Topgolf Callaway Brands Corp (MODG) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Callaway Golf fourth quarter and full year financial result conference.

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

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

(OPERATOR INSTRUCTIONS)

Thank you and welcome, everyone to Callaway Golf company's fourth 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 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 estimates future sales and earnings per share, estimated future gross margins and operating expenses, future gross margin initiatives, or the amount or timing of the charges to be incurred or savings to be realized from such initiatives, as well as the company's estimated 2008 capital expenditures and depreciation and amortization expense 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 one 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, we will provide certain pro forma information as to the company's performance excluding charges associated with the integration of Top-Flite operations, the cost reduction initiatives announced in September 2005 and the company's gross margin initiatives.

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

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

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

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

Thanks, Brad and thank you all for joining us.

2007 has been an excellent year for Callaway Golf.

The company's been able to make significant progress on both short and long-term issues that we believe bode well for 2008 and beyond.

Results for the fourth quarter continued in the positive fashion we discussed in the third quarter call with both sales and EPS coming in at the upper end of our ranges with all other financial metrics dramatically improved as well.

Now, rather than focus on the numbers that Brad will cover in detail shortly, I would like to cover the drivers that made these results possible and we believe will carry into and influence our 2008 performance.

R&D innovation as always is at the hard of the company's success.

The reception of our 2008 line by the trade has been excellent, exceeding even the levels of 2007 and we believe sets the stage for a good start.

Now a cautionary note should be registered.

As we did last year, that the consumer has not yet spoken, so cautious optimism we believe is an appropriate position to take at this time.

Supply chain and operations excellence has been and will continue to be a significant driver of improvements to profitability.

Margin improvement initiatives, which are somewhat independent of the economy have overdelivered our commitments and promise to be equally productive in the coming years.

Brad will detail our new higher targets in a few moments.

Marketing and sales execution has also been ramping up, bringing new looks and vehicles not seen before in the golf industry that are delivering improved results for the money spent.

Our global focus has begun to tap into the significant growth opportunities outside of the U.S.

providing both short and long-term revenue expansion prospects.

All of these together with a philosophy of restless discontent will ensure that continuous improvement remains our organizational mantra.

Now, 2008 obviously will not be without its challenges.

And uncertain economic picture together with a normal complement of competitive activity will provide lots of issues to deal with.

While we can't control each of these factors, we do have a number of positives working for us or under our control that hold the promise of offsetting any negative effects from either of these areas.

Our positive momentum going into 2008, together with our significant brand strength, provides a solid base from which to grow.

Even if, and I stress if, economic conditions are not optimal.

Our target golfer, the more affluent and avid player has shown time and again their willingness to buy if the product news and value equation holds potential to improve their game.

Our sell through at high margins in 2007, particularly in the fourth quarter when retail figures were weak would seem to indicate that our product line may well have driven through the trough of a mild economic slowdown and is ready to ride the recovery in the first half of 2008 with our particularly well received new product introductions.

Further, international is becoming an increasingly important part of the overall business, 47% in 2007 and is less effected by the U.S.

recession talk.

Early signs throughout the international environment remain quite positive, potentially further insulating the 2008 results from downward economic pressure.

Now, having said all of this, prudence in budgeting is very much in our thinking with a focus on cost and spending control in order to be able to react to market changes.

This approach together with our clean and unlevered balance sheet, we believe positions us to whether most economic uncertainty.

I would like to turn it back to Brad at this point.

Thanks, George.

In reviewing the results for the quarter, we achieved consolidated net sales of $177.4 million compared to $179.9 million last year.

A decrease of 3%.

This was a positive surprise given the fact that last year's results included significantly more sales from new products introductions than compared to the past quarter.

Our results were due to stronger and anticipated reorder business throughout the quarter, a bit counterintuitive to the general news reports on a week fourth quarter retail sales but reflective of the strong momentum around our 2007 product line.

Consistent with the seasonally lowest quarter end sales, we reported a net loss for the quarter of $16.2 million compared to a loss of $10.2 million last year.

And a loss per share of $0.25 versus a loss of $0.15 per share in the prior year.

On a pro forma basis, excluding 2007 after-tax charges of a penny for gross margin improvement initiatives, and 2006 after-tax charges of a penny for restructuring charges and a penny for gross margin initiatives, our pro forma loss per share for 2007 was $0.24 compared to a loss per share of $0.13 in 2006.

This larger loss was due to higher employee compensation expense paid in association with our improved profitability this year, higher marketing expense, and an increase in legal expenses associated with golf ball patents.

As I mentioned, the slight decline in sales for the quarter was better than we had expected due to stronger reorder business during the quarter, specifically in drivers, irons, and accessories.

Higher sales in these categories nearly offset the decline in golf balls and fairway woods we had anticipated due to a new product introductions in those two categories that were included in last year's results.

Pro forma fourth quarter gross margins increased 300 basis points to 37% compared to 34% in prior year.

These results exclude pre-tax charges of $1.4 million in 2007 for gross margin initiatives, and $1.7 million in 2006 associated with gross margin initiatives, restructuring and integration charges.

