Topgolf Callaway Brands Corp (MODG) 2007 Q2 法說會逐字稿

Thank you so much for standing by, ladies and gentlemen, and welcome to the Callaway Golf second quarter earnings call.

All participants are in a listen-only mode.

Later, we will conduct a question-and-answer session, and I'll give instructions at that time.

(OPERATOR INSTRUCTIONS) And as a reminder, the conference is being recorded.

I'd now like to turn the conference over to our host and Chief Financial Officer, Mr.

Brad Holiday.

Please go ahead.

Thank you.

Welcome, everyone to Callaway Golf Company's second quarter 2007 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, 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 relating to estimated 2007 sales, operating expenses and earnings per share, the achievement of three-year financial targets, and the company's estimated 2007 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 judgement 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 I, Item 1A 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 on a consistent and comparable basis, we will provide certain pro forma information as to the company's performance, excluding charges associated with the company's gross margin initiatives, the integration of the Top-Flite operations, and the restructuring initiatives announced in September 2005.

In order to evaluate the company's core operating performance from a cash generation perspective, we will also provide information concerning the company's earnings before interest, taxes, depreciation and amortization.

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

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

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

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

Thanks, Brad, and thank you all for joining us.

We continue to be pleased with the company's progress towards the goals established over the last two years.

Our overall objective continues to be the creation of a sustainable revenue and value growth, and our current performance, we believe, very much is in line with those goals.

We also continue to be confident in our ability to achieve the three-year guidance that we updated last February.

Brad will give greater detail on our progress and current performance in his comments to follow.

The positive results we're reporting are a direct consequence of the management team delivering on, or over-delivering, virtually all major initiatives.

Revamping of the new product development process has provided the strongest line-up of new offerings in technologies in our history, and has delivered a full pipeline of strong introductions looking forward into 2008 and beyond.

Upgrading the organization has supplemented our fundamentally strong organizational capabilities with new skill sets that materially improve our competitive position.

Restructuring of our supply chain has added enormously to our flexibility and responsiveness, while significantly improving our reliability and customer service.

Reduction of non-productive OpEx has allowed us to redirect investment into driving revenue growth, cost reduction initiatives, and improving our overall profitability.

Margin improvement initiatives continue apace and are fueling further profit improvement.

Reduction of non-productive inventories will also drive profitability and free up cash for other value-creating applications.

All of the above are being -- excuse me -- are being managed to provide a proper balance between sustaining growth and growing profitability.

We believe the progress in our financial metrics speak for themselves.

We've had a 53% increase in EPS year to-date and nearly 80% increase in EBITDA and a 4 percentage point increase in gross margins so far to-date.

Now, there's still much work to be done, however.

Further margin improvement is in the works and additional inventory reduction will be delivered by year's end, with more coming on both fronts in 2008 and beyond.

The Top-Flite turn-around is progressing with the D-2 introduction continuing to gain traction.

Top-Flite shares have increased since December, the first sustained period of increase since well before we acquired the brand.

The total D-2 volume, the new product that we introduced, has exceeded our plan to-date and significant Top-Flite margin improvements, a 6 percentage point increases year-to-date, continue to show that the brand is on the road to recovery.

Overall, the company's ball business will make money for the first time in 2007.

As a final note, as a reflection of the positive results achieved through the first half, we will be raising our guidance for the second time this year.

And to give you more detail on all of the above, let me turn the call back to Brad.

Thanks, George.

In reviewing the financial results for the quarter, we achieved record consolidated net sales of $380 million, an 11% increase compared to last year's sales of $342 million.

We reported net income for the quarter of $37 million, compared to $23 million last year, and earnings per share of $0.53, a 61% increase versus $0.33 per share in the prior year.

On a pro forma basis, excluding 2007 after-tax charges of $0.02 for gross margin initiatives that we announced last November and 2006 after-tax charges of $0.01 for Top-Flite integration charges and $0.01 for restructuring charges, our pro forma earnings per share for 2007 increased 57% to $0.55, compared to $0.35 in 2006.

Through the first six months, we achieved record sales of $715 million, an increase of 11% compared to last year, and earnings per share of $1.01, a 55% increase, compared to $0.65 last year.

On a pro forma basis, excluding 2007 after-tax charges of $0.03 for our gross margin initiatives and 2006 after-tax charges of $0.02 for Top-Flite integration charges and $0.01 for restructuring charges, our pro forma earnings per share for 2007 increased 53% to $1.04, compared to $0.68 in 2006.

These increases in both sales and earnings are the result of the many initiatives we have implemented over the past two years to return the company to historical levels of profitability.

After the second quarter, our increase in net sales was primarily the result of increased sales of our Fusion drivers, both the FT-5 and FT-I, strong sales of our X-20 irons and increases in sales of both accessories and golf balls.

Taking a quick look at our overall sales by product category.

Our wood sales for the quarter increased 30% to $112 million, compared to $86 million in 2006.

This increase was due to the stronger driver sales that I just mentioned, offset by a slight decline in fairway woods and hybrids.

Year-to-date, our woods category has increased 17% to $215 million, compared to $183 million last year.

