Topgolf Callaway Brands Corp (MODG) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the third quarter conference call.

(OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr.

Brad Holiday, Chief Financial Officer.

Please go ahead.

Welcome, everyone, to Callaway Golf Company's third quarter 2008 earnings conference call.

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

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

I would like to point out that any comments made about future performance, events or circumstances, including statements relating to future growth, estimated sales, gross margins, operating expenses and earnings per share, estimated charges and benefits related to the Company's gross margins initiatives 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 comparisons on a consistent and comparable basis, we will provide certain pro forma information as to the Company's performance, excluding charges associated with the Company's gross margin initiatives.

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

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

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

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

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

Thank you, Brad, and thank you for joining us.

We are clearly disappointed with the degree that macroeconomic conditions in the U.S., and increasingly throughout many international markets, have affected our business in the third quarter.

Having registered a record first half in both sales and earnings and a solid start to the third quarter, it was particularly disconcerting to have the business turn so dramatically negative in September due to unprecedented on the worldwide macroeconomic stage.

However, while recognizing the head winds we are facing, it should be noted that a number of positives continue to be prominent in our business profile that should be mentioned, and (inaudible) well for a strong recovery when macroeconomic conditions stabilize.

First, several business segments and international markets continued to perform quite well.

Japan's positive momentum continued with quarter three sales up 19% in constant currency and 21% year-to-date.

China sales more than doubled in quarter three, up 128% as our local investment begins to deliver significant results, albeit still on a relatively small base.

Accessories continue to grow, up 13% in quarter three and 20% year-to-date.

And our ball business is still up 3% year-to-date in a very challenging year.

Despite the disappointment versus our expectations, the third quarter results still registered the third highest sales level in the past 11 years, and just 3% behind the second occurring in 2005.

In addition to some elements of the business holding up quite well, key fundamental financial metrics continue to be quite strong, reflecting that the margin improvement initiatives, tight expense and working capital controls continue to be working effectively.

Despite the volume contraction, inventories ended the quarter at 19.7% trailing 12 months, ahead of our year-end target of 20%.

Trailing 12-month EBITDA to sales are 11%, and EPS is projected to be up 3 to 15% at year's end.

Our gross margin initiatives continue to deliver targeted results, and are partially offset the margin declines resulting from economic pressures on consumers to move to lower-priced products.

All of the above is to demonstrate that the Company continues to operate solidly and is well-positioned for a strong recovery to growth mode when macro conditions stabilize.

To that end, some additional positives are instructed to look at.

Our balance sheet is virtually unlevered, thus leaving us somewhat insulated from the credit market turmoil some others are subject to.

Prebookings of our 2009 line of new products are progressing quite well, with early results both in the US and internationally, up versus comparable 2007 and 2008 levels.

This is a testament to the fact that the new product line is quite strong and even stronger than both 2007 and 2008.

Trade inventories are in line and should provide no obstacle to the completion of a successful 2009 prebook.

Early sell-through of 2009 products shipping for holiday 2008 are running ahead of expectations even before holiday promotion activity has begun.

Now, the uncertainties we're currently facing make predicting near-term performance challenging; however, given many signals we are seeing we are very positive about our current position, both competitively and financially, as well as our longer-term prospects.

The Company's fundamentals are sound.

We are virtually debt-free, and our relationships with both trade and consumer constituencies continues to be very strong.

Our competitive position is even likely to strengthen given the trade's focus on major brands in these uncertain economic times, which in the longer view is a big plus both domestically as well as internationally.

And further, internationally, new emerging markets such as India, Brazil and Eastern Europe, like China, will provide strong impetus for additional growth when macroeconomics become a less of a head wind.

And while we will continue to maintain tight controls navigating through the current troubled waters, we will and must look beyond to the longer-term opportunities that are clearly developing and will enhance our future results.

I'd now like to turn the call over to Brad to flesh out our third quarter results and full-year projections, after which we will have Q&A.

Thanks, George.