Our progress on the gross margin line continues to be driven by the initiatives we began executing late in 2006, as well as a positive product mix impact partially offset by the negative impact of FX.

Pro forma operating expenses for the quarter were $92 million compared with $79 million last year.

These results exclude pre-tax charges of $1.2 million in 2006, associated with restructuring and integration charges.

The year-over-year increase was due to the increases in employee, annual incentive compensation, marketing and legal expenses as I just mentioned.

Highlights for the full year of 2007 include an increase in consolidated sales of 10% to a record $1.125 billion compared to $1.018 billion in 2006.

This increase was driven by our strong product line and improvements in our supply chain, which resulted in a 28% growth in accessories, 15% growth in woods, 8% growth in our irons and wedge business and 6% growth in putters.

Regionally, sales also increase with the U.S.

growing 5% and international increasing 17%.

All international regions had positive growth led by Europe, which increased 21% compared to last year.

In constant dollars, growth for the company was 8% versus the 10% reported and international growth was 12% versus a reported 17%.

Net income increased 134% to $55 million compared to last year and fully diluted earnings per share was $0.81, an increase of 138% when compared to $0.34 in 2006.

Excluding after tax charges of $0.8 per gross margin initiatives in 2007, and $0.9 for Top-Flite integration, restructuring charges, and gross margin initiatives in 2006, fully diluted earnings per share for 2007 was $0.89, an increase of 107% compared to $0.43 last year.

Pro forma 2007 gross margins, as a percent of net sales were 45%, an increase of 500 basis points compared to 40% last year.

These results exclude pre-tax charges of $8.9 million in 2007 associated with gross margin initiatives, and in 2006 $3.5 million Top-Flite integration charges and $2.1 million for gross margin initiatives and restructuring.

Gross margins were positively impacted primarily by the successful implementation of our gross margin initiative, as well as the positive effects of increased sales of our higher margin drivers and accessories, as well as our x20 line of irons.

Pro forma operating expenses for the full year were $403 million or 36% of sales compared to $358 million last year or 35% of sales and in line with previous estimates.

These results exclude pre-tax charges of $3.3 million in 2006 for Top-Flite integration and restructuring charges.

The increase was due to the same reasons as for the quarter which included higher employee annual incentive compensation expense, which was close to 0 in 2006.

Also, adding to the increase were higher marketing expenses as we relaunched our Top-Flite brand, higher litigation expense associated with protecting our golf ball patent rights along with the negative FX impact on our foreign expenses.

Now moving to the balance sheet, networking capital was flat compared to last year.

Excluding the balance outstanding on our credit line from current liabilities, networking capital decreased to 11% driven primarily by a reduction in inventory which decreased $12 million compared to 2006.

Inventory would have been in line with our targeted reduction of $20 to $25 million, but was negatively impacted by a decision we made to accelerate the launch date of our Hyper x Driver and Fairway Woods to earlier in the first quarter of 2008 and the impact of stronger currencies on our foreign subsidiary inventory balances.

Consolidated net receivables decreased to $112 million compared to $118 million last year due to the slight decrease in sales during the quarter.

Consolidated day sales outstanding improved by two days to 59 compared to 61 days last year.

Collections remain good as does the overall quality of our receivables.

From a cash generation perspective, EBITDA for the year increased 78% to $127 million.

Capital expenditures for the year were $33 million, in line with previous estimates and equal to 2006.

Depreciation and amortization was $35 million for the year, also in line with previous estimates.

We repurchased a total of $115 million of stock during 2007 at an average price of $16.68 per share.

Our outstanding repurchase authorization balance is $100 million.

Those are a few highlights of the fourth quarter and the full year.

So let me shift now to discuss our forecast for 2008.

As George mentioned, we are certainly pleased with the momentum of our business as we exited 2007 and feel we have a very strong product line as we enter 2008.

Our pre-book business coming into the year has been very encouraging but as George mentioned it is early in the year and sell in is not a fail-safe indicator of retail sell through.

While we believe the golf consumer tends to be somewhat resilient to economic conditions we're certainly very aware of current economic conditions and key indicators.

Taking this into consideration we estimate net sales for 2008 will range from $1.145 billion to $1.165 billion or a growth rate ranging from approximately 2 to 4% which we believe will outpace industry growth for the year.

We estimated our gross margins will continue to improve during the year with additional savings from our two year gross margin improvement project of 20 to $30 million.

This is consistent with our original estimate of $50 to $60 million forecasted in late 2006 when combined with the approximately $30 million of improvements we captured in 2007.

So, as a result of this revenue growth combined with improved gross margins, we estimate pro forma fully diluted earnings per share will range from $1.08 to $1.18 compared to the $0.89 we just announced for 2007 or earnings growth rate ranging from 21 to 33%.

Both the forecast and prior period results exclude expenses associated with our gross margin improvement initiatives, which will continue through 2008.

These pre-tax expenses totaled $8.9 million in 2007 and are forecasted at approximately 8 until 2008.

The 2008 estimate brings the total spending related to these gross margin initiatives since the beginning of the project to approximately $19 million, combined with approximately $8 million we have spent on capital related to gross margin initiatives, the total would put us slightly higher than the original range of $15 to $25 million in capital and expense.

