Topgolf Callaway Brands Corp (MODG) 2008 Q1 法說會逐字稿

Thank you for standing by, and welcome to Callaway Golf 2008, first quarter results conference call.

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

Later there will be an opportunity for your questions.

Instructions will be given at that time.

(OPERATOR INSTRUCTIONS) I would now like to turn the conference over to Chief Financial Officer, Brad Holiday.

Please go ahead.

Thank you and welcome everyone to Callaway Golf company's, first quarter 2008 earnings conference call.

I'm Brad Holiday, Chief Financial Officer of Callaway Golf Company and joining me today is George Fellows President and CEO of Callaway Golf.

During today's conference, George will provide a few 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 estimates of future sales, gross margins and earnings estimated charges for the company's gross margin initiatives as well as the company's estimated 2008 capital expenditures and appreciation and amortization expenses, are forward looking statements subject to Safe Harbor protection under the federal securities laws.

Such statements reflect our best judgment today, based on current market trends and conditions and other information.

Actual results could differ materially from those projected in the forward-looking statements, as a result of a 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 may provide certain pro forma information as to the company's performance excluding charges associated with the company's gross margin initiatives, as well as information related to the company's EBITDA.

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

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

The earnings release is available on the investor 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.

Good afternoon and thank you for joining us.

We are pleased with the results of the first quarter particularly in view of the somewhat clouded retail picture in the US.

Sell-in of our 2008 line-up has been quite solid, reflecting the trade's confidence in and support of Callaway Golf's resurgence.

These positive sell-in results are largely consistent throughout the world, with particular strength being reflected in Europe and Japan.

At this point I would like to reflect on what I see happening in the financial market as it concerns Callaway.

There would appear to be far too much emotion and generalizing going on regarding our sector and not enough attention given to facts as we know them.

So if I can ask your indulgence, let me review some basic facts relating to our results that we believe should be in focus.

First, our first quarter sales are up 10% versus 2007.

This is a pretty strong statement by a retail trade focused on inventory in an uncertain retail environment.

Second, our bookings for immediate shipment, a reasonable measure of sell through for the first quarter in US, was up 11% versus a strong 2007 period.

Bookings for immediate shipment in April, are up 7%, further reflecting a relatively positive consumer response to the early stage of the golf equipment buying season.

And even though these levels are somewhat below the levels we had originally planned for, they are still very respectable in view of the relatively negative news regarding overall economic conditions in the US.

Third, the international business particularly throughout Europe and Japan, is quite solid at this stage and appears to be insulated from the negative prognostications about the US and Canadian retail environment.

Now, the intent here is not to paint an overly rosy picture and ignore the obvious concerns about the macroeconomic issues facing the US, but rather to bring the business outlook for Callaway back to as factual a basis as possible and take some of what appears to be an indiscriminate and emotional reaction to general, but not necessarily specific to Callaway business conditions.

In that regard, our best thinking based on facts at this point is to reiterate our guidance as communicated at our investor day, but also to suggest in order to accommodate the continued uncertainties in the current economic outlook, that we expect to deliver at the lower end of the range of our guidance.

We think this is a prudent position at this point in time.

All results to date through April, are in fact within that range and we feel quite comfortable in reaffirming our guidance.

As additional support I would like to remind that all our performance data confirms several elements of our original guidance that promise to provide some degree of insulation from US uncertainty.

That international is almost 50% of our revenues.

That gross margins initiatives are somewhat independent of these macroeconomic issues.

Case in point, the first quarter results that Brad will detail shortly, reflect 130 basis points improvement in gross margins, due to these initiatives.

There were some anticipated charges that off set these gains from the first quarter, that will wash-out by year's end.

And we are confident that we will register at least a 200 basis point improvement for 2008 by the year's end.

The fact that we continue to show a clean and unlevered balance sheet, the fact that we have contingency plans in place to offset further deterioration in US and Canadian outset if it should come out that way.

The fact that we have a commitment not to exhibit a knee-jerk reaction to any irrational pricing action that might be taken by a competitor that could damage our margin or profit performance.

Now, these are facts without emotion and represent how our management views the business and its prospects for 2008.