Sales of irons and wedges were $95 million, compared to second quarter sales last year of $103 million.

This decline of 8% was due to timing related to new products.

In that, we introduced the Fusion Wide Sole line of irons during the second quarter of last year, while this year, all of our 2007 products were introduced during the first quarter.

I would point out that sales for the first quarter increased 16%, and on a cumulative basis through the first six months, iron sales have increased 3% compared to last year.

Sales of our X-20 irons have been very strong, and in the United States was the number one iron in U.S.

revenue market share through June.

Golf ball sales were $72 million for the quarter, an increase of 4%, compared to last year's sales of $69 million.

This increase was driven by strong sales of Callaway branded golf balls, including several new products, but in particular, the strong introduction of the new Hx Hot model which was a Golf Digest Editor's Choice in the Value Ball category this year.

Partially offsetting this increase was a decline in the Top-Flite branded business for the quarter.

As you know, this brand has been declining for the past several years.

Our goal this year was to stabilize the brand and begin the rebuilding process.

To do this, we first reduced the number of SKUs in the line to eliminate the less profitable models and make the brand less confusing at retail.

While we knew this would negatively impact sales, it would also improve overall profitability.

Secondly, we planned on introducing a new ball with some new and exciting technology, which we have done with the introduction of the T2 ball this year, the reception of which has exceeded our internal expectations.

We also wanted to expand distribution in Green Grass Channel this year, and have done so with nearly 800 incremental accounts in the U.S., once again, selling Top-Flite branded balls.

To-date, we are beginning to see positive results due to these initiatives.

Market share has increased since December 2006, and overall profitability has improved compared to last year.

While not out of the woods, we are beginning to see encouraging results for this brand.

Year-to-date, our total golf ball sales were $126 million, an increase of 1% compared to last year, despite the lackluster rounds-played statistics that we saw in the early part of the season.

Putter sales for the quarter were $37 million, flat compared to last year.

Year-to-date putter sales have increased 7%, with U.S.

revenue market share increasing 7 percentage points from last year to 40%.

Accessory sales have increased by over 30% for the quarter, driven by our gloves, bags and footwear products.

Turning to our regional breakout.

U.S.

sales were $204 million for the quarter compared to $186 million last year, an increase of 10%.

International sales were $176 million, an increase of 13%, compared to $155 million last year.

Europe, Canada and South Pacific all had strong positive growth, partially offset by declines in Korea and Japan.

In local dollars, all regions had positive growth except Korea.

Through the first six months, U.S.

sales were $388 million, an increase of 6%, with international sales increasing 18% over last year to $326 million.

All regions have experienced positive growth this year, both in U.S.

and local currencies.

Gross margins for the quarter were 46% compared to 41% last year.

Excluding charges for gross margin initiatives in 2007 and integration and restructuring charges in 2006, pro forma second quarter gross margins were 47% of net sales, compared to 41% in the prior year.

This increase in gross margin percentage is due to a more favorable mix of higher margin products and the positive results from our gross margin initiatives.

Year-to-date gross margins were 47%, compared to 42% in 2006.

Adjusted for the gross margin initiatives in '07 and integration and restructuring charges in 2006, pro forma gross margins were 47% compared to 43% last year.

Operating expenses for the quarter were $113 million, compared to $101 million last year, but as a percentage of net sales, were flat at 30%.

The dollar increase is due to the year-over-year growth in our business, the FX impact of a weaker dollar, and as George mentioned, some is due to our decision to invest to generate future sustainable growth.

Specifically, the increases include higher selling costs, legal costs associated with protecting our intellectual property, and increased employee bonus related to improved financial results.

Year-to-date operating expenses were $218 million, compared to $196 million last year, and were flat as a percent of net sales at 30%.

Moving to the balance sheet.

Net working capital increased 20% compared to last year.

This increase was driven by higher receivables associated with the higher net sales for the quarter and a decrease in our outstanding line of credit.

Excluding the balance on our credit facility, net working capital increased 1%.

Consolidated net receivables were $282 million, compared to $258 million last year, due to the higher net sales.

Consolidated DSO improved to 67 days, compared to 69 days last year.

Collections on A/R remain good and the overall quality of our A/R is good.

Net inventories were $226 million, compared to $232 million last year, a decline of $6 million, and a decline of $45 million compared to the end of the first quarter.

You may recall that the first quarter inventories were $23 million higher than 2006 levels.

So we have made significant progress and are on track to reduce our inventory levels by the 20 to $25 million that we communicated earlier this year.

From a cash generation perspective, trailing 12-month EBITDA through the second quarter was $116 million, an increase of nearly 80% compared to the same period last year.

This increase is the result of many top and bottom line initiatives we've implemented over the past two years.

Capital expenditures for the quarter were $10 million and we estimate 2007 capital expenditures to be approximately $45 million, consistent with our forecast last quarter.

Depreciation and amortization was $9 million for the quarter.

Our estimate for the full year remains at approximately $35 million.

During the second quarter, we repurchased 772,000 shares of stock for $14 million at an average price of $17.59 per share.

Through the first six months, we have repurchased 1.8 million shares of stock for $29 million at an average price of $16.22 per share.