As George mentioned, this was a challenging quarter for our Company, as the global financial crisis began to unfold.

Our order pace in the US, which is fairly representative of our global order pace, was on track through the early part of September and then dropped off fairly rapidly as the global events began to unfold.

Additionally, foreign currencies weakened dramatically against the dollar in September to levels we haven't seen all year.

As a result, consolidated net sales for the quarter were $213 million compared to last year's record sales of $236 million.

While lower than our previous guidance, the $213 million we recorded for the quarter was the third highest on record for the past 11 years, and only $7 million short of being the second highest during that period.

We recorded a net loss for the quarter of $7.4 million or $0.12 per share, compared to net income of $1.3 million or $0.02 a share last year.

Excluding after-tax charges of $0.04 associated with gross margin improvement initiatives in both years, our pro forma loss per share for '08 was $0.08, compared to an earnings per share in '07 of $0.06.

Last year's results also included a gain on the sale of one of our buildings of $3.8 million or three pennies per share.

Through the first nine months, we achieved sales of $946 million, second only to the record of 950 million set last year, with earnings per share of 1.08, a 5% increase compared to $1.03 last year.

Excluding gross margin initiative-related after tax charges in '08 and '07 of $0.09 and $0.07 respectively, our pro forma earnings per share for 2008 increased 6% to $1.17 compared to $1.10 in 2007.

Taking a quick look at overall sales by product category, our wood sales for the quarter were down 40% for the nine -- and for the nine months of 2008, wood sales were down 13%, versus a record 2007.

The year-over-year decline was a result of both lower volume and pricing of our Fusion drivers which were in their second year in the market, as well as a larger than normal shift to lower price points driven by the recent slow-down in the economy.

Sales of irons and wedges declined 4% in the third quarter to $64 million compared to sales last year of $67 million due to lower sales of X20 Irons, which are also in their second year in the market.

Year-to-date sales of $260 million are down just slightly from last year's record of $264 million.

While golf ball sales were down 2% to $48 million for the quarter, year-to-date sales have increased 3% to $181 million as a result of strong sales of the new HX Hot Bite model and Callaway premium golf balls.

Putter sales for the quarter declined 2% to $21 million versus 22 million last year, with year-to-date sales of $89 million, basically even with last year.

Our accessories business continued to grow, achieving sales of $45 million, an increase of 13% for the quarter, driven by growth in nearly every category, in particular packaged sets and the Callaway Golf collection line of accessories and golf bags.

Year to date accessories sales of $179 million have increased 20% compared to last year.

Turning to our regional break out, US sales declined 16% to $105 million for the quarter compared to $124 million last year.

Through the first nine months, US sales were $465 million, a decline of 9% versus last year's record 513 million.

International sales have been impacted by both a strengthening US dollar and the global economy, resulting in a general slow-down in demand during the quarter similar to what we have experienced throughout the year in the US, with the biggest swing in the UK and Southern Europe regions.

International sales for the third quarter were $109 million, a decrease of 2% compared to last year's sales of $111 million.

In constant dollars, international sales declined 1%.

Through the first nine months, our international business has been able to offset the decline we've seen in the US, generating sales of $481 million, an increase of 10% compared to last year's sales of $438 million.

Japan has remained strong throughout the year with an increase in sales of 21% in local currency and up 37% in US dollars.

China has also been growing at a significant rate, albeit off a much lower base.

For international as a whole, sales have increased 5% in constant dollars year-to-date.

Gross margins for the quarter declined to 38% compared to 40% last year.

Excluding charges for gross margin initiatives in both 2007 and 2008, pro forma third quarter gross margins declined to 39% of net sales compared to 42% in the prior year.

The decline was primarily due to pricing actions on our FT-i and FT-5 drivers, and unfavorable mix on the other products.

This was partially offset by the net positive results we are getting from our gross margin initiatives.

Year-to-date gross margins were flat at 45% compared to 2007; and adjusted for gross margin initiatives, pro forma gross margins were flat at 46% compared to last year.