I would like to now turn the call over to Brad, to take you through a more detailed view of our financial metrics and then we will open up the call for questions.

Thanks George.

For the quarter, we achieved consolidated net sales of $366 million a record first quarter for the company and an increase of 10% compared to last year's sales of $335 million.

We reported a 21% increase in net income for the quarter to $40 million, compared to $33 million last year.

And earnings per share increased 27% to $0.61 from $0.48 per share a year ago.

On a pro forma basis, excluding after tax charges of $0.01 for gross margin improvement initiatives for both 2008 and 2007, our fully diluted earnings per share for 2008 increased 27% to $0.62 compared to $0.49 in 2007.

Looking at sales by product segments, our wood sales for the quarter were $117 million, an increase of 13% compared to last year.

This increase was due to an increase in new Fairway woods and Hybrid products introduced this year compared to last year.

This increase was off set slightly by expected lower second year sales of our statement FUSION drivers, the FT-5 and FT-I.

Sales of irons were $96 million, compared to $100 million last year.

The slight decrease was due to lower second year sales on our X-20 and X-Forged irons, somewhat offset in our new F-T and Big Bertha line of irons, as well as our new X-Forged series of wedges.

Golf ball sales were $58 million for the quarter, an increase of 9% compared to last year's sales of $54 million.

This increase was due to the introduction of several new balls, including the HEX Tour-ix, HEX Hot-BITE and the new Top-Flite ball models.

Accessories continue to perform well with sales of $60 million for the quarter, an increase of 24% compared to sales in 2007 of $49 million.

This increase was driven primarily by Top-Flite package club sets and Callaway junior sets.

Putter sales were $35 million, an increase of 19% compared to $29 million in sales last year.

This increase was driven by strong sales of our Black series and Divine Line models that were introduced late last year, as well as our new white hot Tour and Sabertooth models.

Turning to our regional break out, US sales were $184 million for the quarter, up just slightly compared to last year.

International sales increased 21% to $182 million compared to $151 million in 2007.

Foreign currency translation positively impacted sales by $12 million.

So, on a currency neutral basis our international sales increased 13% compared to last year driven by strong growth in Europe and Japan.

First quarter gross margins were 48% of net sales, flat compared to last year, but full year margins are still projected to improve by at least 200 basis points compared to 2007.

For the first quarter, margins improved 130 basis points, compared to last year, due to continued implementation of our gross margin initiatives which continue to be on track with our expectations.

This gain was offset by carry over inventory costs, that were the result of lower golf ball production volumes during the fourth quarter of 2007.

This lower volume was expected and was due to the implementation of initiatives to reduce our inventory levels and should not have any impact on the balance of the year.

Additionally, gross margins were also impacted by an unfavorable shift in product mix, due in part to expected lower second year sales of our premium drivers and X series irons which generally have higher margins than the 2008 replacement products.

We still expect product mix to be neutral on a full year basis.

Operating expenses for the quarter were $111 million, compared to $105 million last year.

This year over year increase reflects slightly higher marketing and promotion expenses to support our new product launches and increase in non-US expenses due to the translation affect of foreign exchange rates compared to last year and general inflation.

Turning to the balance sheet, our consolidated net receivables were $300 million and an increase of $22 million compared to last year due to the year over year increase in sales.

Consolidated days sales outstanding decreased slightly from 75 days compared to 76 days last year.

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

Net inventories totaled $264 million a decrease of $7 million compared to $271 million last year.

As a percent of trailing 12 month trailing sales, which was the metric we discussed at our February investor conference, we achieved 23% through the first quarter, a 300 basis point improvement, compared to 26% for the same period last year.

From a cash generation perspective trailing 12 month EBITDA through the first quarter, was $137 million, a 49% increase compared to the same period last year and 145% increase compared to two years ago.

Capital expenditures for the quarter were $12 million.

We estimate 2008 capital expenditures to be in the $50 to $55 million range, which includes approximately $15 million for our headquarter consultation estimate and consistent with our last estimate.

Depreciation and amortization was $9 million for the quarter.

Our estimate for 2008 is still expected to range from $35 to $40 million, also consistent with our previous guidance.

