Topgolf Callaway Brands Corp (MODG) 2008 Q2 法說會逐字稿

Welcome to the Callaway Golf 2008 second quarter results conference call.

(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 second quarter 2008 earnings conference call.

I'm Brad Holiday, Chief Financial Officer.

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

During today's conference call, George will provide some opening remarks, and I will provide an overview of the Company's financial results, and we will then open the call for questions.

I would like to point out that any comments made abut future performance, events, or circumstances, including statements related to estimated sales, gross margins, operating expenses, and earnings per share, estimated charges relating to the Company's gross-margin initiatives, future inventory levels, and the Company's estimated 2008 capital expenditures and depreciation and amortization expenses, are forward-looking statements subject to safe harbor protection under the federal securities laws.

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

Actual results could differ materially from those projected in the forward-looking statements as a result of certain risks and uncertainties applicable to the Company and its business.

For details concerning these and other risks and uncertainties, you should consult our earnings release issued today as well as Part 1, 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 comparison on a consistent and comparable basis, we will provide certain pro forma information as to the Company's performance excluding charges associated with the gross-margin initiatives.

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

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

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

The earnings release is available on the investor relations section of the Company's website at www.callwaygolf.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.

We are particularly pleased with the results of the second quarter given the rather difficult economic picture in the US.

The first half of 2008 represents a record half for both revenue and earnings for the Company, following record sales in 2007.

While the results speak for themselves, let me take a few minutes to add a little color to how these were achieved and our best viewed at this moment as to the outlook for the rest of the year.

The first half played out much as we had expected with weak economic conditions in the US limiting sales but continued strength international offsetting the softness.

The US is down 7% in revenues for the half versus 2007 while international grew 14%.

As expected, international represented over half the first six months' revenues, reaching 51%.

This lead is expected to continue and likely expand going forward.

Our gross-margin initiatives on track to deliver the $50 million to $60 million in savings as originally projected and proving to be insulated from overall economic conditions.

Having said that, we are clearly facing headwinds with some commodity cost increases and more importantly, mixed pressures as the US consumers trending toward lower-price products.

Despite the issues, gross margins project to increase at least 100 basis points versus 2007.

While this is somewhat below our original expectations, it is still quite a positive picture in this year and a very good indicator for 2009.

When comparing our overall results versus the consumer durable and the apparel of Pier Group, we are substantially out performing the averages in all the key performance metrics we have shared with you in the past.

It should be noted that the market has remained rational throughout this period and is expected to remain so for the balance of the year.

Little extraordinary pricing activity is taking place beyond the normal markdowns to clear out-end-of-life product.

Trade inventories are within acceptable ranges and are not expected to be inhibitor to 2009 sale end later this year..

As indicated in the pre-release, we are reiterating our full-year guidance.

Our expectation is for continued softness in the US being more than offset by the strong international business trends helped along by positive currency rates.

We are anticipating a continued rational market and intend no extraordinary pricing or product activity that would in any way jeopardize 2009 performance.

A continuation of benefits from the gross-margin initiatives and maintenance of tight spending control will provide additional benefits to the bottom line, thus enabling us to reach our annual EPS targets.

Brad will give you detail on the first-half results and second-half projections in a moment.

Overall, we believe these are good results requiring more sweat and strain than originally planned but that do position the business well for the second half--the challenges that we are going to face--and very importantly, a strong 2009 recovery.

With that, let me turn to it back to Brad to give you some details.

Thanks, George.

In reviewing the financial results for the quarter, we reported consolidated net sales of $366 million, a 4% decrease compared to last year's record sales of $380 million.

Net income for the quarter increased to $37.1 million, compared to $36.6 million last year, and diluted earnings per share were $0.58, a 9% increase versus $0.53 per share in the prior year.

Excluding 2008 after-tax charges of $0.05 and 2007 after-tax charges of $0.02 associated with our gross-margin initiatives, our pro forma earnings per share for 2008 increased 15% to $0.63 compared to $0.55 in 2007.

Through the first six months, we achieved record sales of $732 million, an increase of 2% compared to last year, and record earnings per share of $1.19, an 18% increase, compared to $1.01 last year.

Excluding 2008 after-tax charges of $0.06 and 2007 after-tax charges of $0.03 for gross-margin initiatives, our pro forma earnings per share for 2008 increased 20% to $1.25, compared to $1.04 in 2007.

Taking a quick look at overall sales by product category, our wood sales were down for the quarter against a record second quarter last year when the FTI and the FT5 drivers were at their peak in sales.

For the quarter, woods decreased to $86 million compared to $113 million in 2007.

Year to date, our woods category has decreased 6% to $203 million, compared to $216 million last year.

Sales of irons and wedges for the quarter were up 3% to $100 million, compared to second quarter sales last year of $97 million, which included significant sales of the very successful X-20 Irons launched during the first quarter of 2007.

This year's increase was due to the introduction of our new FT i-brids, FT Irons, and new Big Bertha Irons.

Year-to-date sales in our iron category were $197 million, the same as 2007.

Golf ball sales were $74 million for the quarter, an increase of 3% compared the last year's sales of $72 million.