I would point out that a portion of the estimated expense in 2008 is targeted against initiatives that will generate incremental savings in 2009 and 2010 which we will discuss at our upcoming investor day scheduled for next Thursday, February 7th.

The 2008 earnings estimate is based on an assumption of an average $67 million shares outstanding and a tax rate of approximately 38.5%.

As we have discussed in the past, we traditionally launched most of our new products from during the first four to five months of the year as the season opens up.

Actual shipments of our products compared to our forecast could shift by a few weeks between the quarters for a variety of reasons including the pace of reorders, which are driven by sell through of our products to consumers, which is difficult to forecast.

While we don't provide specific quarterly guidance, last year we did provide you with some additional color on the first half to help you as you model out the year.

We currently estimate sales for the first six months to range from $725 to $745 million.

We have included with our earnings release today a schedule that summarizes the planned timing of new product introductions for the first and second halfs of the year for both 2007 and 2008.

We estimate that operating expenses will increase at a rate similar to our top-line growth rate.

This assumes general inflation of 3%, as well as some continued investment in marketing to support brand growth and developing new market growth in particular, China.

We estimate annual CapEx spending to be about $50 to $55 million in 2008.

This includes approximately $35 to $40 million to support our normal operational requirements, and approximately $15 million for the conversion of our headquarters building as we consolidate our campus into a more efficient layout.

Depreciation and amortization is forecasted to be $35 to $40 million for the year, slightly higher than 2007.

Hopefully, these estimates will be helpful to you as you model out the year.

We would now like to open the call for questions.

Thank you.

(OPERATOR INSTRUCTIONS) And we'll go first to the line of Tim Conder with Wachovia.

Please go ahead.

Mr.

Conder, your line is open.

Thank you, operator and congratulations on a great year, gentlemen.

Thanks, Tim.

A couple of items here.

Brad, you talked about the gross margin initiatives that you expect to still realize.

That's just from the gross margin initiatives alone.

Do anticipate whether your product line for '08 that we could actually see a richer product mix and potentially impacting gross margins?

Tim, that's a little hard to say at this point, as you know we have a mixture of some higher-priced products like the I-mix product going out there, as well as a new fusion iron but we also have a new BB08, Big Bertha 08 iron which is somewhat at the lower end of the price range.

It's a little hard at this point to be able to predict exactly how that mix is going to go.

We'll get a much better sense when the sell through begins so I would anticipated a -- after our first quarter call, we'll be able to give you a little more color on that.

Okay.

And you mentioned in the commentary that 4x was maybe a little bit of a drag in the quarter.

Could you, maybe talk about it maybe from a sales perspective, EBITDA, EPS, and then also just maybe give us a summary for the year and what your expectations are regarding 4x benefit or drag in '08?

Do want to answer, Brad or shall I?

Go on.

I think fourth quarter -- are you talking about FX?

Is that what are your saying?

Yes, foreign exchange.

I'm sorry.

For the quarter, it was $5 million and for the year it was 22 top line.

Benefit?

Tim, I'm sorry?

Benefit.

Benefit

Okay.

That was a benefit in the fourth quarter and full year was about $22 million.

Okay.

In total benefit.

And I'm sorry, what was the rest of your question?

What was the effect on operating expense?

Yes, EBIT marg EBITs or EPS , however you want to comment on

You know what Tim, that's always a little bit hard to try to get all the numbers that would equate down to an operating margin, but I would tell you that it's probably in the range of 25 to 30% flow through benefit from that.

Because you have the negative impact on all of your local costs.

Right.

And so that's an offset, you know, to the gains you would get on the top line in gross margins but it probably is in that 25% range roughly, flow through.

Okay.

And then George again, Brad gave us a little bit of guidance on the gross margin initiatives that remain under the prior program that you outlined, would it be fair to say that your '08 goal that you outlined last February, do you feel more/less confident at this point and time than you did then?

We feel very confident because as you can see from the results in '07, we've overdelivered on that part of it.

At this stage, since it's a very dynamic process, you know, there are projects that enter and projects that leave and we'll be covering it in a lot more detail next week at the investor conference.

We feel very comfortable with the original expectation of 50 to 60 and in fact, at the investor conference we'll be indicating a target on top of that we anticipate being able to deliver in '09 and 10.

So, I would say, at the least we're certainly as confident about our ability to deliver, if not more so.

From what you had out lined last February for '08?

That's correct, yes.

Okay.

Then last question, gentlemen, retail inventories, you commented that you had good, better than expect reorders in the fourth quarter in the U.S.

Maybe comment where you see the inventories now at retail both domestically and internationally on a year-over-year basis for yourselves and the industry.

Well, our inventories, as you know are down and as Brad indicated they would have been down more but we accelerated some of our manufacturing in order to be able to deliver some of the 2008 product earlier.

As far as retail inventories are concerned, we're very comfortable.

They're quite clean.

We have no issues of any serious consequence, certainly not to my knowledge either, domestically or internationally.

So, I think that playing field is quite positive for us.