Now, I would like to review our estimates for the year.

As you know, our original pro forma guidance included a sales range of $1.145 billion to $1.165 billion, with earnings per share of $1.08 to $1.18.

As George already mentioned, we are still projecting our results to fall within the original full year guidance albeit at the lower end of the range.

There are several factors we took into consideration in developing this projection.

First, I think it is fair to say that the economic situations in the US and Canada, have become more real than what we had assumed in our original guidance.

Additionally the golf season in the northern portion of the United States and Canada, got a fairly late start this year which is somewhat reflected in our Q1 results, with sales in the US flat compared to last year and Canada down slightly in local currency.

These factors along with the fact that it is still very early in the season with little sell through data available at this time, influenced our full year projection to the lower end of our original guidance range.

The off setting good news at this time, is that as expected, our international business has been somewhat insulated from the economic situation in the US, as demonstrated by the strong sales in Japan and Europe.

Additionally we continue to benefit from our gross margin initiatives, which we also feel remain somewhat insulated from macroeconomic conditions and are on track with our original expectations.

And as George mentioned we have developed contingency spending plans intended to offset these conditions as much as possible, in an effort to protect our overall annual profitability.

After considering all of these factors, however, we felt it was realistic at this point of the year, to adjust our projections to the lower end of our guidance range.

As in the past we will update you as appropriate on our full year projections.

Those are the highlights for the quarter.

We would like to now open the call for questions.

Ladies and gentleman.

(OPERATOR INSTRUCTIONS) We will go John Shanley with Susquehanna International.

Please go ahead.

Thank you and good afternoon, guys.

Hey John.

Good afternoon.

George.

Can you give us an indication of what drove the particularly strong sales results in Japan in the quarter and is that business sustainable going into the both the second quarter and the balance of the fiscal year?

Well, the environment is Japan has been quite positive for us but we had a very important introduction, our Legacy driver that has been extraordinarily well received and in fact, after about one week in February, it took over the number two position and the 7.9 share in the marketplace.

It has been very strongly received and there are other Legacy products that are part and parcel of that franchise.

That together with the fact that the Japanese market appears to be relatively robust, tells us that certainly the start of the season is very, very strong.

It is hard to predict, John, at this point whether or not some of the stuff that we are hearing in the states creeps over the ocean.

But right now all of the signs point to Japan having a very successful year.

By the way that translates into Europe as well.

That's great to hear.

Let's turn to golf ball sales for a second.

Brad mentioned they were up 9% in sales, but the product income declined pretty significantly down 22%.

What's driving the lower profit margin.

Was it the change you made in the golf ball introduction and the fact that you didn't produce as many golf balls in the quarter as you originally anticipated or is there something else going on?

Most of that has to do with the fourth quarter absorption on lower inventory that was about $2.5 million which would have translated into profits.

So, I think the numbers would have gone from down 22% to almost up 20% it was really that one event that happened.

I see.

Okay.

Understandable.

Then also on accessories.

That's becoming a real significant product category for you with sales up a strong 24% in the quarter.

Can you give us an indication what specific products are driving that accessory business and is that something that is also sustainable going forward?

I think again the trend that we have seen on accessories has been strong for a reasonable period already.

Bags business has been very strong for us and continues to be.

In fact, we are struggling to keep up with the demand that we have for the bag business.

That is, in fact, sustainable.

The glove business is pretty strong for us.

The shoe business is pretty strong for us.

We have -- we are beginning to focus a bit more aggressively on accessories -- also by the way, which Brad mentioned in his comments, we have introduced some sets for youth and package sets under the Top-Flite name, each of which has been received quite well by the marketplace.

Again, as we begin to focus on some of these areas, I do believe these are in fact sustainable growth opportunities.

That's good to hear.

The last question I have is, are there any competitors that are exhibiting any signs of irrational pricing or promotional activity which you can mention to us.

There are some early signs that some guys are getting nervous and jerky about -- part of the problem and it is sort of prompted parts of my initial commentary.

I think people are acting a little emotionally with very little fact .

A little too emotionally with very little fact in front of them.