The increase was driven by strong sales of Callaway branded golf ball including several new products but in particular the strong introduction of the new HX Hot Bite model and the Callaway Tour I an IX balls.

Year to date, our golf ball sales were $133 million, an increase of 5% compared to last year despite the US rounds played being down 2% through June.

Putter sales for the quarter declined to $33 million versus $38 million last year with year-to-date putter sales up 1% compared to last year.

Accessory sales were $73 million dollars, and increase of 22% for the quarter driven by growth in nearly ever category and are up 23% through the first six months.

Turning to our regional breakout, US sales declined to $176 million for the quarter compared to $204 million last year.

International sales continued to be strong and were $190 million for the quarter, an increase of 8% compared to last year's sales of $176 million.

In constant dollars, international sales increased 3%.

Through the first six months, US sales were $360 million, a decrease of 7%.

International more than offset this decline with sales of $372 million, an increase of 14% compared to last year's sales of $326 million.

Most regions have experienced positive growth this year with Japan and Europe being particularly strong both in US dollars and local currency.

In constant dollars, international sales increased 8%.

Gross margins improved for the quarter to 46.7% compared to 46.1% last year.

Excluding charges for the gross-margin initiatives in both 2007 and 2008, pro forma second quarter gross margins improved 140 basis points to 48% of net sales compared to 46.6% in the prior year.

This increase in gross-margin percentages primarily due to the positive results from our gross-margin initiatives and favorable affect of foreign currency rates, partially offset by product mix.

Year-to-date gross margins were 47.3% compared to 47% last year.

Adjusted for the gross-margin initiatives, pro forma gross margins improved 60 basis points to 48.1% compared to 47.5% last year.

We estimate charges for the full year associated with these initiatives will be approximately $11 million.

This increase in full-year expense is due to the acceleration of some projects associated with our next round of margin improvement initiatives that will impact 2009 and 2010.

Operating expenses for the quarter were $111 million compared to $113 million last year, flat as a percentage of net sales at 30%.

Year to date operating expenses were $221 million compared to $218 million last year, also flat as a percent of net sales at 30%.

Currency translation and inflation has had a negative impact on OpEx for the year.

The tight management of spending has partially offset this impact, and we will continue to carefully manage OpEx spending over the balance of the year.

Moving to the balance sheet, consolidated net receivables were $287 million, compared to $282 million last year.

DSO increased to 71 days compared to 67 days last year due to an increase in standard payment terms related to some current-year sales programs.

Collections on receivables remain good as is the overall quality of our outstanding balances.

Net inventories were $236 million, an increase of $10 million compared to $226 million last year, and a decline of $28 million compared to the end of the first quarter.

Inventory as a percent of trailing 12 months sales, improved slightly to 20.6% compared to 20.8% in 2007, and we are still on track to achieve our year-end target of 20%.

Trailing 12-month EBITDA to the second quarter was $135 million, an increase of 17% compared to the same period last year.

Capital expenditures for the quarter were $13 million, and we estimate 2008 capital expenditures to be approximately $50 million to $55 million, consistent with our forecast last quarter.

Depreciation amortization was $11 million for the quarter.

Our estimate for the full year remains at approximately $35 million to $40 million.

During the second quarter, we repurchased $1.5 million shares of stock for $20 million at an average price of $13.59 per share.

We have $80 million left on our November 2007 authorization of $100 million.

As George mentioned, we are maintaining our original full-year guidance with sales ranging at the high end of our $1.145 billion to $1.165 billion range and pro forma, fully diluted earnings per share at the lower end of our $1.08 to $1.18 range based on 64.5 million shares outstanding and excluding $0.11per share for our gross-margin initiatives.

Let me spend a couple of minutes providing a little more color on this balance of your outlook.

With regards to sales, we estimate that the second half of 2008 will be up year-over-year for a couple of reasons.

First, we feel our international business will continue to out perform our last year's results due to the continued lift from positive currency rates along with the fact that in our Japan market, which has been out performing expectations all year, there is a second selling season in the fall that provides some additional upside.

We do, however, expect to see continued weakness in the US market combined with a rational but competitive pricing environment for the balance of the year, feel our international business will partially offset this weakness.

We also feel we should get a year-over-year lift from limited new product introductions we are planning during the fourth quarter to capitalize on the Holiday season.

We typically do this every year but feel the opportunity is larger than we have planned for in the pas.

In looking at sales by quarter, we estimate the third quarter to be down slightly compared to last year with the offsetting sales growth falling into the fourth quarter.

As George has already mentioned, our gross-margin initiatives are on track to achieve our original guidance of $50 million to $60 million that we provided in 2006 for the two-year time period ending in 2008.

Taking into consideration the impact of the shift in our product mix this and to a lesser extent the higher impact of the oil prices, we currently estimate our annual pro forma gross margins will improve by at least 100 basis points compared to last year.

While this is lower than original expectations, we are still please with the results given the challenging environment we have been in this year.

Third quarter margins should be up by a similar amount with a larger year-over-year improvement falling into the fourth quarter.

We estimate our annual operating expense should be flat as a percent of sales compared to last year.