In addition, we have repurchased an additional 545,000 shares during the third quarter at an average price of $17.22 per share, and have $88 million left on the $100 million authorization we received in June of this year.

As George mentioned, we are raising our full year guidance again with sales increasing to a range of 1.07 to $1.08 billion, and pro forma fully diluted earnings per share from $0.78 to $0.84 based on 70 million shares outstanding and excluding $0.08 per share for our gross margin initiatives.

This is the second time we've raised our forecast this year and, in addition to the increase, we are also narrowing the range, given the fact that we're now halfway through the year.

This new outlook compares to our last estimate of sales ranging from $1.045 billion to $1.065 billion, and pro forma fully diluted earnings per share of $0.72 to $0.82 based on 70 million shares outstanding.

For the balance of this year, please keep in mind that net sales in 2006 included several new products that were introduced during the fourth quarter equalling approximately 25 to $30 million in sales.

Our current balance of the year forecast does not include any new product sales, nor are any planned, with the possible exception of some small amounts for holiday sales opportunities.

Excluding these new product sales from last year's results, we are assuming mid-single digit growth over the balance of the year, which would imply 5 to 6% growth on an annual basis, consistent with our three-year targets.

On the expense side, as you recall, our OpEx was originally forecasted to increase versus 2006 by 20 to $30 million, on sales of $1.035 billion to $1.055 billion due to inflation, increased marketing expenses and increase in bonus expense that was not in our 2006 base.

In our current forecast, we're estimating OpEx to increase by approximately $45 million compared to 2006, for generally the same reasons as I've already mentioned for the second quarter.

Of this increase, approximately $5 million can be attributed to the negative FX impact on our foreign subs' operating expenses.

The balance of the increase is due to additional selling expense associated with higher sales, incremental employee bonus associated with higher earnings, as well as additional investments we believe are important for continued growth in our business.

These include some incremental marketing dollars and additional expense to protect our patents and develop long-term growth plans for the company.

Fortunately, we have been able to offset these increases by delivering higher gross margins than we originally had estimated.

This increase is due to stronger than originally estimated sales mix of our Fusion drivers and other higher margin products.

We are also making very good progress on our gross margin initiatives, which is helping to offset these other increases.

Bottom line is, we have been able offset decisions to invest in our business with the over performance on gross margins, resulting in increased profitability which is in line with our top line increase.

This is our overall thinking as we look at the balance of the year.

At George's earlier comment, balances spending as an investment in future growth with much improved 2007 overall financial results.

We would now like to open the call for questions

Thank you.

(OPERATOR INSTRUCTIONS) We do have a question from the line of Kathryn Thompson with Avondale Partners.

Please go ahead.

Great, thanks.

First focusing on the top line.

Could you -- good strength in Europe, could you outline the drivers for the strength in the quarter?

I'm sorry.

Exactly what percentage of the growth was a reflection of the drivers?

No, no, no.

Your European growth was stronger in the current quarter that you reported, and I just wanted to get a little bit of color behind that strength.

Well, if you recall, last year Europe had a very, very slow start.

They had terrible weather issues earlier in the year.

This year at the early part of the season, they started out quite strongly, the weather was fine.

Unfortunately, they've gone into flood period now, so I think the second half of the year might be somewhat different.

On a comparison to last year's basis, the Europeans were really being compared to a much lower and difficult base.

And Kathryn, also remember, World Cup was going on about this time last year.

Yes.

I just wanted to get your thoughts about to what extent that also impacted.

Yes.

No, it absolutely did.

And we -- we knew that World Cup wasn't going to repeat itself, we had no idea as to exactly what the weather was going to do.

And, unfortunately, in this particular case, weather just flip-flopped a bit.

It started off very, very nicely and, unfortunately, has gotten fairly severe.

On an overall basis, however, the European business continues to be quite strong.

Okay.

In terms of your Fusion driver sales, your FT-I and FT-5.

How much of sales do you think will be pushed into Q3 based on demand?

You had indicated that you need demand by the end of July, but where does that stand and what should we expect when modelling?

Well, we do have -- we do have some carryover going into the third quarter.

There are still a few SKUs that we're going to clean up over the course of the next week or two, but I think that any of the volume that we're going to be showing in the third quarter is going to be a result of sell-through.

As I indicated to you, the business continues to look quite strong.

So we anticipate that it's not going to be carryover that carries us into the third quarter, but rather just a reflection into the marketplace.

Hey, Kathryn, one other thing.

We got pretty well caught up on FT-5 by June.

The demand for FT-I continued very strong, and where we thought we would probably get caught up by the end of June, that carried over a little bit even though we overdelivered against our original expectations on I in June.

And we should have, to George's point, most of that cleaned up by the end of this month.

It's really the FT-I that you're getting caught up on?

Yes, and that was due more to demand.

The supply side was working very well.

And, as I said, we thought we'd get caught up in June, but the demand continued strong and so it pushed it out a little bit in July.

Basically, by the end of the July, we had it almost all caught up with the exception of a couple of SKUs.

Also, just on your OpEx, appreciate the little bit more color that you gave in the quarter and I feel like there's going to be some more focus on that.