I think that perhaps some of the smaller guys might be prompted to do something silly but if in fact they do that, we will do everything we possibly can to try to maintain some stability in the marketplace and not fall into that trap.

The market is just breaking.

The weather is finally starting to get reasonable and I think that we are beginning to see the affects of that in our inside sales orders and things of that sort.

So, I think it is really premature for everybody to get crazed about what might happen later on in the marketplace.

At this point in time, even with the rounds figures looking a little suspect, equipment purchases are a little less subject to rounds and people will, I think, still come into the marketplace .

Additionally, the great proportion of the demo days that we have which drive equipment sales quite dramatically are now beginning to happen given the fact that the weather has cleared.

So we are still reasonably hopeful for the ultimate outcome for the marketplace in the balance of the year.

I would just caution everybody to relax a little bit until we see more of

Good advice.

Thank you very much.

Appreciate it.

Thank you

We will go to Rommel Dionisio with Wedbush Morgan.

Yes, good afternoon.

Guys, in your prepared comments I didn't hear anything about the I-MIX line I know it was a couple weeks delayed, but it should be in stores now.

Can you give us an initial read on that or is it a little too early?

It is a little early.

Most of it is getting out literally in the last three weeks.

Aside from anecdotal buzz and interest in it because it is a unique product, I would be premature if I were to project -- initial buzz on all new products is always very positive.

For me to try to extrapolate on that would send us both into troubled waters.

All I can say at this point in time the reception has been quite good.

The traders responded favorably to it.

Other than anecdotes that are also positive I rather hold that until the next call and be able to tell you that with more confidence and more numbers.

Fair enough.

Thanks, George.

Go to Jeff Blaeser with Morgan Joseph.

Please go ahead.

Good evening.

Thanks for taking my call.

Could you please give us a little more color on the strong woods growth, how much of that is coming from the new Squareway woods and how was your focus on the women's lines doing and percentage of sales now and what you think it could potentially be?

I won't comment on the latter part of it because you are asking for projections, but the woods are driven by the very strong offerings in Fairway woods and hybrids that we had this year.

I think if you were at the investor day, you will recall that this was the year we were going to sort of remake the Fairway wood and hybrid market by coming out with some really new and interesting technology.

That has certainly been the driver for the first quarter wood sales.

The driver sales were planned to be somewhat lower because we were going into the second year for both FT-i and FT-5 and it is very early to try to determine how the driver sales are going to go based largely on the comments I just made about when the season opens and when demo days happen.

Demo days drive -- no pun intended, sorry -- drive our business and very strongly drive the FT-i and FT-5 sales.

At this point in time we are not that concerned about the fact that started off slowly, because so did the marketplace.

But the results to date are largely or much more reflective of the Fairway wood business.

The women's line has been very well received and we are looking forward to that being the first of many steps we will be taking to drive the overall women's market.

I think as I have said in the past to all of you guys, the women's market we believe is significantly under developed in the United States certainly as compared to Europe.

And that is partly a factor -- the most significant factor we believe in that, is that we as manufacturers really haven't created the product appropriate for the women's market.

We took a big step in that direction by introducing the current Gems line for women and would expect to continue that marketplace going forward.

So those are essentially the things that have affected the wood market at this stage in the year.

Going back to Japan, last year growth was significantly higher in the first quarter.

Is there anything particular to that or is that a timing issue on both quarters?

No, I think the introduction of the Legacy driver has been a significant part to play in that.

The fact is that we are now focusing on the Asian market with products very specifically designed and created for the Asian market.

That together with the entire international organization really kind of gelling and I think becoming a lot more effective has created a very, very strong Japanese marketplace for us.

And as I said, I believe that based on all the things we are hearing and all the products we have out there, this should pretty much hold up for the rest of the year.

Thank you very much.

We will go to Kathryn Thompson with Avondale Partners.

Please go ahead.

Thanks.

Kind of tagging onto the driver sales and Japan sales.

How much of the driver increase in the quarter was driven by this Legacy driver in Japan versus the Fairway woods in the domestic market.

The overall woods business was driven more by the Fairways.

The driver sales in the US if I remember correctly was not up very substantially --

Driver sales were actually down for the quarter, Kathryn, but they were off set by the hybrid and Fairway.