Spending will be higher in 2008 due to the negative impact of foreign currency on our foreign subs, general inflation, and some additional marketing investment, which are being partially offset by tight spending controls we implemented earlier this year in anticipation of a weak US economy.

Please keep in mind that last year's results included gains from the sale of two buildings from our Carlsbad campus during the third and fourth quarters of $3.8 million and $1.5 million, respectively, which are responsible for some of the year-over-year increase.

Specifically, I would anticipate an increase of approximately $10 million in operating expense during the third quarter compared to 2007 with the balance of the full-year forecast falling in the fourth quarter.

Overall, we are pleased with our results to date.

We have been able to overcome several challenges so far this year and post record results.

For the balance of the year, we are focused on leveraging all potential opportunities as well as tightly managing our costs both in the cost of goods as well as OpEx areas in order to deliver on our 2008 commitment and set the stage for a successful 2009.

We would now like to open the call for questions.

(OPERATOR INSTRUCTIONS).

Our first question will come from the line of Paul Swinand from Stephens, Inc.

Please go ahead.

Good afternoon, everyone.

My first question was on the woods business.

Is it correct to say that the woods is one of the major drivers in Japan?

We have a particularly successful woods business in Japan.

We have introduced a new brand called Legacy, which in a very, very short time has gone to the top of the list there.

That continues to be a very strong performer and certainly is at the core of some of the performance we are seeing there.

Are the irons and the putters up in Japan as well?

The putter business is extraordinary strong in Japan.

As you may know, the Japanese tour, I think our share is something in the 60% to 70% of professionals on that tour.

So we have a very, very strong presence.

Paul, also in local currency, Japan as a market is up 22%.

Or course, we are getting some uplift on the currency, but just generally, their business is very strong.

And then the US, in other words, the woods products that are for sale in the US, those are for sale in Japan, too.

Are those actually up in Japan?

The other woods products are second-year products as you probably know, and the dominant player as far as Japan is concerned is the Legacy launch that we had earlier in the year.

That is by far leading the charge if you will.

Fair enough.

Then just a housekeeping question, and if I missed it the prepared remarks, I apologize.

On the tax rate is there anything repeatable there or any color you can give us there?

I would still hold it at 38.5%, Paul.

That's pretty reasonable at this point in time.

Okay.

And then I know your accessories business has been trending up for a while, but is it the usual suspect there.

Is there any particular you would like to call out driving the accessory business?

The accessories has been pretty consistently strong straight throughout.

We are seeing a very significant uplift almost across the board.

Package sets have been very popular this year for us.

We introduced package set products, and this year also eyewear has been strong for us.

We like the eyewear you gave us at the Callaway Days.

Good.

Thanks a lot, guys.

And we'll next go to the line of John Shanley from Susquehanna Financial.

Please go ahead.

Thank you and good afternoon.

Hi there.

George, as you mentioned in your prepared remarks that you're not expecting any unusual promotional activity.

Clearly, golf product sales of retail have slowed down with some of the major outlets, particularly Dicks, noting in their recent conference call that golf products were off almost 9%, and that clearly is going to be building some level of inventory, I would imagine.

Are you getting any indications from your retail accounts that they are becoming more promotional and likewise putting pressure on some of the wholesale components of the business to either lower prices or give incentives to help blow out inventory positions?

Not extraordinarily.

In one respect, I think the entire industry was sort of ahead of the curve.

Everyone was anticipating a less-than-bountiful year in 2008, and the signals for that were really early.

The trade has been careful as far as inventories are concerned.

I think the pressures because of this kind of a downturn are going to be substantially less.

I think that there have been some promotions that also have been very effective.

Our gas-card promotion, for example, we found was actually quite successful in moving through a bunch of product.

The kind of pricing activity you are seeing now is not a typical of prior years.

The fact that it's not extraordinary, it probably is representative of the fact that the overall inventories are not terribly out of line.

Okay.

Just turning to the woods product category, is there some plans that the company has to try to stimulate that business going forward to try to reverse some of the fall off in sales that you encountered in the last two quarters?

I think as we indicated in some earlier calls, this was an off year for us in drivers, and there was an extraordinary effort against fairway woods and hybrids.

We said we had about a year left to go to try to get the pacing of our new product activity, particularly in the woods area, at a level and on a level and timing that made sense.

I think you will see we will get in sync for the '09 year.

That is clearly going to be a driver year for us, I think the pacing of our new products will finally have arrived at the right spacing, would be the way to phrase it.

Yes, of course, we are clearly going to be addressing that, and we think that '09 will be very representative of that.

That's encouraging to hear.

And then lastly, just turning to Japan again, is this growth that you've been encountering in Japan in the last couple of quarters, is that sustainable going forward?

Is the overall market demand for golf products in Japan growing at the same level as your sales increases in that country have been signaling?

We have clearly gained share in Japan because of very successful launch of Legacy.

I think it's fair to say, and not to be overly pollyanna about it, Japan has had to follow the R and A guidelines in terms of clubs as the rest of the world has.

There was probably some pent up purchase demand with Japan because, if you recall, they had a difficult driver year before then.

I think this is a bit of a catch up.