So you would say they're in better shape for Callaway year-over-year at both domestically, internationally and what about the industry also?

The industry is a little harder to say.

Certainly from our point of view, I'd say we're at least as good if not better than we were last year because if you recall, last year we were still facing the elimination of a lot of SKUs on Top-Flite balls that we had to get out the door.

We still had some remnants going back on some older product of a couple of years prior, all of which or a great portion of which, we dealt with in '07.

So going into '08 I think, we feel a little bit more comfortable than even we did last year.

As far as the industry is concerned, you know it, I would rather leave it up to the other guys to speak for their own.

Okay.

Great.

Thanks, gentlemen.

We'll go next to James Hardiman with FGN Midwest Security.

Go ahead please.

Good afternoon.

Couple of questions for you, guys.

Obviously, now that international represents I think you said 47% business, I was wondering if you could give us a little bit of color on sort of the momentum of the overall golf industry within those markets and more specifically how you guys are doing from a market share perspective.

As you sort of go market-by-market in the areas where you guys do business.

Sure.

Market share is a little harder to come by, as you know the data is a little sparse when you -- even in the U.S.

it is a little sparse, but certainly outside it's even more so.

Where we do have share?

We have significantly improved our share in Europe.

That's primarily indicated by share data that we have for the UK.

We'll be sharing some of that with you again, of course next week at the investor conference.

The same can be true of our situation in Japan, largely.

Beyond that, we really haven't got share data.

The only thing I can tell you is that given the fairly dramatic increases we've seen in revenues in literally every one of our foreign subs and the fact that it is certainly our impression that those revenues outstripped the market.

One can obviously presume that our share went up in virtually every single market.

Okay.

And I guess when I look at your growth, maybe the fourth quarter isn't the best time period to look at, but if you had to rank the momentum of those different markets would it be, you know, roughly in line with your performance in the fourth quarter and, obviously, the United States is probably the worst of all, but should I also assume that Europe is not quite as bad as the U.S.

but doing okay and then Asia are doing really well.

As bad and in what respect, James.

I'm sorry.

I need to understand what --

Oh, I'm sorry.

In terms of the growth internationally.

Sales growth?

And obviously, the U.S.

did the worst and then Europe and then some of these Asian countries did really well.

But James, recall that we didn't have any -- you know, last year we had a significant portion of new product launches in fourth quarter.

So, more of them were directed at U.S.

in the fourth quarter of last year, so I think fourth quarter's find out a good way to look at the growth.

Right.

If you look at it on a total year basis, obviously international really ramped up quite dramatically and I think it's reflective of one obviously, more concentration on the international markets.

As we indicated to you, I guess at the last investor conference, you know, we've stepped up our management throughout the international environment.

We've focused a great deal more on them.

They've been significantly better integrated into the entire development process for new products and we are very much into sharing of best practices from many, many different perspectives.

All of which we are going to spend a fair amount of time on next week.

So, I think, that, you know, international probably will continue to outstrip from a growth point of view, the U.S.

for a number of years to come because in many respects.

Many of the international markets are at much, much earlier stages of development as far as penetration of golf.

So I think, that we're all looking at international as being a very significant source of growth for us.

Okay.

Great, thanks, guys.

All right.

Next question is from Katherine Thompson with Avondale Partners.

Go ahead please.

Hi, great.

Thank you.

A couple questions on certain products.

First, your iron sales, you did have an improvement year-over-year.

Was this driven by your X series irons or a different type of product that we should be focusing on that's helping that growth.

The iron business, Katherine, was predominantly X20.

That was a very successful product for us this year.

Both the regular and tour model.

You know, as I think we mentioned in the past, we're trying to time the introductions on our various line.

We have a very broad line that covers the full spectrum as far as golfers are concerned and we're trying to pace out those introductions appropriately from one year to the next.

X was a very big year last year because of the x20 introduction.

This year, of course, we have a new Big Bertha iron, as well as a new fusion iron so that we should see a balanced growth situation on irons as we go from one year to the next.

And we're trying to do the exact same thing obviously, as far as drivers and fair woods are concerned as well.

Was there any type of international iron introduction that we should note that would helped their progress?

Different from what happened in the U.S?

No.

Okay.

As far as your I-mix , you know, we've had a chance to look at it at the PGA show and it definitely was the buzz of the show.

And the question I have for you, what are you doing to mitigate the possible risk cannibalizing sales of say, FT-5 or FT or your square head driver sales this year from your I-mix introduction.

So in other words, you might have a guy that, in a given year might buy a couple of drivers and this year saying I'll just buy -- I'll do the I-mix and may be get, you know, two shafts and only one head.

How are you approaching

Well, the incidence of multiple driver purchases by an individual is relatively small so the likelihood of cannibalization that you are describing is not very great.

Quite a contrary, I think what we're really providing is an opportunity for somebody to custom their driver selections much more closely to their product needs and, in fact, might lead again, might, certainly our research could indicate it could, might lead to actually increasing their purchases because where as if someone would buy a driver and hope it would serve all purposes for them.