The Fairway woods and hybrids were the ones that drove the overall wood growth.

But to your point the Legacy business in Japan was a very significant bright spot for us as far as drivers are concerned and does represent the continuation of what appears to be a very successful franchise that we are developing in Japan.

Just to give a general sense, what percentage of total Japanese sales are of drivers in a given year or of woods specifically?

We don't have that --

I rather get back to you on that rather than guess -- pick a number out of the air.

We can get back to you on that.

In general it is more driven by the Fairway than it was the Japan Legacy?

What, you mean the overall wood sales were more driven by Fairways, correct.

Okay.

Also, could you give a look into the status of your retail inventory in the market and your competitors?

Sure.

Our retail inventory at this point in time is in very, very good shape.

We -- there are even some instances where we believe our inventory is a little lower than we would like it to be and we are going out after that to see if we can get it back up again.

The retail inventory being low is a serious problem if allowed to go on for too long simply because the buying season is in fact limited and you certainly don't want to be running out of hot selling products at that period of time.

As far as any significant over stocks, we really are not in difficulty on virtually any part of our line as far as that is concerned.

Kathryn, I would add also that I think retailers have been more conservative this year on their inventory.

For that reason it is pretty clean.

Are you seeing retailers saying listen we have to get a higher quality or certain types of brands that we know we are going to sell?

Yes, again -- I think we talked at the investor day as well.

That in tough times the retailers will tend to go to quality and in doing that they will tend to cut back on the number of fringe brands that they would carry.

It was our expectation back then that some of the tertiary brands would have a difficult time this year and in fact we believe that's what is happening.

Okay.

Also just looking at your along with the retail and inventory -- I know you made some comments earlier on discounting in the market.

Are you seeing any regional differences in discounting?

No, it is very difficult to regionally discount the way the trade is structured.

You know the big golf course guys are fundamentally covering very substantial portions of the country, each of them.

So it would be very hard to do something in one region without having it spill over to the others.

And as far as the green grass market is concerned which obviously is regional by definition, that market is just opening upright now.

To the extent that there is anything that ultimately will happen there, it won't happen for a while.

So, no, we have not really seen anything particularly important on a regional basis.

Okay and then my final question, just cash used in operations is down 121 versus 77 last year, 77.6.

Could you have comments on that and how we should see that trending for the year?

The reason for that is increase in AR because of the higher sales as well as this year we paid a cash bonus, operating bonus to our employees and last year we didn't.

Those are the big reasons.

Where would you like to see that trend for the year just for modeling purposes.

Up (Laughter)

I mean right now you are comparing to a year where it is not apples to oranges.

If our sales continue to increase and our AR is outstanding and it is good, that is fine, I don't mind investing in A/R.

I think that the bonus paid is an anomaly and should balance itself out compared to next year.

But taken aside from that obviously cash from operations should continue to grow.

Okay, how much of the increase was A/R?

You know what, it was just -- I'm not going to go into that level of detail.

Suffice it to say those two were the primary drivers of that amount.

Thank you so much.

Ladies and gentlemen (OPERATOR INSTRUCTIONS) Will go to Bill Chappell with SunTrust.

Please go ahead.

Good afternoon.

This is Mark in for Bill.

I just want to make sure I understood on the I-MIX.

Is that something you all ship in for in the quarter, is that something that got shifted out to second quarter?

I guess was that to expectations or --

I'm sorry could you say that again, please.

Yes, I'm just trying to make sure I understand what went on with the I-MIX.

As far as the ship in did you get full credit for that in the first quarter or is that something that got shifted out to the second quarter?

We had most of it in the first quarter but we still have some of it going out now.

We should be pretty much done with the initial shipments of that in the next, couple three weeks I would think.

Again, remember, this was a program that was limited to specific doors as opposed to a broad scale program and it was limited to those doors that we feel were most appropriate for customizing a fitting program.

They would tend to be larger doors.

They would also tend to be the ones strongest personnel capable of doing it appropriate justice.

So that was one of the principal guidelines in terms of where it went.

So it also wasn't if you just take look at our total product, introduction wasn't a big part of our total product introduction.