How much of that increase year-over-year is just from compensation expenses?

Just so we can have a better idea, not only just for modelling for this year, but looking out into '08?

Well, as you recall, we said in our original estimate we'd be up 20 to $30 million, and on our base, you could assume that about $10 million of that was just inflation if you assume 3% inflation.

The other 10 to 20 was really going to be for marketing and bonus expense kind of accommodation, and we really don't break it out in any more detail than that.

What we have been a little surprised with this year is the FX translation and the impact it has on our foreign operations in translating the dollars back.

In our last forecast, we had kind of thought the dollar would strengthen a little bit over the balance of the year, but that has not been the case.

As a matter of fact, it's really weakened more.

Hence, we built some of that translation into our full year forecast.

So of that total that we talked about, or the increase if you want to say, which is about an incremental $15 million over our last forecast, $5 million of it really relates to the FX impact on our foreign operations operating expenses.

The balance, which is about $10 million, is for all the other things I mentioned which is --

In line with the previous.

What's that?

It's somewhat in line with your previous expectations?

Well, yes.

But proportionally, yes.

Proportionately it is, yeah.

So it's, once again, it's marketing, we've decided to continue to spend some dollars in marketing.

We have, as you know, we've -- sales increase certainly has driven some of the OpEx.

And then we've made some decisions to protect our intellectual property, as you're well aware.

So all of those kind of make up the balance of the increase.

And we think they're good decisions that are important for our business and we had, with the performance on gross margins, the flexibility to invest in some other areas of the business.

We thought it was appropriate.

Okay, great.

Thanks.

I'll get back in the queue.

Thank you.

And our next question will come from the line of Bill Chappell with SunTrust Robinson Humphrey.

Your line is open.

Please go ahead.

I guess, turning to the gross margin for the quarter.

I mean certainly the improvement year-over-year is impressive.

But it's -- is there any way to break out how much of it is was mixed and how much was the gross margin initiatives?

And maybe can you give an update in terms of, are you on plan, are you ahead of plan for what you're expecting to see this year versus next year, and kind of on some of those initiatives?

We won't be able to break out the difference between mix and margin.

I can only say to you that we are very much on schedule as far as the gross margin initiatives are concerned.

They're coming in a bit faster than we had originally anticipated, and, in some instances, a bit higher than we had anticipated.

So I don't expect that it will diminish next year's expectations, but it certainly has enhanced this year's.

And then turning to the iron sales, maybe I was just misjudging the growth in a given quarter.

Can you give an update of where you are on market share?

Have there been major changes for that business?

And also kind of -- actually on the drivers side, did you end up in the quarter in June, where were you compared to Taylor-made on the driver side?

We are just starting to get the June stuff, Bill.

I mean, literally, it's just starting to trickle in and we haven't had much of a chance to study what the market shares are.

I know that in the -- Now, is your question on market share for irons?

Because I think I tried to explain the timing of new products.

No, I understood the timing of new product.

I was just trying to understand if there was any market share thing going on as well.

No, you know what?

As I mentioned, X-20s are the number one iron out there.

We are well in the lead in terms of market share overall by quite a margin.

Like I said, we only have stuff really through kind of the May timeframe that we've had a chance to look at.

It's just starting to trickle in for June.

And then just a final question.

Is there any way to gauge what currency -- what the total affect of currency was on the top line sales?

On a year-to-date basis, it's about $11 million, I believe.

11 to $12 million.

Okay.

So a few percentage points?

Yes, it had a positive impact on our international sales, but it's also, as I mentioned, having a negative impact on the OpEx line.

Okay.

Great.

Thanks.

To your point, and this is through May, because we -- we haven't gotten all the June shares in.

Our iron dollar share was 27.2%, up 2.3 share points versus a year ago, on a year-to-date basis.

George, real quickly, while I have you, I guess the question has been with the success of FT-i and FT-5, is this a one-hit-wonder?

What's -- can you repeat it?

Can you expand it?

Can you just address that a little bit of, do you feel like this can really drive sales for more than a quarter or two?

Well, we certainly hope so, yes.

With the high proportion of sales in any given year resulting from new products, obviously, that's a very decent and appropriate question.

As I sort of alluded to in my opening comments, the new products development program that has sort of been reinvented over the course of the last two years, has really given us a very full plate of new product activity.

This year was perhaps the strongest in the history of the company, but we feel very, very positively about the number and quality of the new products that we have currently on our plate for 2008 and 2009.

The fact is that, that we're already working on 2010.

So it's not for the lack of -- of options, I think, that we'll be looking into the new year.

We're feeling pretty good about our ability to continue to drive the technology in the industry and continue to be the innovator.

And I think that '07 is a good example of what happens when we -- when we get most of it right.

And I say "most of it" only because in -- the one area which I believe we have not gotten sufficiently better at is forecasting.

Our demand for the new products in this year far, far outstripped our forecasting and that gave us some degree of difficulty.

But I guess if we're going to face any problem, I'd rather have that one than the reverse.

Great.

Thanks.

Sure.

Thank you.

And our next question is from Alexander Paris with Barrington Research.