Operating expenses for the quarter were flat at $93 million compared to last year.

As a percentage of net sales, operating expenses increased to 43% this quarter compared to 40% last year, which included a $3.8 million gain on the sale of a building.

Year-to-date operating expenses were $314 million compared to 311 million last year, flat as a percent of net sales at 33%.

FX translation and general inflation have had a negative impact on OpEx for the year, but tight management of spending, and lower incentive compensation expenses partially offset this impact.

As George mentioned, our ability to generate cash is strong and our balance sheet remains very conservative, with no long-term debt and a net positive cash balance.

Consolidated net receivables were $153 million at September 30th this year compared to $165 million last year.

Consolidated DSO was 66 days compared to 64 days last year, due to increase in standard payment terms related to some current year sales programs, and was flat compared to 2006 levels.

Despite the challenging economic environment, the overall quality of our receivables is good.

Net inventories were $220 million at the end of the quarter, and as a percent of trailing 12 month sales was 19.7% We are very pleased with this result given the drop in demand late in the quarter, and we are still on track to achieve our year-end target of 20%.

Trailing 12-month EBITDA through the third quarter was $119 million or 11% of net sales.

Capital expenditures for the quarter were $9 million, and we estimate 2008 capital expenditures to be approximately 45 to $50 million.

Depreciation and amortization was 9 million, for the quarter and our estimate for the full year remains at approximately 35 to $40 million.

During the third quarter, we repurchased 219,000 shares of stock for $2.9 million at average price of $13.21 per share.

We have $77 million left on our November 2007 authorization of $100 million.

As George mentioned, forecasting at this time is challenging given everything that is going on.

In addition to a global economic slow-down, currents have been fluctuating recently, a factor that has a net negative impact on our annual forecast.

However, based on current conditions, we are estimating full-year net sales of $1.125 to to $1.145 billion, and pro forma fully diluted earnings per share of $0.92 to $1.02, based on 64 million shares outstanding and excluding $0.11 per share for our gross margin initiatives.

This estimate would still result in year-over-year earnings growth ranging from 3% to 15% compared to last year, which in our opinion is very good given the global circumstances.

Let me provide a little more color on the balance of the year outlook.

We estimate the fourth quarter sales will be higher year-over-year, primarily due to the introduction of a few new products from our 2009 product line for the holiday season, primarily our X-22 Irons, which are currently at retail, and our newest square driver, the FT-iQ, which will be at retail in mid-November.

As George already mentioned, preliminary feedback on these products, as well as our entire 2009 line, has been very positive to date, with bookings ahead of both last year and 2007 at this point in time.

We expect the fourth quarter to be -- or the impact associated with these new products that will be partially offset by lower order pace on our current product line due to the current economic weakness.

Our gross margin initiatives are on track to achieve the original 50 to $60 million in savings that we estimated back in 2006 for the two years ending now in 2008.

These savings are mitigating the negative impact of product mix; and to a lesser extent, the impact of higher commodity prices this year in our ball business.

While we may not see the margin expansion we had planned for coming into the year, we are happy with these results given the overall situation.

We estimate fourth quarter margins will be higher than last year due to the positive mixing impact of our new products, as well as continued savings from our gross margin initiatives.

We estimate our annual operating expenses to be flat as a percentage of sales compared to last year.

Overall expenses for 2008 will be higher due to the negative impact of foreign currency on our foreign operations, general inflation and some additional marketing investments, which are all being partially offset by tight spending controls and lower incentive compensation expense compared to last year.

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 estimated year-over-year increase.

Despite record low consumer confidence and a weak economy, we have been able to overcome several challenges so far this year and deliver increased (inaudible) over a strong 2007.

For the fourth quarter, we are focused on leveraging all potential opportunities, as well as tightly managing our costs and liquidity.

I would reiterate what George said earlier, which is we have a strong balance sheet, solid operating controls in place, our 2009 product line is perhaps the strongest we've ever had, and that we are well-positioned to benefit when the economy begins to improve.