If anything, the growth as far as the category is concerned, is probably higher than we should expect over the long course.

In our particular instance, the success as a Legacy launch and entire franchise and the share gains we are seeing over there, has a allowed us to grow even faster than the accelerated market.

We hope to continue the pressure on share growth, but I would be surprised if the category were able to sustain the level they did in '08.

Can you give us any indication of what you think your market share is in Japan at the present time?

I don't have those figures here in front of me, but we can get back to you on that fairly quickly.

The Legacy driver alone, I know achieved a 9% share, which for an individual product is extraordinarily high.

But as far as the overall share including the other pieces, I'm sorry, I don't have that figure handy right now.

Fair enough.

Thank you very much.

I appreciate it.

Our next question will come from James Hardiman, FTN Midwest Security.

Please go ahead.

Good afternoon, couple of quick questions for you guys.

In terms of the new product release that's going to move into the fourth quarter.

What's the rational behind bringing that out a little bit early?

Does that impact '09 numbers?

Obviously, you guys haven't given any guidance for '09.

How do I think about how that affects '09?

It sounds like for the fourth quarter, it helped sales and hurts earnings.

What does that do for '09?

If you guys are the only ones out there going this, moving things up, this could clearly be an incremental sales driver, but are you hearing that anybody else might be moving up their release schedules as well that might make it even more necessary that you bring these out early?

Let's go back to the basic assumption.

We are not doing anything extraordinary different than we have done in prior years.

The fact is that there is a Holiday season, and there is a remarkable spike, if you will, in the November-December time frame for golf products, and obviously, they are gifts, et cetera.

We have attacked that piece of the business in the last couple of years, but we are actually finding that it's a bit bigger than we had originally anticipated, so we stepped up a little of our activity as far as Holiday is concerned.

Again it's not materially different.

It is it slightly more volume than before but not materially different than it has been in the past.

So to the second part of the question, will it impact '09, we believe it won't impact '09 at all.

We think what we pick up in Holiday is essentially incremental to what we have been able to get before.

We are not taking any steps and certainly don't intend to take any steps as we see it right now that will impact the '09 products in any way.

Great, then, shifting gears, it looks like you guys are accumulating a good bit of cash on the balance sheet.

It doesn't look like your guidance for the back half of the year really assumes any share repurchases.

You talked about potentially using cash for acquisitions as we move forward.

What's the contingency there?

If you guys don't do a move from an acquisition standpoint, are you going to continue to accumulate cash, or is the expectation that you will buy back additional shares if something doesn't strike your fancy here over the next couple of quarters?

I think our activity over the last couple of years should be pretty good indicator.

We have always said that buying back shares is clearly on the table all the time as a potential use of cash.

We are continuing to be very active in looking at the possible acquisition opportunities that might exist out there.

One way or another, clearly we are going to use the cash if we don't find opportunities that make sense for us from a acquisition point of view.

The other alternatives are clearly going to be up there for us to consider.

Without telling you exactly what we are going to do because I'm not sure at this point, I think our actions in the past are pretty much going to predict what we are going to do in the future.

Would it be safe to say that guidance for the back half of the year does not assume significant share repurchases?

I think based on the numbers, is that a fair assumption?

Yes, that's a fair assumption, sure.

Just the last question here really quick.

Can give us a little bit more color on the commodity price increases.

What commodities are you getting beaten up on?

How much of those prices are locked in going forward?

And do you think that's going to have any impact on the gross-margin savings you guys talked about in '09 and '10.

Not significantly.

I think, clearly the biggest are petrochemical-based product, which affect the ball business more.

We have had prices pretty much locked in for the vast majority of this year, so we mentioned it because it's clearly on top of everybody's mind, but it has not had a material effect on margins this year.

We also see those costs are some what the sliding backward.

We don't anticipate they are going to have any meaningful impact and certainly not an impact on the commitments we've made as far as margins.

Typically, you guys are able to lock in prices based on an actual product?

And it seems like if it's the ball business that's getting beaten up the most on raw materials, and you came out with your new balls this year, if it's more of a shift towards drivers and irons next year, is it less of a concern?

Well, it's not a huge concern to start with because it's not enough of a move as far as the commodity costs are concerned to materially affect us.

We also obviously have pricing options, and more importantly, a lot of the gross-margin initiatives that have been taking costs you of the system, a good proportion of them happen to be in balls as well.

From a margin point of view, that's not going to effect us, not as we see it now.

As you say, some of the emphasis will be going against clubs.

We are finding margin improvement initiatives in that area.

We expect those margins to be in good shape as well.

I would say at this stage, the improvements in margin that we have committed to are alive and

Excellent.

Thanks.

Next we will to the line of Kathryn Thompson from Avondale Partners.

Please go ahead.

Okay.

Thanks.

Just for your fiscal year guidance, can you confirm what your share count was projected to be, your previous guidance versus what you outlined in the release.

I think we had 66 in there originally, Kathryn.

Okay.

Also just looking at your cash flow statement, just saw a big swing in working capital.

Would you talk through that and what we should expect through the remainder of the year and what we should expect from cash flows from operating activities.

I'm sorry.

I missed that.

What do you want to?