Your line is open.

Great quarter.

Thanks, Alex.

Thank you.

Just a couple of things.

One, on the ball business.

Were you profitable in the second quarter in balls overall?

Yes.

Okay.

And you expect to be for the full year?

Callaway balls are up sharply, D-2 was up, but all the rest of Top-Flite is down, essentially.

Again, remember, Top-Flite -- Top-Flite is a combination of things.

The D-2 ball is -- is, in fact, doing well, but we've eliminated a very substantial number of SKUs and really low margin products out of the Top-Flite line.

So on a unit basis, we've suffered the consequences of that, but the benefit to us, obviously, from a profitability point of view is very measurable.

And, in fact, going forward, we're going forward with the kind of product offering on Top-Flite that is a much more solid base for us to grow from than perhaps the stuff we had in the past.

How many SKUs do you have in the Top-Flite left?

Well, we reduced the SKU count this year by about 30%.

I'm not sure the exact number.

I believe the -- it's about 15 to 20, but I'd have to check because we're still in the process of culling, if you will.

Plan is to one at a time replace those with -- with -- with Callaway designed balls in all the price categories?

Not Callaway designed balls.

We're continuing -- we're going to continue, obviously, to have a full line of balls for Top-Flite but, again, targeted at a different price category, if you will.

I meant more D-2 type balls.

Oh, yes.

No, no, absolutely.

We have, as I think we've mentioned in the past, we have a substantial IP portfolio in golf balls and we're beginning to mine that.

D-2 being one good example, and you'll see some other examples going forward.

With your great quarter, and I think Top-Flite products had a very good second quarter, do you think it was -- was there a good wind at your back?

That is, was there -- do you feel that the overall golf retail business was -- was pretty healthy?

Or are just the two of you are just gaining a lot of share?

Well, I think it's a little of both.

The -- as far as golf balls are concerned, as I guess everybody knows, the year started off terribly in terms of rounds being played, and as we've said very often, the correlation between rounds played and golf ball sales tends to be a lot stronger than anything else.

Even through June, because we just did receive the June rounds-played number, while June was up on a year-to-date basis versus last year, rounds played is still down 1.3%.

So you can't say the rounds played issue, largely because of weather, is particularly robust, but our ball business has been very good despite that.

I think retailing is -- is always the case, is a mixed bag, depending on what region you're in, the kind of weather that you're facing and how early a start the golf season has had.

As I indicated, in the case of Europe, they had a great start and then they ran into a flood period.

In the U.S., certain regions of the country started off with a very, very wet spring, but are rapidly catching up.

So I think the best way to evaluate the year, unfortunately, is when it's over.

Because the trends by region tend to vary quite -- quite dramatically.

I noticed that the rest of your Asia business was kind of flat and you -- you mentioned Korea and Japan a lot, but not a lot of mention of China and India.

Are these people all too busy working to buy golf balls?

No, I don't think so.

Again, both Korea and Japan actually on a year-to-date basis have done well on local currency basis, but, as you know, the yen has weakened relative to the dollar.

So, as reported, it looks a lot weaker than it really is.

Their business is actually quite good.

We've begun to sell in China.

We're beginning to establish the infrastructure to be able to make a go of that, but, again, I caution everybody to recognize that China is a long way from becoming the full potential that it -- it probably will be in some years to come.

There still aren't a great number of golf courses.

The retailing infrastructure for golf is -- is at very, very basic levels right now.

So I -- I think there's a great future in both India and China, but it is in fact the future, it's not today.

One more short question.

It seems to me, in your three-year plan when you first start talking about it, you were talking like some assumption of an about $80 million kind of on-going flow and free cash flow.

Is that number, if that's correct, still reasonable expectation over your three-year plan?

Yeah, that was 80 to $100 million on a per billion dollar basis, Alex.

We were trying to compare ourselves to the benchmark.

I think, for Callaway, it was in the 90 to 120 range, but on a per billion basis, it was about 80 to 100.

And yes, we are, we're --

We're definitely on that schedule.

Great.

Thank you very much.

Thanks, Alex.

Thank you.

Thank you.

And our next call -- question from James Hardiman, FTN Midwest Securities.

Your line's open.

Good afternoon, guys.

Good afternoon.

Couple quick questions.

First, just a clarification.

There's a little footnote on the release.

It looks like the classification of the irons and maybe the accessories, did they switch?

Was there -- what were the items that maybe came out of one and went to the other?

Did I miss that?

Oh, the Top-Flite hybrid sets, I think was the footnote, was taken down into the -- into the other -- other area.

Okay, the Top-Flite --

It's small.

It's not -- it's not that material.

Okay.

In terms of your guidance, obviously you don't want to get into what you were expecting and the details of your guidance, but I guess, even qualitatively, what does your guidance tell us about the -- I guess your thoughts on the second half of the year.

Obviously, you beat your first half expectations by some amount, versus consensus I think was $0.03.

But, ultimately, how much of the -- the full-year guidance increase, at least qualitatively, is due to the great job that did that you did in the first half, and how much of it is something that you see in the second half that -- that you know feel you're going to do a better on in the second half?