Now, they have the opportunity to buy multiple heads and/or multiple shafts and be able to put together a variety of combinations so that depending on the conditions under which they play at any given round, they actually have a new driver to suit those conditions.

We think it's very clear that customization is very much a trend that is growing and is going to become a much, much bigger factor going forward.

We think the I-mix represents the best example of how to cater to and suit that trend.

If you take a look at the pricing and the various combinations from a financial point of view, we have really protected ourselves against cannibalization and in fact, perhaps enhanced our opportunity to improve margins overall.

On the I-mix, would you say that their margins are comparable to your FT-5-type drivers?

Yes.

Okay.

Also, why the decision to accelerate your entry of your Hyper X?

Well, we planned out the year taking a look, you know, from a sales timing and trade timing it turned out because of the excellent way our supply chain is operating that we had the ability to ship it earlier and as I think I've said a number of times, we're really intent on trying to get our new products out there at the very earliest possible date in order on make them available for all comers if you will, whenever they come into the marketplace and while the market doesn't really ramp up until the April period, there are people that are shopping in February and certainly, as far as the sunbelt is concerned there are people that are actively playing and shopping right now.

So, the earlier we're able to get new products out, the better we're able to take advantage of the market.

Okay, great.

And then finally, could you just comment about what specifically you're doing to push growth in China?

Well, I think, again, hopefully you'll have an opportunity to be with us next week, but we have, during the course of '07, have a fully staffed on the ground subsidiary in China now with some very, very strong local management, all of whom are hired in and around the region.

We have expanded our distribution base from just a couple of cities before that were serviced by a distributor network to 25 different cities to date.

We've gone from a rather nominal, I believe the number is 20 outlets that we were servicing, you know, in the past to something over a couple of over a hundred outlets today.

So, you know, we're trying to stay out ahead of that market as it develops.

We're being very careful in terms of how we build the infrastructure because we're very firm believer that business should proceed infrastructure, but we do have enough infrastructure on the ground now to be able to stay out ahead of the growth of the market and it's beginning to ramp up.

Now it's still going to be a marathon, not a sprint, but now we're well, well positioned to take advantage of the growth as it occurs.

Okay.

That's all I have for now, I'll hop in the queue.

Thank you.

Thank you.

Our next question is from Bill Chappell with Sun Trust Robinson Humphrey.

Please go ahead.

Good afternoon.

It's actually Mark in for Bill.

If you could switch gears a little bit to the golf ball business.

The success rebound in the top five businesses and have you gained quite a bit of distribution at this time last year, with the success this past year is there a possibility of new distribution going into this year or how is the discussion of trade going?

No, absolutely.

They're going quite well as a matter of fact.

As we indicated, we were facing a situation where we had a rather long-standing downturn on Top-Flite going on for years long before we acquired it.

We had a very, what we believe to be a very realistic but aggressive objective of stabilizing that business in '07, and thankfully, we were very successful at that and D2 represented the first major launch of a product under the Top-Flite name that had a full marketing program behind it, both from a product point of verify, a product with a very significant point of difference, as well as marketing support program.

That registered quite well and D2 did in fact, stabilize the business.

Going into '08 we have a number of additional new product introductions under the Top-Flite name that are intending to build on the base of that D2 franchise.

The reception to those new products has been quite good.

Again, based on the fact that D2 itself was successful.

So, we believe that we're on a very clear recovery path for Top-Flite.

Great, and I guess, is there any update on the litigation with TELUS.

Yes, it's going on.

Okay.

Great.

Thank you.

Alrighty.

We have a question from Robert Samuels with J.P.

Morgan.

Please go ahead.

Mr.

Samuels, your line is open.

Hi, sorry, can you hear me?

Yes.

Hi, sorry, can you talk a little more about what is driving the growth in some of your international businesses and then, if you could quickly comment about any sort of cost pressures that you may be seeing.

Sure, what is driving the business internationally is very much the same of what is driving it in the U.S.

We had an extremely well received product line both from a trade, as well as a consumer point of view.

That together which I think, a really measurable improvement in overall execution on a worldwide basis.

As I've said we've upgraded the quality of the management and we've done a lot of best practices sharing.

We've certainly integrated the international operation much, much better into the overall operation and as a consequence of that, I think we've really beginning to gain the benefits associated with that.

You know, it sounds a little motherhood-ish and I don't mean to sound that way but the fact is the better you execute, the better you can take advantage of what is fundamentally a very, very strong product line.

So, that's beginning to happen and we fully expect it to continue because clearly, we haven't fully capitalized the opportunities internationally.

That together with the fact, that there have been overall improvements in distribution overseas, as well as improved executions said that we have really a multi-faceted improvement of our business internationally.

To give you an example from a product point of view, our Hyper X driver that we introduced in Japan became the number one driver in Japan and stayed that way for the entire year.

Now, that's a marketplace that is very heavily dominated by local competition in Japan and yet, this product was able to go in and take over the number one slot.

So, product is certainly a very important part of it but execution is as well.

From a cost point of view, you know, we are so heavily vested in these margin improvement initiatives that we have not only overdelivered on the margin improvement initiatives, but we have essentially overcome and recaptured any cost pressures that we've really faced and as we look into '08 we anticipate that will in fact continue.