There is a big swing in changes in assets and liabilities in your cash flows from operations.

Right, right.

The big things if you look at cash flows from operating activities, is last year one of the areas is inventory.

Last year, we garnered a lot of the gains from our inventory reduction initiatives, and don't have the same level of gains this year.

We also actually paid our bonus this year versus last year no bonus paid from a cash perspective.

We accrued it, and we didn't pay one in 2007.

Then we had a little bit of a decline in cash collections due to longer payment terms I talked about in AR.

hat makes up the bulk majority of those three items.

Okay.

You talk a little bit about operating expenses in your prepared comments, but they were a little bit higher than we were expecting.

What were the main drivers particularly for the selling expense?

And for that line item, how should we think about that, and how much discounting is included in that selling expense?

I'm just trying to look at the details, here, Kathryn, hold on a second.

Overall, I think we were flat as a percent of sales.

We were up commensurably with sales.

We did have FX as a negative impact on our business, so it would have impacted 50% of our business across all categories selling G and A, and that certainly had a negative impact year to date and will have for the full year.

We have seen that as a negative.

We have actually been cutting costs from what we originally considered.

Plus you have general inflation.

If you just assume base of about $400 million time 3% if you assume that as inflation.

I mean there's certainly upward pressure.

We've actually cut spending this year relative to last year on a dollar-per-dollar basis.

I think that FX was the main thing.

I'm sure it was.

That's worth a fairly significant amount

Okay.

Could you just remind us?

I think you said in the prepared comments or in the Q&A earlier but I missed.

Your tax rate guidance for the back half of '08.

I just gave full year.

It was 38.5 is what you should use for full year.

That's still a good annual number at this point in time.

All right.

That's all I have for right now, thank you.

Okay, Kathryn.

Thank you, and we'll next to go Alexander Paris from Barrington Research.

Good afternoon.

Refresh my memory a little bit on the gross-margin initiative.

The original program was for 2007 and 2008, announced in 2006, $50 million to $60 million savings.

No you're on target for that, so that presumes that through 2008 you will have gotten those savings, right?

Correct.

And now you're talking about margin improvements in 2009 and 2010?

Another 20 to 30, yes.

Is that for just the after effects of this program or more initiatives?

here are more initiatives it's on top of.

As a matter of fact, we have taken come recent initiatives at some of our expenses went up that we were taking a little bit earlier than we had originally planned.

As you know, we just shut down our Gloversville, New York ball facility, and we have some other initiatives that we are working on right now that will impact nine and ten.

That that's the $20 million to $30 million over those two years?

That's correct, yes.

Great.

Looking at the balls, where are you in terms of Callaway brand balls plus your goal of having Callaway designed Top-Flite balls.

Where are you in terms of having the full list of balls covering all the price points and so forth?

You still have some Top-Flite balls you want to redesign?

As you know, we have been operating over the last couple of years to get rid of a lot of the old margin Top-Flite balls and significantly upgrade them.

That's been done fairly substantially.

The D-2 introduction last year, and we had the Gamer and the Freak introduced this past year.

There will be come continued upgrading of the Top-Flite balls going forward.

We are actually gaining some nice traction and increasing share with Top-Flite, and we continue to get rid of sort of the remaining low-end that represent a reasonable number of units but not much in terms of profitability.

As a consequence, we substantially changed the profitability profile of the ball business for us.

We are now quite comfortably in the black and growing.

So but just in terms of the ball business as a whole, you should expect a continued influx of new and upgraded balls as the business progress.

That's just a cost of doing business.

I know nothing is forever, but is this closing of the last plant, is that pretty much it for now or for the near term in terms of moving manufacturing around in balls?

We are constantly in the process of re-evaluating that as I think we mentioned.

We're undergoing a very complete and substantial review of our entire manufacturing and distribution network, if you will.

And that together with the changes in process and the automation that are being brought to the party by our supply chain and manufacturing group I think will continue to change our manufacturing foot print and that together with offshore sourcing, it's going to remain a fluid situation, probably for the next several years.

Speaking of international outsourcing, in terms of India and china, those two big countries, can you give a quick statement of your plans, progress, and what opportunities you see there over the next year or two?

Sure, are talking abut from a sourcing point of view or business in general.

Overall, breaking in to the market or your market growing or your penetration growing.

About a year or so ago, we put an on-the-ground subsidiary in China, which is growing very substantially.

Again, it's also a small base obviously, but it's growing at quite a healthy pace.

We see that continuing for quite some of time.

The brick countries in general are clearly very large opportunities for us going forward, so we are taking a very close look at the remaining brick countries that were not well represented.

Brazil and India are clearly important to us.

Russia, we have a foothold but clearly nowhere near where it's going be.

China is in fact of the brick countries the first we put an on-the-ground sub in, but I think over the next several years you will see us expanding more aggressively in the remaining countries as well.

On top of that, it's one of the reasons we are so bullish about our entire international operation.

We are seeing some substantial growth in Eastern Europe.

Again a lot of the developing countries are the countries from an economic point of view that are playing catch up.

Golf is becoming a greater and greater factor, and we are seeing very substantial growth opportunity in those as well.