It was new technology, high-end and we never really planed for it to be a huge part of our business.

Great.

I guess on your share count guidance of 66 million, with your current diluted share count at 64.8.

You are expecting some dilution as the year goes on are you not going to be buying back shares?

When we try to forecast our share count we base it on an estimate of where the share price will be by quarter.

And obviously to George's comments.

I think the market has certainly our stock prices have been down this year for all of the reasons, I think, George pointed out.

So the dilation from the share price wasn't what we expected in our original guidance.

Keep in mind we knew we knew we would start the year at a lower level and would continue to go up throughout the rest of the year as we have options exercise, and as the price would go up.

We didn't see it in the first quarter.

We lowered our full year by a million shares down to 66 million.

Okay, but free cash will still be used to buy back shares.

Is that correct?

We always review those and if the opportunity is right, then certainly we would go out and balance that will with other opportunities that we have with cash.

Great.

And any comments -- I know you guys were somewhat looking at acquisitions as a possible opportunity.

Are you seeing anything out there?

Is there any update there?

We are continuing to look at those opportunities.

It is still very much on the top of our plate and we will obviously come out with news on it as we have it.

We are not at a point where we can talk about anything.

Okay Thank you.

Welcome.

We will go to Paul Swinand with Stephen's incorporated.

Go ahead.

Good afternoon.

Can you hear me.

First question was on the bookings, George, I think you said bookings were up 11% and 7% in April.

Could you break that down between the US and international?

That was just US.

Okay.

We don't get as -- our data systems aren't as robust to try to get some of those day by day numbers from some of the international locations.

I think George was commenting relative to the macroeconomic issues in the US.

is what he was saying, Paul

Got it, okay.

Thanks.

Following up on John's question of however you can take accessories.

Is the channel mix where you are selling the accessories the same as it has been in the past as it has been for the clubs business or are you actually adding doors and new channels?

It depends on how far back you go.

Obviously and also the fact that certainly channels are becoming somewhat more important overall.

The sporting goods channel is growing.

So even if we were not to add any doors or any accounts, if you will, that by definition is just getting more important.

The discount channel, the Wal-Mart and Targets of this world, are growing their business and becoming more important, COSTCO, et cetera.

So, I think, growth is happening just simply because of the sheer growth in those particular categories.

To the extent that we've added new doors, yes, we always do as new factors come up in certain regions and we think they are appropriate to carry our line or some portion of our line, we add it.

But right now it is less of a function of growth in overall accounts as much as it is growth in the sub categories.

Thanks.

My final question is on your demo days.

Can you give us any color as to the traction you are seeing and what is working and what is not from your demo days?

Part of the reason for my question is one of the comments we have heard from the retailers is that some of your products aren't as visibly different than last and they need to be demo'd.

Well, interesting comment.

The fact is that our products are fundamentally, technology superior products and they have always done very much better when they are demo'd.

When people match our products up against competitor's products and see the consequences of what we bring to the party, we always do better under those circumstances.

That hasn't changed.

If anything, the fact that the weather has really held back the number of demo days that we would normally would have probably has started us off more slowly than we would have normally have expected.

As we get into the demo season and we are now starting to do that, I think some of those comments may change.

Okay.

But are you seeing the same reaction to the products that you are offering this year -- the same kind of sell levels at the day.

Absolutely.

There is no question -- we have tour vans that go around to demo days and the results of a tour van appearance continue to actually grow in importance and the quality of what they are able to accomplish and they are out there now in full force.

So we expect some pretty good results from that.

The response by the marketplace to our demo days has not materially changed.

It was strong and continues to be strong.

Thank you.

Thank you.

We will go to Alexander Paris with Barrington Research.

Please go ahead.

Hi, just a couple of things.

Going to your forecast of coming down to the bottom of the range and you were talking about economic uncertainty now.

Just to make it clear is that you looking at some of the emotions out there or are you actually seeing things coming from your clients and their retailers and so forth that leads you to conclude that that is going to affect the sales later in the year?

Well, I'm affected mostly by the emotions that seem to be exhibited in the market.