Great, thanks.

You're welcome.

Your next question is from Rommel Dionisio with Wedbush Morgan.

Please go ahead.

Yes, good afternoon.

Just a couple of questions about the I-mix.

You know, this is obviously a significant shift in terms of consumer behavior.

Do you guys put on a pretty significant AD campaign, you know, focused just on educating people on the rule change and if so, would that occur in the first of the year?

Yes, of course we do.

And again, I think very importantly, I think, we've planned it.

This thing much like the FTI last year, we've planned it.

We believe appropriately, conservatively.

We have the right kind of marketing plan behind it because it is an educational process.

It's not an instantaneous thing and we think that while it has the potential of growing to be much, much larger than we participate year one, we're being very careful about that.

Well, congrats on the quarter.

We'll see you next week, George.

Thank you and look forward to it.

We'll go next to Jeff Blaeser with Morgan Joseph.

Please go ahead

Thank you for taking my call.

Due to the profit breakdown for U.S.

versus international for the quarter and year and do you, I guess, eventually expect international sales to exceed that of the U.S., is that in the plan?

We do not -- international does not exceed the U.S.

as far as revenues are concerned, but if you take a look at the respective trajectories it's not hard to come to the point of view that in a reasonably short period of time international should indeed, become the largest revenue producers of the company as far as the profitability between the two divisions we don't really get into into that little detail at this point.

Okay.

And from a cash flow standpoint, it looks like you almost hit your three-year target in year one.

Is that sustainable going forward, do you believe?

Well, not to dock that question, I would rather save that for the investor conference, it will give you an incentive to show up, but we'll be discussing that in some detail next Thursday.

Fair enough, thank you very much.

All righty.

We'll go next to Hayley Wolfe with Rochdale Securities.

Please go ahead.

Hi there.

I have a couple of questions.

First on Japan, is it this year we change over to COR compliant driver and if so, what do you expect to transpire in that market?

This is the year, '08 is the year that they convert over.

I think that we began to see that in '07 to be honest with you.

If you recall, we had discussions in '06 saying that there was sort of paralysis on the part of the Japanese consumer in '06 because they weren't quite sure whether or not they should buy a non-conforming driver or wait until the conforming drivers came out in '07.

As it turned out the market was somewhat depressed in '06.

In '07, they came on very, very strongly, our Japanese business was exceedingly strong and in fact , the year of C driver, which is a conforming driver became the number one driver in all of Japan for the entire year.

So, the market did respond quite aggressively.

My expectation would be that '08 should also be a pretty positive year as well because I would expect that not everyone has gone over to conforming driver as yet and '08 should be a good year for

Next question, the accessory business was pretty strong this year.

Can we expect a similar type of increase next year or do we see the business plateau or are there new categories you can expand into?

I don't think it's going to plateau at all.

I think we had a very big footwear impact last year.

As you recall, we took over the business and there fore, began to capture the full revenue rather than just the licensing revenue.

So, that sort of distorted the number a little bit but no, the reception to our accessories line has been very strong.

We certainly have lots and lots of room to continue to grow.

We look forward to accessories continuing to be a very important contributor.

Directionally, would footwear have been half of the increase?

No, no, not at all.

We had very much across the board increase in accessories.

Okay.

Next question on the hybrid irons.

Help me understand, when you buy a set of irons, you buy the hybrid whether there's cannibalization on your hybrid clubs and how that works.

There's a lot of people that aren't comfortable using hybrids and what we're attempting to provide -- again, don't forget this is at the Big Bertha level and these are real gain improvement irons to try to assist people that are mid to high handicappers to play the game a bit more comfortably so they will give some of the benefits of hybrid to a person who is strictly an iron user.

I don't think it really changes the extent to which those who were inclined to go to hybrids will indeed go to it, anyway.

We haven't seen any of that in any of the testing that we've gone through to date.

Actually, '08 will prove that out, I'm sure.

But we don't really anticipate a great deal of cannibalization coming out of that.

Okay.

There's two more questions, one quick one.

Any tour players going to be using FTI in '08?

There are.

Oh, yes, Ernie Els for one has used it throughout '07 and continues to use it in '08 to very good effect.

He's having quite a year and we've seen increasing interest in I and a part of another pros perhaps being led by the success that Ernie's having with it.

Yes, the high MMY shaped driver business is going to be with us for a long time.

One last question which may be a little unfair, but prior to recessions --

If it is unfair don't ask it.

C'mon, I have to.

All right.

It wouldn't be me.

'98 and '02, you had down in sales and I know it was quite a different company back then but help me understand, you know, why the complexion of the company is different now so that you will be able to withstand any type of recessionary pressures better than you did in the past?

Sure, I think you put your finger on it in terms of the company being so significantly different back in those days.

But you know, as I sort of indicated in my initial comments.

We are so vastly different today, the momentum that we're going into '08 with is particularly strong.