So at this point in time, we have lots of geography to deal with, and all of which looks pretty good now.

I would guess given the long period of British rule, there would tend to be more golfers in India than china.

Would that be true?

Not necessarily true as a matter of fact.

We would think, and I have shared that point of view until proven otherwise.

India is a very fertile ground for us, but you have to remember that income distribution is a very important part of the development of the golf business.

Income distribution is moving at quite a pace in China.

There needs to be more of that happening in India before you see that happening quite at the same pace.

Having said that, you're still dealing with a country with a billion people.

So the opportunities there, even if the income distribution hasn't caught up with it yet.

Okay.

Thank you.

We will go to Hayley Wolff from Rockdale Research.

Please go ahead.

Hi, guys.

A couple of questions.

First on the conversation about raw material pricing for next year, I know you talked about pressure in the ball business, but as you reload programs for products coming into '09, are you saying you're not seeing increasing costs of components?

No, as a matter of fact, our component costs are coming down.

Hayley, we have been very heavily involved in re-examining the entire manufacturing process and supply chain, as you know, of course.

We have met with a great deal of success in bringing our unit costs down, and '09 is going to be no different.

We are looking at some marked improvements in overall unit costs.

And, Hayley, keep in mind one of the things we have done with kind of linking together our product development process and manufacturing is designing efficiencies into the product, which has really benefited also.

Okay.

Japan, will you have a follow-on product for 2009?

I don't think we are prepared to reveal our new product activity at this moment.

You can be assured that we are being very aggressive as far as new product activity, but I'm careful not to mention specifics.

I'm wondering about sustainability of momentum.

Sustainability is there.

Clearly, we have a very robust pipeline of products for Asia and Europe as well as the United States, so we are not suffering from any lack of options.

The fourth quarter product intros, should we think of those as being a niche prize, or should we think of that as being a new driver put into the market in the fourth quarter?

You should think of them as being a wonderful example of managing one's new products.

I can't tell you what it's going to be, but I think the important issue is that in terms of the overall volume we are talking about for '08, it is not substantially different from prior years, and it will not certainly not, based on any planning we are looking at this point in time, will not effect the '09 calendar at all.

Some of the timing we are doing on new products is to balance the new products' flow, if you will.

And the fact is that yes, there is a Holiday season.

Yes, there is incremental volume to be associated with that, and also depending on the remainder of the new product activity that we have planned, there is a certain among of spacing we have to provide to have each product have its day in the sun, if you will.

You're saying you don't want to have a repeat of launching the 5 and the I and the same time?

You got it.

One last question.

Thank you for that by the way.

You're welcome.

I remember a couple of quarters back you talked about how the FT3 had legs in year two, and you thought that you could see that same kind of performance from the FT5 and FTi.

I'm just curious, what's changed and what have you learned from that.

I don't think the point of view changed too much for that.

Let's not forget what the market is like in this country this year.

Both of the products have done reasonably well.

They would have done better had the wood business not been down 7% in the first half.

I don't think I changed my point of view.

It's important for us to find a way to make sure that products have a life in the second year.

The new product activity pace in this industry as in most other industries has accelerated, and if we allow it to go unchecked, it's going to be harder to manage and make money, so we really have to make sure that there is a second year for most new products, and we're working fairly hard at doing that.

Fusion productsFT5 and on have shown that, unfortunately, '08 is not the best example of it.

Do you worry about the Hyper-X now that it's price at parity to the FT5?

They are two different products, and some products are at end of life, and others are not.

We have actually taken a hard look at end-of-life processing of products in order to make sure we were able to get out of them gracefully without having undue costs.

That process is working well for us.

It will be refined as we go forward, but it's doing very nicely.

The movement of inventories appear to be doing quite well.

As we look at it, we don't see a trade or for that matter our inventories as being an obstacle for '09.

Thanks a lot.

All right.

We will move to Bill Chappell from SunTrust.

Just one question, not to beat a dead horse on the Holiday issue, but can you give us some color on what you do see for the Holidays.

I'm surprised you would pull forward anything with what we are hearing for the consumer going in to the Holidays.

What are your expectations for the Holiday this year versus last year?

Relatively modest.

Two things we are doing as far as the Holidays.

There are some products associated with Holiday, and we have reasonable expectations as far as those are concerned.

Clearly, we are looking at the state of the economy and the expectations as far as consumers are concerned and I think scaling our expectations appropriately.

There is no rosy pair of glasses at this end of the table anyway.

And I think the comparisons year to year, I don't think would shock anybody.

But the comment of you see opportunities where you wanted to pull forward some products.

I would think with the Holidays, you would want to postpone things until the economic environment improves.

Two issues.

Number one, there were certain Holiday opportunities that we were not taking advantage of in prior years now that we are going to.

That?s a matter of doing something we should have been doing all along but hadn't.

As far as the other part of the question is concerned, there are timing issues for new product introductions that we feel have to provide spacing to get the maximum value.

We are trying to do that spacing with the kind of introductions we are doing now.

I know what your concern is, and everybody's concern is, are we sacrificing '09 for '08, and the answer to that is an unequivocal no.