In addition, we have a credit facility with favorable rates and will balance liquidity with longer term growth initiatives.

We would now like to open the call for questions.

Stacey, are you there?

Yes, I am.

(OPERATOR INSTRUCTIONS).

Our first question comes from the line of Joe [Lackey] from Wachovia.

Please go ahead.

Hi, gentlemen, thanks for taking my call.

Just had a quick question for you, if you could expand on the 4X impact during the third quarter.

If I recall, you said it was a 1% head wind on international sales.

Any -- can you quantify the impact on EBIT, by chance?

You know what?

Typically we don't do that.

I would tell you kind of a rule of thumb that we've come up with.

It's probably -- the impact on sales is probably 70% of it flows -- 60 to 70% flows through to the bottom line; and it was negligible I believe, for the third quarter.

You know, less than $1 million topline.

Great.

Thank you very much.

Another question here.

I know your sales, you know, were decelerating in September here, but any stabilization that you've seen in the market, either shipments or in -- at a retail level here in the last couple of weeks?

Is there a flattening or is it continuing to go down?

The -- it's really split into two pieces.

We have basically the ongoing sales of our second year, our ongoing products; and of course the prebook on 2009 products.

We found the receptivity on prebooks to be quite robust.

And I think that the trade, while cautious, looking into '09, are nevertheless reacting quite positively to the new product lines going out.

They're continuing to be relatively cautious on existing products.

It's a little early to tell what their reaction is going to be for holiday on existing products, although I think we'll get some sense of that in the course of the next couple of weeks.

Great.

Thanks.

And our next question comes from the line of Alexander Paris with Barrington Research.

Please go ahead.

Thank you, good afternoon.

Hi, Alex.

Just some questions about your product line.

You were mentioning it was strong versus a year ago, but you didn't bring out any new products in the fourth quarter a year ago, did you?

Or am I wrong?

No, I'm talking year-over-year.

So if you take a look at fourth quarter, we didn't have any new products last yea,r but this year we will have growth with the new products.

We had minimal -- some new products last year.

They were minimal, but we're talking about the new products we're introducing this fourth quarter.

Yes, last year, if you recall, their -- the focus was on Fairway Woods.

This year, we have three new drivers, an entirely new line of X irons, a fairly robust selection of new putters, and some ball activity as well.

So the new product lineup, if you will, is far stronger than either of the past two years.

Are you talking about the fourth quarter or overall product lines?

Overall.

And I'm just wondering about the first quarter sell-through.

This early introduction of more products, that is going to help you get more orders in the first quarter.

I was wondering, are the rest of -- are you spacing out a little bit to -- are they all going to ship before March, your new product line?

Well, actually one of the reasons that we're doing what we're doing right now -- well, there are two reasons, actually.

One is because we really believe that there is a larger holiday market than I think we've ever taken into account.

But also because we need to space out the products that we're introducing.

Last year, I believe, and the year before that, we crowded them a little too close to one another, and I think we left something on the table because we didn't allow each product to establish itself before the next one came out.

So we're spacing them a bit differently and the product at retail base that we have, some of course are beginning to appear a little bit toward the end of this year, but we have product and retail dates in January, February and March for next year.

But the early shipments -- you'll get those out of the way and into the store so you can focus on the additional ones, right?

That's correct.

And we would expect some sell-through on those products, obviously, because of the holiday season.

Right.

Are you at all concerned that the retail industry is pretty soft and they're going to be absorbing a record new product line for you?

Or as you were intimated, or do they really focus a lot more on new products?

So having more new products would be better in a cautious area because you -- cautious period because you're more likely to get orders.

I think one of the characteristics of the retail that we're facing today might, in fact, be beneficial in the long-term.

I think the trade is very clearly somewhat more cautious about inventory as it relates to both existing, as well as new products.

I think the major effect of that will be that secondary and tertiary brands are going to be consolidated out.

