, gross margins are expected to improve for the fourth quarter due primarily to an increase mix of higher margin Callaway products compared to last year, lower freight costs due to supply chain improvements, along with the fact that last year's margins were more negatively impacted by Hogan inventory issues.

Operating expenses should be fairly flat for the fourth quarter compared to last.

We would now like to open the call for questions.

[OPERATOR INSTRUCTIONS] We go to the line of Alexander Paris of Barrington Research.

Please go a head.

I'm trying to go get a feel for -- I know we've got a lot of cost rationalization going on.

You have to be somewhat disappointed in your sales, still behind a year ago.

I wanted to get a little more color on that.

I guess there's a macro view and micro view.

Looking at the macro view, what is the situation with retailers?

What is their mood?

Competition, third quarter price competition that are hurting on a macro basis?

No, the price competition hasn't really been much of a factor.

I know that there is a lot of noise in the marketplace because of that driver program that we introduced last quarter.

But, again, that was hopefully a temporary aberration.

I think there's clearly been a retail slowdown that was particularly noted in the July/August period of time.

There was a recovery for some retailers in September that was pretty notable.

And there's some talk of perhaps October being slower than originally expected.

The difficulty that this category faces, of course, is in the general retail market.

A slowdown in a couple of months can be recouped in the months in a highly seasonal business such as ours.

If you have a slowdown in the midst of the season it's very difficult to recoup it as you get towards the end of the season.

A doesn't necessarily benefit us quite to the same degree that it might other categories.

So the macro issues, I think, are a bit mixed, but they are pretty typical of what the overall marketplace looks like, not just for golf but all products.

On a micro basis, we have sort of a bipolar issue here.

The Callaway decor business is the Callaway and Odyssey business is doing quite well.

They're up 7% year to year.

From a share revenue they are relatively strong relative to how we came in the year in January.

The general outlook is extremely, we think very problem.

The problem is we've unfortunately given back some of the gains that we made in the core businesses because of the difficulty we've had stabilizing the Top-Flite and Hogan businesses.

Our feeling at this point, and that's somewhat due to the fact that we have to undertake some certain inventory clearing products in the marketplace in order to get the inventories of the old Top-Flite product out in preparation for the shipment of the new product in.

I think, and, again, as I indicated, while the jury is clearly still out, we really believe that we have a very credible restage program intended for Top-Flite.

And we think, in fact, we have what is going to be necessary to stabilize that business.

The early indicators that we have both from the consumer testing of the product itself that we did initially and the early reception that the products have gained from the trade presentations that we've made to date would seem to support this early optimism.

We can't be naive about these things.

We still from the consumer hurdle to get over, which of course we won't begin to feel until the early part of next year.

All the early indicators that we have from both the consumer and trade point of view would tend to the fact that we have a program that will stabilize those brands.

If you take a look at this year and take out the difficulties we've had with Top-Flite and Hogan, it was really quite a good year.

Unfortunately you can't separate businesses.

We own the whole pie so that the give backs that we had Top--Flite and Hogan essentially put us into a position of flat sales.

We'll see an improvement of that to some degree in the fourth quarter.

It will reflect itself in the earnings that I believe we will see for the full year.

I think, again, based on the early anecdotal information that we about the new products selling for '07, we're quite optimistic actually, about where the retail sales are going to go.

The sense that we get from the retail trade about the '07 calendar and the '07 product introductions is also quite positive because there's some very unique and innovative kids of products we're bringing to the marketplace.

Whenever that happens, you tend to have a surge in retail response, in consumer response.

At this point in time we're actually feeling quite good about the way '07 looks and reasonably well about how the fourth quarter is going to end.

Ben Hogan which is a club product, at one time you were saying you were extremely happy and surprised how it was doing.

Is that a problem where you just don't know where to fit it price point wise?

Is it competing with the Callaway brands?

Is that part of your relaunch.

Is that trying to find its position within your total product is that what the problem is.

That is part of the problem.

I'm not sure that we were ever that bullish about it.

The problem is that some -- perhaps, I guess, starting back two years ago it may have been back in '04, there was an attempt to take the Ben Hogan business, which has traditionally been a very niche iron business for the traditional golfer.

That was effort to broaden that base of consumers and they introduced a number of woods and drivers and fairway woods et cetera in the attempt to make it out of the niche category and make it into a more broad-based business.

That initiative failed.

And in fact, we paid the consequence of that very substantially toward the end of '05.

And we've continued to pay the consequential of this in '06 as we were essentially charged with getting rid of the inventories associated with the products that did not in fact broadened the franchise.

Focus for '07 because it is a far larger and much more important business for us is going to be against Top-Flite.

We are going to reposition the Hogan business back to the niche category in which it's always belonged.