Look, one man's opinion the market is irrational right now and the kind of variations that we see going on don't appear to be in most instances based on actual data, but rather on fears and expectations.

Now, that may be an over statement based on some other people's feelings it seems to be a reflection of what is happening to us.

You can't help but be affected by some of the commentary coming out of the general retail market right now.

Most people are very nervous about how the year is going to shape up.

But we also said I think back at our investor day, the golf market is not any consumer market.

It is a very specific market with I think in some instances very different characteristics from general consumer products.

They ardent and avid golfer, buys a product because it is not a casual purchase for them.

It is a very important purchase.

And I think, or at least it would be my opinion that they are less affected by some of the economic conditions.

Whether or not they become as severe as people fear or not.

So, yes, I'm reacting I think to emotions over which we have no control and to some degree the fact that the retail trade is nervous.

Now whether or not that nervousness ultimately gets played out, I can't tell.

If retail declines in the US as it would appear it is doing right now at these early stages, without question that is going to affect us like it is going to affect everyone else.

The important thing from our point of view is that 50% of our business comes from a market that is not here and not affected by the same fears and emotions.

That is one thing that is very important to us and the second thing is that this is the golf industry.

It is not some of the other consumer products that have shown themselves to be much more variable depending on economic conditions.

It would be idiotic to ignore all of that and to say we will be totally unaffected and we are preparing ourselves for the worst, but we are hopeful it will not be there.

And yet your initial sell-in measures tell you it was pretty good or is that more overseas rather than the US.

No, it was not just overseas.

The US was flat, which by the way, is pretty darn good because '07 was a very strong year for us.

It is lower than we had hoped for.

We weren't sure that the US economic conditions were going to continue to be questionable.

It turns on to have more legs than we originally had hoped, but by the same token international is responding very much the way we had anticipated and the combination of the two still puts us comfortably in our range.

If the US continues to be relatively weak, but not disastrous and international continues to perform the way it is, we are very happy having projected what we we're projecting.

Right.

Speaking of international, you were mentioning you are getting more aggressive overseas.

Has your promotion or extension into China and India, accelerated relative to the rest of Asia lately.

We are becoming more aggressive in China.

India is very, very early stages and don't represent any particular activity on our part at this stage.

We are seeing China grow and it is growing at a reasonable pace.

But again it is off a very, very small base.

I would not anticipate that China is going to become a very meaningful part of our business in any short-term, short timeframe but we are very pleased with the way it is going.

We are expanding our distribution base there.

We would anticipate, given the sort of coming out party that China is looking at with the Olympics this summer, that that might accelerate even further.

But rather than get euphoric about, let's remember it is still a very small part of our business.

Two other quickies.

Your broad product line did you get it all pretty much shipped out to retailers about when you expected it to this season?

Yes, I think -- again each year we have gotten better.

You know, we had severe difficulties if you go back to '05 when I first got here and each year we have gotten significantly better.

I would say without really any question '08 was by far our best year yet.

We have -- you will always have and we did this year as well, have some problems on some fringe SKUs.

High trajectory left hand ladies club or things of that sort.

I wish we could get rid of those issues, but we never will.

In terms of shipping out the important product that we needed to have in stores at the break of the market, I think we were very successful at that this year.

Just one quick one, in acquisitions you have stated in the past that you are willing to be looking outside the golf industry but staying within the leisure products area does that summarize it?

That's correct.

We will go to James Hardiman with FTN Midwest Securities.

Hey guys.

Couple quick questions.

Could you give a little bit more color on the guidance, particularly on the sales line.

I'm assuming that the sales guidance I should think about that as the same as the earnings guidance, it's the same but maybe towards the lower end.

But if I do the quick math I think you can have flat sales for the rest of the year and sales would be up about 3%.

I think the guidance goes for about 2% to 4%.

Am I thinking about that the right way?

I'm assuming that the majority of the uncertainty is on the top line rather than the margins.

But is that a fair way to look at how you expect the rest of the year to pan out?

The things that are reasonably under our control are the gross margins initiatives and spending levels and all of those things, each of which have a part to play in our contingency planning.

Volume is always the open issue and that really drives the business.