Well, we've increased our guidance for the year, which would give you some implication to what the second half is going to be like, but I think it's very difficult to look at this business on a quarter-to-quarter basis because timing ultimately ends up playing such an important part of it.

We were very successful at getting our new product activity really focused into the beginning of the season, much more so than we've been able to do in the past.

As a consequence, you would expect the first half to be a bit more robust on a -- on a year-to-year comparison basis.

We'd indicated that we thought that we would be in the mid-single digits growth area for revenues and -- and, in fact for the year, it would appear that we're going to come in at the higher range of that mid-single digit number.

And that's a better way to evaluate how the overall year is going, rather than whether or not things have shifted between the second and third quarter and sort of distort some of the models that I guess you're looking at.

We think that we are, based on our forecast right now, we are going to grow in the mid-single digits.

It's going to be at the -- maybe the higher end of the mid-single digits, and that sort of talks to some of the optimism that we have on the year.

It is not disproportionately out of line with where we thought it was going to be, so...

We also have a degree of caution about the second half of the year just because of all of the -- the concern about consumer -- consumer attitudes and the whole sector.

You can witness what's happening in the marketplace, the whole sector obviously has a great deal of uncertainty associated with it.

We don't feel quite as uncomfortable as apparently the rest of the market does, but I think it's appropriate for us to be a little cautious.

Right, right.

And then can you talk a little bit -- your thoughts on the pricing within the industry.

Have we -- if you look at the last couple of years, certainly last year when some of the pricing pressure hit, I think it was -- I believe, if I recall correctly, it was a Father's Day sort of incident.

And then a couple years back when Taylor-made came out with their R-7s, I believe it was more of a June type of an event.

Do you feel pretty good that you've made it into August and -- at least I don't believe that any of your competitors has done anything sort of irrational.

Do you feel like you've passed a hurdle for this year and you can sort of take a breath here?

Or is there -- based on history, do you think there's more to come?

I can -- I can only talk with any degree of assurance as to what we think.

I don't quite know what's happening down the street from us.

I think, fundamentally, this is a rational market.

There are occasions, as you pointed out, where -- where something a little squirrely happens, but I think that's more of the exception than the rule as far as the industry's concerned.

So far this year, I think the business has responded and acted in the fashion you would hope it would.

We certainly have nothing planned that would disturb that equilibrium, if you will.

I can't speak to what our competition will do.

But, also, if you take a look at the -- the seasonality of the business, we are well into it.

Anything that -- anything that were to happen from this point on would have lesser effects simply because the market -- the market purchases are not behind us, but a good portion of them happen to be.

So I -- I would hope that the market range is relatively stable for the rest of the year.

I have no reason to indicate that it wouldn't.

Great.

And just one last quick question here.

Can you just give us an update on the whole -- the Top Golf investment that you guys made?

How's that sort of progressing, if at all?

Well, we're feeling pretty good about that.

We continue to watch it carefully.

The performance of the top golf organization continues to be pretty good.

They're expanding, going into two new markets in the United States very shortly.

Dallas in a few weeks and Chicago a few weeks after that.

These are updated models of their prior locations, so we would expect that they will act at least as well as the earlier ones have.

And if that's the case, I think our optimism for that investment will continue to be very strong.

Great, thanks guys.

All righty.

Thank you

Thank you.

And next question from John Shanley with Susquehanna Financial.

Please go ahead.

Hey, John.

The new D-2 ball was actually doing better than you initially expected.

Can you tell us whether or not there's a possibility or did Top-Flite as a whole, actually become a bottom line contributor in the quarter?

Yes, it did John.

Yes it did.

Remember, our original expectations for Top-Flite was to stabilize it because it had been on a, a rather lengthy, I'm talking many, many year decline, and the worst thing we could do is raise our own expectations way beyond what would really be possible.

So our intent was to stabilize the overall volume, cull out the non-performing or low margin portions of the line so that the profitability issue would not be quite as severe as it had been in the past and on all those fronts I think we're seeing significant progress.

As we go forward, assuming the rest of the year continues as we see it right now, the Top-Flite brand will be -- will have established a base from which we can do some better things.

And right now, it's living up to those expectations.

Great to hear.

Gross margins, obviously were up very strongly, that's really a nice thing to see.

Can you give us an indication of whether there was also a contribution through that gross margin enhancement through product margin improvements, and if so, where does that come from primarily?

Was it in the clubs and irons or pretty much across the board?

It comes really across the board.

The operations board has done a fantastic job of attacking the supply chain and almost every element of it from freight costs to assembly costs to product componentry costs, and together with some of the spot automation projects that they've also put into play.

It would be hard to point to any one particular area as being the answer.

The important thing, and certainly the thing that gives us heart for the future is that every single element has seemed to respond as predicted and that's why we have a great deal of confidence in our ability to certainly deliver the 50 to $60 million that we committed to early in the year and potentially based on the early indications that we might do better than that.

Also in terms of geographic changes, were there certain geographic markets that really generated a much more enhanced performance during the quarter that really did aid the company's gross margin improvement?

Well the gross margin improvement really is something handled out of the operations group and really affects everybody.