We're going to finish the cleanup and straightening out and SKU rationalization of that line through '07 without diverting too much attention away from the main chance business, Callaway, Odyssey and Top-Flite

We will and are in fact preparing restage program for Hogan that will essentially take place in '08 but to put in perspective, not to diminish the value of the Hogan business, it is a very small niche business.

In total, it's revenues on a worldwide basis are not large enough to really move the needle.

So other than being, I guess, a frustration because we are really trying to reposition it back to its sort of niche roots.

It is not going to have that much of a material affect on '07 and beyond.

Just one more real quick, go back to the balls.

It's not an efficiency or cost problem with Top-Flite because suppose have the very efficient manufacturing which you move to so it's mostly a marketing problem.

Is it trying to fit it into proper price points relative to the old product?

Just bad marketing?

I think you have to go back a little bit.

Top-Flite at one point in time years ago was in fact a leading golf ball.

Unfortunately, over, I guess, a rather substantial number of years it had been significantly under invested and its brand as a consequence declined.

We purchased Top-Flite and Hogan brands at the end of '03.

I don't think we did as much for those brands as we should have on as fast a timetable as might have been the case.

The investment, the , if you will, of the Top-Flite position in the overall ball market was a little late in coming.

I think contributed to the fact that we've had the difficulties in stabilizing it that are currently the case, that changed pretty dramatically as we begin to put the bear against the problem fairly substantial marketing and strategic thinking which led to the restage that we're implementing for '07.

The issue is not although there are clearly cost savings that we put against that business that will in fact materially improve the margins on that brand, I think it's a marketing and strategic and executional issue.

I believe with the restage that we are in the process of launching right now we have we've addressed those quite well.

But, again, the -- there's a lot yet to be done.

It certainly will be reporting on the progress of that restage as we go forward in future calls.

But the issue on Top-Flite has clearly been marketing, investment, and essentially strategically fitting it properly in it's overall place in our franchise for sure but in the marketplace as a whole.

Thank you very much.

Next we go to the line of John Chandlerly of Susquehanna Financial Group.

Could you give us details which retail channel sustain most of the sale decline in woods and irons in the quarter and also give us a sense of what the current inventory level at retail is on those two product categories?

Yes, the woods and irons category that we have is actually in excellent shape.

There are no inventory issues for us going forward, so that as we introduce our '07 line, that's not a consideration for us.

We do a fairly good job -- even I'd say a very good job at managing inventories at the retail level.

And when faced with a problem, as we were, for example, in Hogan, we deal with it rather quickly and directly.

As far as Odyssey and Callaway are concerned, our inventories are quite controlled.

If anything, I might argue that perhaps a little lower than I'd like to see them.

So that shouldn't be a consideration going forward.

As far as which retail channels have most of the sales decline or was it pretty much across the board between Big Box Sporting and Golf Specials and Green Grass?

It's pretty much across the board again.

The decline, if you're talking about the retail decline that we're talking about is pretty much an across the board proposition and we watch even though some of them may not be as directly related to us but we watch the retail reports and you can see with some minor exceptions that thats been across the board kind of a problem.

The problem for us that made it somewhat more of an issue is that it occurred right in the middle of the season.

I don't think I feel terribly uncomfortable if we had a retail decline in January, but I do feel rather uncomfortable when it happens in July and August.

Sure.

In Europe was there one or two countries in the European marketplace as a whole that really precipitated the 20% sales decline quarter over quarter or was it pretty much again across the board?

No, actually you'll find that Europe had a very, very strange year obviously because of the largest business we have happens to be in the U.K. we feel it there.

The entire European category is down as much as 20% year to year.

The problem was one of a perfect storm, if you will.

The year started off with horrific weather in central and some degree northern Europe which delayed the start of the golf season, if you will, by several weeks.

Unfortunately that was then followed by the world cup.

For anybody that's familiar with that particular sport, Europe shuts down for four weeks during the course of that.

The interest in golf was substantially reduced.

This is uncharacterized of Europe for every four years and then it was followed by hot weather through the central part of Europe which certainly started the golf season off but reduced the I think recovery because of the discomfort associate with temperature in Europe so, they just had a whole bunch of stuff that happened to them that made the overall category suffer.

Having said that, and this is small compensation, our shares did very well.

In fact, we increased our shares in Europe throughout that entire period which meant we were getting a bigger share of what was unfortunately a smaller pie during this year.

So our franchise is in very good shape.

The world cup is not happening again next year.

As far as the weather is concerned, I'm not smart enough to figure out what it's going to be, should return to norm.

To that effect, again these are anecdotal things.

The reports for the selling of our products throughout Europe are quite positive.

I think the retailers feel they are going to come back rather nicely as well.

Europe did suffer, there's no question.

There was another issue in Japan, which is really quite different from Europe.

As many of you may know, Japan as of the beginning of '08 must go to conforming drivers, which essentially is what the U.S. does and what Europe does.