The quality and reception of our new product line, both from an '07 and '08 point of view and admittedly, '08 is at this point at the trade level is quite strong and we've also shown I think, fairly clearly that the avid golfer is in the market for a product that is innovative and new and promises to provide some improvement and benefit to the game and we've proven in '07 that price is not a very significant obstacle to those people because we went from what was essentially a $299 driver marketplace to selling two products that were over $400 with absolutely no resistance either at the trade or the consumer level.

You know, there are so many factors that are working.

Now, none of that says that the marketplace is not going to be tougher because of the economy, but there are enough characteristics about golf to indicate that while we're not totally insulated from economic pressures, we're certainly somewhat insulated from it.

You combine that with the fact that internationally, we have become a much bigger factor.

They are somewhat less -- again, somewhat, not totally but somewhat less affected by the economic issues in the U.S.

at least, at this particular stage.

That provides another further insulating level to these economic pressures.

If you add all of those up, Hayley, I think you come up with a cautiously optimistic view of the year.

And we have budgeted appropriately, we've set in place the appropriate controls to be able to react to the marketplace or to turn from our current expectations.

So we're actually going to a way feeling reasonably good about it.

I know that the popular press orientation is to be a bit more doom and gloom then I think we feel and while we're very sensitive to that, we don't tend to agree that it's quite as bad as perhaps some people are saying.

Okay.

Great, thanks a lot.

All righty.

We'll go next to [Chris Edil] with [Susquehanna Financial Group].

Good afternoon, everyone and congratulations as well.

Thank you.

Just to go back to that prior question just for a moment, I guess, George, what are -- obviously generally speaking, difficult overall retail environment but what exactly are your retail partners telling you, specifically within the golf category whether their specialty, independents or sporting goods retailers but what is going on in the golf business in terms of how they're looking at it for '08 and how they're look at inventory level going in.

Sure.

Well, the inventory level, let me answer that one first, based on our presell, the inventory level, at least on our product is anything but suffering.

But I think that's in part a reflection of the momentum thing I talked to you about before.

We've had a very successful year.

We've got a great deal of credibility with our trade and they're very positively reacting to the '08 line.

So I think we're by that stage and gone pretty well.

In our conversations with our lead retailers, they're cautious about '08, there's no question about it.

Many of them had somewhat difficult fourth quarters but again, let's not forget that fourth quarter is the lowest quarter for this business.

It's not where they do a banner business to begin with and to the extent that we come out of the sort of the winter doldrums into the golf season that is yet to hit us I think the consumer has yet to speak as to whether they're going to come out buying or not and you really have to remember that the brands that suffer most in these kinds of economic situations are the tertiary ones.

The strong brands are still very, very strong.

Further, from a profitability point of verify, our gross margin initiatives are largely economic condition independent.

The savings and the margin improvements that we're bringing to the party are significantly less reliant on a robust economy.

So, we have several levels of insulation, if you will, to a potential downturn and I don't think anything short of a catastrophic downturn, which I don't think anybody is really looking at right now.

It should be as big as factor as I think some people are concerned about.

Now, I'm not trying to be Pollyanna about it because like I said, we're being very prudent about how we are budgeting.

We're very prudent about how we control our costs and spending, but we think we have a pretty good handle on where it's going to go and I think we've taken a good middle ground in terms of how we're looking at '08.

Are you - as you look at channels and distribution, is there any meaningful changes in terms of how you're look at distribution for '08 or is it fairly similar to 2007?

Oh, it's pretty similar, I mean, of course guys, you know, continue to grow and they're very strong.

The mass marketers, you know, at the level that service the market continue to be very strong and do well.

The rounds played for green grass were flat to slightly down.

We don't anticipate there's going to be a dramatic change in that so that business should be reasonably stable.

I think one of the areas of great opportunity for us might indeed be and in fact we're looking very closely at it is the corporate business.

We've begun to pay a lot more attention to it.

We think that there's a tremendous opportunity out there that we have essentially not tapped into in nearly as significant a way ads we planned.

So that there are some sources of revenue that I think are going to help us above and beyond the traditional trade.

Okay and then I guess the last question I have for you, George.

You look at your new product introductions for 2008.

Can you give us an idea for an average pricing perspective?

You brought it up earlier in terms of the increase of pricing you saw in '07, the reception.

But in giving us idea as we go in to 2008, any magnitude of the increase versus in '07 and I guess, generally speaking, it would be fair to assume that from a margin perspective, the new introductions for '08 in aggregate potentially, could be higher for woods and drivers or, just given what you're doing from a sourcing and efficiency perspective as well.

Certainly, from a larger improvement basis, you would expect that to be the case.

Yes, the mix issue as I indicated a little earlier, a little hard to call right now, but clearly I-mix is at a much, much higher price point than previous.

The FT-5 and FTI continue to be the over $400 driver.

We've seen competition now follow us and come out with more expensive product as well so I think the log jam on pricing that I think the industry suffered from for so many years may very well have been broken and I think all that bodes well for general margins.

Okay.

Thank you very much and congratulations.

Thank you.

We'll go next to Casey Alexander with Gilford Securities.

Please go ahead.

Hi, good afternoon.

Hey, Case.