The regional, the regional issues, really relate to weather conditions and things of that sort.

The important thing is that our ability to produce and deliver our products, whatever they happen to be, to whenever they happen to be demanded has markedly improved.

So it really, it really can't be attributed to any particular region of the country, rather to the overall operations.

I was really referring to whether or not you had to enhance SG&A expenditures in certain geographic markets to get the type of top line results you're--

You're talking about driving the business?

Well, we're really bringing a new level of analysis into the business and trying to refine the kind of nature and marketing that we do both from a classic trade point of view as well as a regional point of view.

In addition to the opportunities internationally, as I think I indicated in prior calls, we believe that there's a nascent business growing in Eastern Europe, clearly the China initiative is something we're looking to with great anticipation for the future and we're beginning to see activity in Latin America as well.

So yes, we're clearly going to be moving spending around to take advantage of some of these opportunity areas.

Also to improve some of the areas in which we had been operating, but perhaps not as well or as efficiently as we'd like.

So that's constantly under examination and we are pretty much changing our mix in marketing and selling expenditures on an on going basis.

Uh, just turning to the U.S.

for a minute, nice improvement in terms of sales, up 10%.

Can you give us an indication of what retail channels of distribution were the main contributors to that or was it across the board, green grass shops, big box --?

Pretty much across the board.

We're seeing positive responses out of almost every element of our business, some of the fundamental trends that are occurring in the golf retailing world continue, and obviously, that influences the overall business, but I think our Green Grass business is very solid and we've seen good response to our products there.

The off course accounts, we've done very well, in and even in the non-traditional golf trade, whether it be Costco or Wal-Mart, Target and places like that.

We've seen positive response to what we're doing.

We feel good that the business is developing reasonably well in all major parts.

On the big box component are you seeing change in terms of the attitude or demands from Dick's now they have golf galaxy and conversely , obviously TSA doesn't look like it's exactly doing great, not quite on life support, but certainly doesn't look like it's manning up to the pressure Dick's is putting on it.

What's happening in that big box area?

Is that still a major part of your U.S.

growth potential or is it getting more difficult based on the consolidation that's going on in the

No, we're uh, clearly consolidation is changing the nature of how we do the business, but we're blessed with an important part of the industry.

As a consequence, we're not going to be as affected as some of the smaller players.

We're still a very important player and very much a driver of the industry growth.

From that point of view it's our partnership with the large trade as well as the small trade that speeds to the health of the industry.

We're likely to be a beneficiary and a help to the growth of the business.

I don't think we're going to have a problem because of the consolidation at all.

That's great to hear.

Thank you very much.

Appreciate it.

Thank you.

Next question is from Kathryn Thompson with Avondale Partners.

Please go ahead.

Just a follow-up question on inventories.

Could you break out between finished goods, work in process, materials, if you can?

Hold on here a second.

We got that.

For the quarter, uh, raw materials was 88, work in process 2, and finished good was 154.

Okay, and just a sequential or year-over-year comparison for that if you have that?

Q2, 06, same.

90, work in process 3, finished goods 154.

Okay, thank you very much.

Thank you and our next question is from Hayley Wolff.

And your line is open.

Hi there.

Hi Hayley.

I have a couple questions.

First on golf balls.

With Top-Flite somebody asked a question about, did it contribute positively in the quarter?

Uh, I just want to clarify, is that before the $3 million charge from last year?

If I back out the $3 million charge is it still sort of a positive year-over-year contributor?

You mean for the inventory?

Right.

Is that what it is was?

It would have been, well it was up versus last year.

It was profitable for the quarter.

At least the way I interpreted the question.

The question is what it profitable, yes it was and it was also up versus last year.

So stripping out the charge it was up versus last year?

Yeah, I believe so.

I believe the answer to that is yes.

And if your 10-K, you talked about, SunTech and investing in some golf ball production over in China, given where the cost structures of Top-Flite at this time, can you sort of give a sense of when you might migrate your production over there?

That continues to be a fluid question Haley.

The dynamics of golf ball manufacturers, the costs are changing as we bring efficiencies to the party here.

So some of the imperative to go do that isn't quite as strong as it perhaps was a year ago because of some of the significant improvements our people brought to the party here.

So I don't think I can answer that question because it's still a moving target.

Okay, so you might not move production over there?

I think that's an open question at this point.

If we continue to make the progress that we're making here, I think the imperative to do that is reduced.

Okay.

And we're pushing very hard on our costs and efficiencies here.

It's still an open question.

As we move into the third quarter, can you sort of characterize the follow through demand on the FT-I?

Yes, it seems to be continuing.

This is a new tech, technology base that, that we think has a lot of legs.

The product is really an extraordinary performer.

I think people are seeing that.

I don't think we've necessarily penetrated the market as deeply as I think we will over time.

So I have hopes that this is not a short-term product category.

Does the opportunity exist to bring it down to a lower price point?

I'm not sure that's a desirable thing to do.

Okay, now switching gears to the gross margin trends in the quarter.

I'm trying to understand the sequential gross margin, given that the mix wasn't that dramatically different first quarter to second quarter, when I looked at the woods and iron category in the aggregate, I'm trying to understand why gross margin went down sequentially.