We did better in the first quarter but as we stated it really is very -- it is very dangerous to look at this business on a quarter to quarter basis because a very tiny shift in a shipping date on some new products could distort the quarter to quarter numbers.

We did a little better than we probably anticipated in the first quarter.

Most of that short of whatever the sell through figures ultimately come out to be, must come out of the second quarter by definition.

The net is pretty much where we expected to be and to your point, yes, if we are up 2% to 3% for the year and given our start for the year yes if we are relatively flat for the balance of the year you will probably come out to that number.

You got a big boost from currency.

Do you guys build in currency benefits throughout the rest of the guidance for the year?

We take it into consideration.

Keep in mind though, James, one of the things that gets lost a little bit and what we have seen a little bit in international.

When the dollar weakens too much it forces pressure on our pricing overseas because some of our international consumers can go online and buy it for a pretty good rate and there is always a delta between US pricing and international for a lot of reasons.

And aside from Japan where we have a unique product in the Legacy brands we have actually had to take some product reductions in some of our regions which falls all the way to the bottom line and can have an impact on us.

We monitor that very closely and we don't want to get too far out of line with US pricing, because this has really become more of a global pricing type of business because of the internet.

We are unique in that regards, James, because of the very big piece of our business is outside of the US.

So currency helps you in certain visible ways, but it takes its toll in a lot of other areas.

The net net to us might be slightly positive but it is not overwhelming.

Okay.

Just last question on the golf ball business.

I think you said Brad, correct me if I'm wrong.

That excluding the inventory charge that the profit -- the operating income out of the golf ball segment would have been up about 20%.

That's correct.

I think that suggests that the margins on the golf balls are up significantly over last year, probably the best margin number you have ever had.

What is driving that?

Is the Top-Flite strength finally paying off here, what's driving that and should we expect that to continue throughout the rest of the year?

I think, James, several things.

One, obviously the overall improvement of Top-Flite has a very important part to play on that because that was a profit drain on us for a long period of time.

The gross margin initiatives that we talked about, some proportion of them did fall into the ball category and we are getting smarter and better at doing that as well.

And thirdly, after many years of not really addressing pricing in the ball market and sort of eating all of the increases we had in some raw materials, we did take some pricing action selectively on certain products.

It is really a combination of all three that leads to the conclusion that you drew and that is that the margins on ball have in fact improved.

I would add to what George said the launch of the Callaway IX, the premium balls, certainly is a positive, as well as the Legacy ball we have overseas in Japan and as you know with the Top-Flite brand, we have balls now that are a little bit higher price point which is part of the strategy, which also yields some higher margins.

So in combination in addition to what George was saying.

We got out of a great number of these very low price, low margin balls on Top-Flite.

We took a hit in terms of the sheer numbers of balls we produced as a consequence, but we significantly improved the overall margin for the brand.

All of those things contributed and, that's what we said.

We are here to improve the overall profitability of the company and we've taken steps in almost element of our business to do that.

Balls are coming along very nicely.

Got you.

Thanks guys.

I would like to turn the conference back to George Fellows for some closing comments.

Thank you very much.

Again I didn't want to sound too preachy about the emotions.

I think it is very important that we look at not just our company but at our segment perhaps a little differently than some other consumer markets and take a look at the fundamentals and basics.

I think that some of the activity that is going on tends to paint with a broad brush.

We are either a victim or beneficiary of that.

I think in this case we are not necessarily getting the appropriate attention to the quality of the performance that the company is delivering.

That's why I thought it was important to point out some of the things that I know all of you are aware of but sometimes perhaps lose sight of.

Again, we are looking forward in a hopeful way to the balance of this year.

We are not unmindful of the that fact there are a lot of unknowns that are yet to be cleared up and the state of the economy not just here but throughout the world is going to affect us in some form or fashion.

But we believe we are certainly well prepared for that as much as one can prepare for in advance.

And we think our performance to date reflects some of that and we would hope to have a call with you in another three months time perhaps and reconfirm it.

But in the meantime, we would ask you to take a look at the fundamentals before you make certain conclusions about the marketplace in general.

Thank you all for your time and attention and we look forward to talking to you again.

Ladies and gentleman that concludes your conference for today.

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