Hey, Brad, can you tell me in taking into account the employee compensation plans, how many shares would you have to buy during the course of the year to end up with an average of 67 million shares outstanding.

Run that page.

You're saying how many shares to buy to counter any dilution.

Yes, to counter dilution and end up with 67 million shares outstanding?

Not a great number.

Not a great number.

So, if you were aggressive with the share repurchase program, it actually could end up a little lower than that, then?

Well, I'm certainly not in a position to commit to you how much we're going to rebuy.

We are clearly always in the market to certainly to counter any dilution, and it all depends what other options are available to us to spend our free cash flow.

Okay.

Did you buy any this month?

No, we did not buy any this month.

Okay.

It was a little hard to decide what day to do what.

Okay.

I will.

I understand.

I was in front of my screen the whole month.

I can imagine.

You don't have to explain.

I think pretty much everybody else got everything else I had so that's fine.

See you guys next week.

Thanks, Case.

We'll go to Tim Conder with Wachovia.

Please go ahead.

Thank you, yes, just a couple followups, maybe where Casey was going with that.

Brad, did you give the shares outstanding at 12/31.

If you did I apologize, I missed that.

The actual shares outstanding.

At 12/71.

Correct and I guess -- maybe using a diluted number also.

Actual shares outstanding was 66.3.

On a diluted basis?

No --

Basic count.

No, the diluted would have been about 67.5.

Okay.

That's year-to-date.

At 12/31 though.

Yes.

Okay.

So your '08 guidance assumes basically very minimal --

Let me correct myself there.

The actual Q4 would have been diluted 64.7.

Right.

That would have been diluted at the end of the fourth quarter.

Because it was anti-dilutive because of a loss in the quarter, right?

Right so the basic was 63.8 like I said for the outstanding -- sorry 66.3.

66.3.

With outstanding and we're saying 67.5 on a diluted basis next year, on average.

Okay, but you said the guidance would assume 67.

67, yes.

So, you're saying there's going to be - there's only has extremely modest share repo.

Again, that's -- I think what Casey was going after.

Well, yes, i mean, it's an estimate right now, Tim.

Certainly, we'll monitor it throughout the year but for the purpose of planning it out, we use 67 million shares.

And then George, can you elaborate a little bit more on your supply chain initiatives that you mentioned in the press release?

You had already undertaken some of those.

Can you elaborate on what you guys are looking at here or give us some examples.

Yes, I want to leave a carrot out there for you to come next question so I'm not going to give all of it.

I'll be there.

I'll be there.

Good, then I'll tell you.

The original 50 to 60 that we indicated we feel very, very comfortable with and in fact, the balance is certainly going to be delivered in '08.

We are going to talk to some additional margin improvement initiatives for '09 and '10 at the conference next week.

And I think the important issue that we're going to clarify then is we don't really believe we've come to the end of the road by the way.

It's just that at this particular moment we're focused on delivering the balance of the original expectation.

We've identified 20 to 30 more for '09 and '10, but that's not a complete list and we're obviously going to continue to be working very hard at increasing that number if we can.

Okay.

And then lastly, gentlemen, I know that a question was asked regarding TELUS earlier in the call, but could you just kind of give us a couple branches on the tree.

I mean, where are we in the appeals process?

Is there a certain point where they'll have to file an appeal or not and can you kind of talk through a couple of the branches on the time line.

Well, I'm going to be extremely limited in terms of what going to going to say.

We clearly have won in the courts.

It was a clear indication to the courts that they did infringe on intellectual property.

They've filed an appeal.

We've filed for an injunction which we expect to hear something about by mid year.

And other than telling you that I would much rather be in our seat than there's that's about all I can say.

Okay.

And then lastly, tax rate, Brad, going forward and is there any impact on the non renewal of the R&D tax credit on a go forward basis and what are you kind of assuming.

As I mentioned in my comments, Tim, we're still assuming 38.5 I think that's fair just given all the ins and outs of the tax area.

I think that's a fair assumption for next year.

Okay.

And then, do you gentlemen anticipate R&D any major change there's, ramping it up further or not?

No.

At this point, I think we are, by far, the largest R&D spender in this industry and we intend to continue at that level because of the benefits that we've gained from that, but we don't see at this point that's it's necessary to ramp that up.

Okay.

Gentlemen, thank you again.

Thanks, Tim.

Thanks, Tim

And we are out of time for questions.

I'll turn it back to you Mr.

Fellows for closing remarks.

Again, thank you all and we certainly hope that many of you, if not all of you can join us next Thursday.

We'll be giving a lot more color commentary on not just our '07 performance, but I think forward looking into '08 to give you some comfort and confidence that a lot of what we are projecting out is indeed achievable.

We've had a very good year.

We're very much of the opinion that one year does not make a trend.

There is no one resting at this table or any of the other tables in our company with the results that we've achieved so far.

So, I think that you should count on us to continue to be agents for change in this business and to continue the press heavily to improve the overall financial picture of the company.

We are not uncomfortable with the marketplace as we look at it right now.

We are cautious but certainly not uncomfortable and we hope to convince of the same when you see us next week.

Thank you and stay tuned.

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

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

You may now disconnect.