I'm just looking here Hayley, if you take a look at originally, actually I think when I talked to you earlier, we had thought of this because of a higher ball mix.

Our ball mix is actually contributing kind of year-over-year because of the improvements we made on the ball side that George mentioned earlier, but it really has to do with sales mix primarily around irons.

We shipped so many X-20s in the quarter.

The mix went down in the second quarter.

It's a sales mix with the products and that was one that actually brought it down a bit because of the sales mix.

Okay.

Okay?

The gross margins on the items themselves only continue to improve as more and more of the gross margin initiatives take hold.

So that, that certainly is not a contributor.

And Hayley just to be clear, that is quarter 2 over quarter 1.

Right.

I want to make sure everybody understands that.

It was down a little bit versus the first quarter primarily because of the mix of the X-20s irons.

But substantially up over last year.

Just want to be clear there.

And George, don't take this the wrong way because you're doing a great job, but historically succession planning hasn't been a strength of this company.

I want to get a sense of where the board is in planning for the future this time around?

I'll tell you one funny anecdote, early on when I first came to the company, I think we were having a bank meeting and one of the people introduced me as the current CEO, which I found very funny, although he panicked when he realized what he said.

In any event, we've introduced a robust succession planning process in the company that we're in the middle of working through and the succession planning process starts at my position, but also works its way down through most of the middle management positions as well.

We're going to try and make sure that going forward, whenever that, whenever that date comes about that we're not caught short without having appropriate back-ups in place.

So I think the Board is quite well aware of that, is very supportive of the process we put in place and is monitoring it with us very carefully.

Okay great.

Thank you.

By the way, my health is fine.

God bless you.

I should make it at least through this week anyway.

Thank you Hayley.

Our next question is from Casey Alexander.

Your line is open.

Hi good afternoon.

Brad can you quickly run through that share repurchase information again?

Sure.

We have, let me get back there.

For the quarter, 772,000 shares and a net price price of $17.59 through the first six months, 1.8 million shares average price of $16.22 and for the third quarter to date, 545,000 shares at $17.22.

Assuming that you're on plan, and now you're moving into your cash collection period of the year, is it fair to assume with the back-up in the stock and the increase in the guidance that you could be even more aggressive with the share repurchase program here in the second half of the year?

Anything is possible, Case.

We're obviously going to look at it particularly in view of other options we're facing right now and our original intent was to insure that we are able to offset any dilution that occurred because of other issues.

I think we've been successful at doing that.

If it seems appropriate to go beyond offsetting dilution, we'd certainly consider it.

Okay.

And secondly, Brad, this is specifically for you, in the years that I've known you, this is the first year you've done pretty significant insider sales.

Can you speak to that and where you're at?

Are you done with your program or do you have more to go?

To answer that, this is the first time in seven years I have exercised any options.

Quite honestly, I have children ready to head to college and I'm basically done.

I think I have a 10B51 left out there at a higher price, but virtually I'm done.

I would just also mention that I still have a significant amount of holdings left.

I have probably exercised 30% of what I have.

Casey, I think I should point out, he's a lot younger than some of us.

The issue of college is a lot more important to him than the rest of us.

The 10-B-5s that were exercised by the management represented frankly a relatively small portion of the backlog of options they had available as Brad indicated.

He still has two-thirds of what he had available and a couple of other instances they had at least half of what they had still available.

So you know, that, that shouldn't be taken as any indicator of any future.

Look, I'm not being critical.

Like I said it's the first time in the years that I followed this that I've known him that he's done significant sales.

I wanted to get a sense of where he's at with it.

Okay yeah that's where I'm at.

Our next question comes from [Jed Ellabrook with AG Edwards].

Your line is open.

My question has been asked and answered thanks

Okay, next question from Erin Moloney with Merriman Curhan Ford.

Your line is open.

Hi, good afternoon.

Just have a couple quick questions.

I apologize if I missed this.

But did you have updated market share data for the woods category for the quarter?

We didn't have that.

I have it through May if that's, if that's --

You have May's already Erin?

We're just getting June's in.

Our May share of woods, our dollar share was 21.1, up 4.1 percentage points from a year ago year-to-date.

Okay, great.

And on the timing of product launches looking at this year and going forward, were you fairly pleased with the timing of the new products this year?

Should we expect similar timing in future years?

Yes, give or take.

I think what we've been saying is that the ideal is to get most of the new products out at the beginning of the season before the buying begins.

We attempted vigorously to do that this year.

We were largely successful.

I think as we go forward that would be the intent as well.

Okay, great.

Thank you.

And ladies and gentlemen, I'm sorry but we are now out of time for any other questions.

If you have any other questions, please contact the company.

I'd like to turn it back to Mr.

George Fellows.

Go ahead.

Thank you all very much for joining us.

We're feeling pretty good about the way the business is going and feeling pretty good about the way the industry is going as well.

I think we feel very comfortable with the commitments we have out there.

That we are very much on track to delivering against them and perhaps a couple of instances overdelivering against them.

So I would just urge you to stay tuned and we'll be back and fill you in on more stuff in the third quarter.

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