Up until this point, they have been allowed to operate with equipment that did not necessarily meet the USGA and R&A requirements for the rest of the world.

The issue was whether or not they should buy a new nonconforming driver knowing they would only have one year to use it or buy a conforming product and suffer the consequences or frankly to defer their purchase and wait until things settle down.

Sadly a rather large proportion of the consumers in Japan appeared to have taken the third choice.

So the market itself suffered rather measurably.

Again, to the extent it that it represents a positive feeling our shares in Japan did very well.

We took a larger share of a smaller pie.

As we go into '07, there's going to be, I think, still a little bit of a hangover in terms of what should a Japanese buyer purchase when it comes to golf, but we think it's going to be a little less severe because we're going to be a lot closer to '08, I think the conforming driver business will in fact deliver reasonably well for Japan.

I think those two major sort of one time issues should be behind us.

And, in fact, again, the earlier anecdotal information we're getting about our selling of the new line is also going quite well.

At this point in time we're feeling rather good about the early part of the season.

Okay, great.

In follow-up to your explanation of what's going on with Top-Flite, would you think the problem with Top-Flite is indicative of the overall value portion of the golf ball marketplace or is there also a coral area in terms of issues related to the Chickapee plant itself?

Are you competitive with Chickapee in relationship to what some of the other value Golf ball producers are currently offering into the marketplace?

Yes, again, it really isn't a pricing issue.

I mean, that would show up in our margins, because obviously we price to the marketplace not necessarily to our cost.

There are clearly that we're looking at that are intended to bring the costs of both manufacture down that would materially affect our margins.

But the issue with Top-Flite is really a marketing and strategic issue, and that was that we had lost focus on exactly what position in the marketplace Top-Flite should occupy, the price points at which it should really compete.

And also very importantly given the rather substantial intellectual property inventory that we have that came with the Top-Flite purchase, we had not introduced into new technology into Top-Flite balls in many, many years.

In fact, some of the previous efforts at restaging or introducing new Top-Flite balls going back several were done with essentially the same old technology even though new stuff was available.

Maybe a large part of that was dictated by the unwillingness of the people involved at the time to make investment necessary to support new technology.

Clearly that's changed.

The technology that we've introduced with the Top-Flite ball is really quite good.

We put that ball not only to general consumer testing, but we ball not only to general consumer testing, but we have on a blind basis put it in front of many professionals and very capable golfers.

And the reactions we've gotten have been extraordinary.

So the value that this new ball is going to provide given the technology is going to be very, very positive.

Again, we're very hopeful for that restage.

It's looking very good.

Again, the consumer hasn't spoken yet.

Frankly, none of this matters until they do.

So we can feel as good as we like.

We will see what happens in the next three, four , five months

Your accessory business seems to be doing particularly well, a nice increase in sales on the quarter.

Can you give us some insight in terms of whether this kind of growth momentum is sustainable and secondly are the operating profit margins on accessories comparable to or different than those that you get in irons and woods?

The operating margins on accessories are quite healthy and they will continue to be so.

Again, a lot of the initiatives in terms of how we source these things will continue to contribute perhaps even better margins going forward.

The growth that we're seeing is in fact sustainable.

I think we're getting a lot smarter with how we design them.

About how we accommodate the marketplace needs for the features that we put in them.

I think the track record that we built up would pretty much speak for itself.

It is, in fact, turning into a very positive piece of our business and a growing one as well.

Our projections, at least going forward, would indicate that that should continue.

Thanks very much.

Appreciate it.

No problem.

Next we go to the line of Rommel Dionisio of Wedbush Morgan.

Please go a head.

Just a couple of questions.

One of the challenges you faced over the years was [inaudible] being delayed products to market or some capacity constraints.

In our prepared comments, you go into detail about the cost savings.

I wonder if you could talk about how some of these new would address that?

One of the big part of those initiatives that Dave is bringing to the party really attacked.

It's attacked on several different fronts.

First the restructuring of the new product process was very important in order to make sure products were available to on a more timely fashion relative to the market place need.

Unfortunately our history has been that we would introduce products when we felt they were ready, but in many cases they were ready in the middle of the purchase cycle, if you will, as opposed to the beginning of the purchase cycle.

The capacity issues given the long supply chain we have are very critical and they hinge in part on the lead time that we are able to get from our fenders.

One of the key initiatives that Dave has embarked on has very substantially affected those lead times and in some cases have reduced those lead times by as much as a third.

That has huge implication to our ability to bring a product to marketplace in a timely fashion.

It has huge implications to inventory issues and our responsiveness to changes in forecasting.

That as an area of many initiatives we think is going to be more productive going forward.

That part has been critical for us.

Planning is better and earlier, which we started toward the end of '05, which substantially was improved in the early part of '06 but not perfectly so because we did have some problems.

We think is going to be a pretty clean operation going into '07.