'08 is what it's going to be, and we are pretty comfortable that we are okay with '08.

So it makes no sense for us to take any chances with '09.

Thanks for the clarification.

We will go to Tom Shaw with Stifel Nicolaus.

Thanks, guys.

Mainly clarification of questions at this point.

You talked about the gas promo being successful, but what did that do from a profitability standpoint in the quarter?

Didn't affect it terribly.

Again, it's another form of promotion.

We would have done something else in its place.

In any kind of promotion like that, you ensure, and our return on that promotion exceeded what we spent for insurance, so it was actually quite a cost effective promotion for us.

Tom, one other thing, it really was a value proposition for the consumer and protected our international pricing opportunities.

So in countries like, for example, Germany the fusion is sold through well all year, where you are able to maintain full pricing on the product over there.

That's the reason we did.

One of the reasons we did it.

Was there a time frame when the gas promo and the price drop overlapped.

About two days.

Yes, very short.

From the GMI cost being pulled forward into '08, are you expecting any of the benefits to be pulled forward?

No they should start to impact us in '09.

We wanted to get the actions taken care of, so we can capitalize on them in '09 as part of the $20 million to $30 million commitment.

It may indeed pull forward more into '09 because we started it a little earlier, but it won't affect '08.

I hate to keep hitting on the tax rate, it probably helped the quarter by $0.02 or $0.03.

Any more clarity on what happened in 2Q?

Well, Q2 we had a couple of IRS audits that closed.

We had a couple of small gains, but I think from an annual perspective, 38.5% is probably the right number to target.

It might be a 10th or two lower than that.

38.5 is certainly in the zone.

But for the second quarter, we had a couple of audits that had closed out.

So we reversed the provisions that we had on the balance sheet for those.

Which by the way is a factor almost every year because any company has a whole bunch of these things outstanding, and they close out when they close out.

And I guess last one, and it was asked earlier, and I don't know if we had a great answer.

What are you hearing with competition in terms of bringing out new product this year?

I thought our answer was great.

Would you care to repeat?

No, as far as competition is concerned, obviously, I can't predict or speak for what they are going to do.

It is not atypical for people to bring out some products towards the end of the year.

I believe some of our competition did that at the end of last year.

Again, it's a function of A, taking advantage of whatever Holiday opportunity they believe exists and/or any other agenda that they may be serving, but again, I don't anticipate any dramatic differences year to year, and we are seeing no signs of that right now.

Thank you, guys.

And we will go to Rommel Dionisio from Wedbush Morgan.

Please go ahead.

When you have had a hot driver launched, the FT3 the FTi, you have had supply-chain issues initially.

Yep.

Slowing demand.

I wonder if you could walk through operationally and strategically how assuming you have successful launches, I suspect you will, the Company's chain, how the supply chain has changed and your demand to meet for a hot product.

Changed vastly actually.

We have changed our process throughout the entire supply chain.

Our lead times, for example, when we were having our difficulties, our lead times were in the four-to-six month range, so you would have to put a forecast in six months in advance of the time you needed the product.

Reduced those lead times to 45 days.

So that we have that many more forecasting cycles to go through before we have to commit to exact numbers.

That reduction lead time enormously affects your flexibility in terms of being able to adjust to market.

The process that we have gone through with many of our manufacturers shortened their process time as well so that we are, I think, substantially more nimble than ever before.

That together with the fact that we now have a robust demand planning function that materially improved the forecasting accuracy that we are dealing with and has a long way to go yet but has certainly improved over the past, but has essentially taken us out of the problem area.

We have had no difficulty whatsoever in supplying virtually every single product this year.

We are way ahead of the curve as far as the '09 products are concerned.

The difficulties we have faced as a supply-chain company are pretty much behind us and as very much a result of the very hard work that the manufacturing and supply chain people have done over the past couple of years.

Related question maybe for Brad.

At the end of, I guess, the December quarter, would we expect to see an inventory build above normal given the product launches for next year?

We are targeting to be down at 20% on trailing 12 months.

It is our target.

There might be a little bit of timing in there, but our target is 20%, but generally, I would say no.

The issue in terms of end-of-year inventories is affected by those reduction lead times I talked about.

The buildup doesn't have to be nearly as extreme today as it used to be in the past.

So that materially affects the amount of inventory you have to have one hand for you launches, and those have come down some bit.

The other part of it that you have to take into account is what is the introductory calendar.

When are the end market dates that you established for them because that determines where and how you build inventories, but as far as going into '09 is concerned, we don't anticipate anything particularly a different happening.

Very good, thanks.

And we'll next go to Jeff Blaeser from Morgan Joseph.

Please go ahead.

Jeff Blaeser, your line is open.

Sorry, thank you.

Have your '09 gross margin expectations changed, and should the difference this year kind of be added on to what you are looking for next year?

The gross-margin initiatives have played out the way we thought they would.

Right now we seen some up tick in our costs because of things we talked about a shift in the product mix.

If product mix comes back and we are able to get out in front of--and hopefully oil prices are starting to stabilize, and we should be back on track in terms of gross margin in '09.

I think mix will become less of an issue based on the introductory calendar we are looking at.