All of our new products for '07 are introduction now.

All of the scale up of those production lines is in fact moving very well because they've been given more time to do so where as in the past they haven't.

So we look into '07, we think a lot of the supply chain issues that we were facing for many years are hopefully pretty much behind us.

Now, again, stuff happens.

I'm hoping that's not going to be the case this year.

Right now, virtually any project of any consequence at this point in time is pretty much on schedule for us.

Thanks very much.

Thank you.

And, again, if there are any questions or comments, please press star one at this time.

We go to the line of Matt Fosneck of Covis Capital.

Please go ahead.

I have three questions.

Hi, Matt.

How you doing?

First is the cost savings, 50, 60.

What's the base off which you're measuring that savings?

The base of the savings is cost of '06.

Do you expect this to be the gross amount that you save?

Or is there a different net number or is this the bottom line?

These are bottom line savings.

These are net savings.

Again, this is what we've been able to identify and put on the screen right now.

Obviously, Dave and his people are continuing to look and may anticipate may undoubtedly find some other stuff.

These are ones that we have very good handles are and the initiatives are being started.

This is Brad.

I did mentioned in my comments that there should be some expense associated with capturing these.

Something that we are going to do 5 to $10million.

The gross amount would exclude that and we are going to report that separately.

But other than that --

By the way, the increased effort to disclose things like how you get these savings and what you expect in the fourth quarter is much appreciated.

I think that's a very positive step.

Thank you.

By the way, we contrary to what some people think, we have been listening and we've been trying to find some ways to provide additional color that will give you some where with all to better evaluate how we're progressing.

We would welcome additional suggestions and would consider whatever we can do to make it a little bit easier.

Given the fact that we are going to go to annual guidance and that's essentially where we are going to stay.

The 44 million in net savings, Brad, you made a comment you said something to the effect of some of this will continue to be reinvested.

Do you mean some of the 44 million you've captured would be put back into the business so the net in '07 will be less than that, can you just give me a little more color on what you meant by that?

That's what I mean, Matt.

We over delivered this year on what we have.

But we've also said we're going to reinvest back in the business.

As we launch products next year if we think it's appropriate, we will reinvest some of this back into demand creation initiatives.

We were going to try and invest back in half of those savings.

We didn't do that this year.

We saw some of the issues coming up as it related to profitability.

We wanted to try to protect that as best we could.

As we feel more bullish about some of the things we see in '07, I think it would behove us to try to drive those improvements.

Some of that which was intended to be invested will get back in the investment column for '07.

Let me ask about '07.

Obviously you don't want to do that until later.

You're saying $0.46 this year roughly, which is 20 % up.

These new cost savings, if you get the 20, 25 million, that's roughly $0.25.

And then the Top-Flite inventory rate downs at about $0.10 which obviously won't be there next year.

And maybe the increase in investment of the 44 million net offsets the timing of the so it's kind of a wash year-over-year.

That kind of gets me to about 80, $0.85.

Without answering the question about the numbers.

This excludes any growth or operating measure.

What's wrong with that amount or what am I missing?

What's wrong with it is you're asking me to give you guidance now.

No, I'm not.

I'm saying am I missing a large component of either a headwind or tailwind?

You're generally, your reasoning is reasonably appropriate.

We'll give you a lot more color on that obviously on the next call, which will probably define a little bit more about how much we're spending back et cetera.

But nothing in your analysis is way off base from what I can see.

Last question would be about buybacks.

What's your current authorization.

47 million.

If you want any more suggestions, I think that would be a good investment.

I know what that suggestion is, Matt.

Thank very much.

Thanks.

And next we go to the line of Robert Samuels of J.P.

Morgan, please go ahead.

Thanks, all my questions have been answered.

Thanks, Bob.

And there are no other questions in queue.

Please continue.

Well, let me thank all of you for your interest.

I know this has been a sort of a bumpy ride this year because of the lack of some guidance.

And because we're trying to stabilize the business in the midst of changing a lot of the very fundamentals of how we go about business and those of you who stuck with us, painful as it may have been at times, I think should feel a lot more comfortable as we go into '07.

A lot of the major interruptions to our operation, hopefully, are behind us.

Some of the plans that we put in place are in fact being delivered and yielding the benefits that we anticipated they would.

There's lots more to do.

There are lots of things that we're promising for '07 that we have to deliver on and we understand that.

We're feeling pretty confident that we can and we're feeling pretty good that the three-year guidance we gave in the earlier part of this year is very largely in tact despite the fact that we are starting from a somewhat lower revenue base because of the Top-Flite problems.

But, indeed, if the plans that we've set forward and the early optimism that we're seeing for that brand develop for '07, I think we'll have, hopefully, some friendlier calls as we go forward.

So thank you all very much.

That does conclude our conference for today.

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

You may now disconnect.