I wouldn't expect any impact from '08 carrying over.

It sounds like mix was more of an impact than product cost.

By far.

Definitely.

Do you still have any free-cash flow expectations for the year?

You mean in terms of targets, Jeff?

Yes, I know you have given three-year targets and--

We haven't shared anything on a annual basis.

I would tell you given the way our business is running now, I'm certain we are on track for our three year plans and wouldn't deviate from that at all at this point in time.

How would you classify second-year product inventory levels at retail?

They are well within acceptable ranges.

We are going through the normal process of selling through end of like product.

We are seeing no particular buildup that's troubling at this point.

I think to George's earlier point, I think the retailers were cautious going into the end of the yea.

We did just have the successful gas card promotion.

I think generally speaking, retail inventory is pretty good right now.

I have to throw some kudos away at the retailer.

Sometimes, we complain that they don't want to take as much as we would like them to, but they were all appropriately cautious going into this year knowing that there was some uncertainties they were going to face.

Most of them handled it quite well.

I would be surprised if any of them have any long-term difficulties.

Thank you very much.

We will go to Casey Alexander from Gilford Securities.

Please go ahead.

Good afternoon.

Are we characterizing this wrong to say pulling product forward?

Was this always a part of your plan for the year?

And it was just our misperception that we wouldn't see any new product until '09?

Is that a part of why people are struggling with this so much?

I don't know if that's the reason.

I think that when we finally settle on our calendar or our new product introductions for '09, the timing is always uncertain until you decide on how it goes.

When we finally decided on what the timing would be, I wouldn't say to pull forward, it was just settling down of the schedule.

No, there is not a pull forward that you're talking about.

The products intended to ship in '09 are shipping in '09.

If there is any of it that's shipping towards the end of '08, it was because that's the way the plan sorted out.

Because I mean I heard five other people discuss this as pulling forward product, and maybe that's not the right way to characterize it.

I would not characterize it that way.

And I would certainly chastise them if I were you.

I don't think it's my place to chastise anybody.

Another question, it seems to me from the analyst day that Thomas' presentation about the international business was kind of--he suggesting, as I recall--he sort of expected Japan to be flat to modestly up and a big pull from the rest of Asia during the course of this year.

And it looks like it has gone the other way.

Is that a surprise to you guys?

I think the enormous successes of the Legacy introduction there was a surprise only in the respect that it was even bigger than we thought.

But Japan grew 17% last year, so the performance of Japan being way up at the top like that shouldn't come as a surprise and certainly didn't come as a surprise to Thomas.

So maybe we mischaracterized something, I guess.

But no, we are not surprised by how well Japan is doing.

It's doing better than we expected, however.

One other thing, Brad, I know this is sort of pressed to digitation, but you want to take a shot at sort of a guesstimated share count for '09?

I mean because obviously there has been such a change to what we have been working with '08 that we are clearly all going to have to move our share counts for '09.

Is there any range or area that you would feel comfortable with us working with right now?

Probably, if I were just to venture a guess now, because it's so dependent on stock price and everything next year, Casey, but probably in that $65 million range, roughly.

So not much up from '08?

wouldn't expect much, but it's really dependent upon--

If you would recommend us, Case, probably the count would go up.

And that would hurt the earnings per share if I did that.

That's okay.

There is one other question.

You are now at the end of the second quarter.

You still have $135 million out on the credit facility.

Is the management just more comfortable with carrying a little leverage on the balance sheet than they used to be four or five years ago?

Because four our five years ago, by the time you got to Q3, you clearly had any leverage you had wiped off the balance sheet.

And it doesn't look like it's going to be that way this year.

Are you guys more just comfortable carrying a little bit of leverage on the balance sheet now?

It's all timing, Casey, and during the third quarter, we should be down to zero in terms of the line of credit.

You have to go back and look at how much stock we repurchased over the past couple of years.

The difference was we weren't buying a lot of stock back in the years when we had $100 million on the balance sheet.

We have purchased a lot of stock back, but I would expect us during the third quarter to be down to zero on the line of credit, and then it will start to build as we have working capital.

Okay.

That's great.

Thank you.

I'm all done.

Thank you.

Gentlemen, we have no additional questions, and Mr.

Fellows, I will turn it back to you for any closing comments.

Thank you all for joining us.

I know this has been a very troubling year for a lot of people.

We have been, we believe, quite successful in coping with it largely because the management team here has been out ahead of the problem.

We anticipated that the year was going to be somewhat troublesome.

I think we put in place a lot of controls and some smart planning that ultimately was able to deliver the commitments that we had made to the marketplace.

We are focused on that very substantially and will continue to do such.

We think that there is still a lot of very good things to happen in this category.

I'm also a believer that we are seeing far too much negative talk about the economy, even beyond where it really happens to be.

And because of that, we are somewhat optimistic that the recovery for '09 is very much going to happen.

And indeed if that were to be the case, we are looking forward to '09 as being a very nice year for us.

We still have a very difficult second half to go.

I would stay tuned, but right now, we continue to feel quite comfortable with our projections for the balance of year, and we would hope to talk to you about them in the next quarter.

So thank you all very much.