And that's certainly the consistent feedback that we're getting back from virtually every account that we talk to.

The consequence is that whatever inventory dollars the trade does in fact go out there with will be concentrated against the much larger brands.

We're clearly going to be a beneficiary of that, and I think that will, to a large extent, offset any inventory resistance that might exist.

So in the short-term, I think we're somewhat insulated from some of the inventory questions.

In the long term, it actually ends up being beneficial, if in fact a lot of secondary brands consolidated out of stores.

Just a couple other quickies.

Tax rate in 2009 is going to stay kind of the same as 2008?

You know what, our tax rate, frankly now, Alex -- we had some favorable outcomes on some outstanding tax issues, so I think this year we'll probably end up close to 37%.

I think it's always good -- and we plan internally -- to be kind of in that 38 and 38.5%.

So I would tell you we'll probably get back to that level next year.

Okay, and the campus restructuring, everything is sold and you're all through moving things around, so there is no more charges or expenses there?

Well, we are still doing the remodel on our corporate office here, and we will start moving -- it is a little bit of you have to move one group and then wait for the other group to get in place.

So we will be moving people this December, and through probably through next August by the time we get people moved and do the refurbishment in some other parts of the building.

But I will tell you, we will have CapEx and expenses going into next year.

We just haven't given the estimate of what it is.

But it should be less than what we did this year.

And the golf course investment that you've made, I haven't heard too much about that.

Is it doing well?

Or are you encouraged enough to look at other outside investments of that type?

Are you talking about Top Golf?

Yes.

Yes, actually we're quite encouraged by some of the things that we're seeing.

The newer model stores that have gone up --or outlets if you will -- that have gone up in Chicago and Dallas.

Dallas is performing quite well and the ramp up in Chicago is proceeding nicely.

Overall, we're clearly still very interested in looking at opportunities outside our immediate businesses, and we continue to screen alternatives right now.

Just to remind you, Alex, that is just a minority interest on our part.

Right.

Okay.

Thank you very much .

Good

Thanks, Alex.

And our next question comes from the line of Kathryn Thompson with Avondale Partners.

Please go ahead.

Yes, hi, this is actually David in for Kathryn.

Just first off, just wondered if you could give some additional color on gross margins in the quarter?

And I know in the July call you had originally, I believe, seen gross margin improvement on a year-over-year basis; and what changed inner-quarter that kind of led to the decrease on a year-over-year basis?

Well, it's really predominantly driven by the two things I mentioned, which was we took pricing down on the Fusion drivers in order to clear them out at retail and in preparation for -- in one particular case, the FT-iQ launch that we're going to be launching next month.

And then we saw, frankly, a continued shift down in terms of price points to a lower mix, if you will, of price and gross margins.

And I think a lot of that had to do with just the turn in the economy and people being vert cautious about what they bought.

Sure.

For your golf ball segment , do you have an estimate of a break-even level from a sales perspective of where you need to be from -- or at the top line

Well, we're making money right now.

I mean, we have been for several quarters.

So, you know, we're beyond that, and continue to make improvements.

As a matter of fact, we improved in golf ball profitability both in the quarter and on a year-to-date basis, so I think we're past that point.

Okay.

I guess I was looking more than in -- you could say the EBT line, maybe.

All right.

Well, this is from -- at a -- by operating segment.

Okay?

Okay.

Okay?

All right, great.

And then I guess lastly, just if you could give some additional color in the swing of working capital.

Was that entirely a function of changes in accounts receivable, or were there some other moving pieces in there?

You know what?

It was really a couple of things.

It was working capital -- actually three things.

It was working capital, and a lot of it had to do with we made significant gains on inventory last year as we started to embark on our gross margin initiatives.

And while we continued to make progress this year, it was on a lower level.

The second thing was, if you recall in 2007, we paid no bonus, but we accrued for a bonus which was paid in 2008, so that is having an impact on our 2008 cash flows because it was paid in this year.

And our accruals are slightly lower this year than they were last year on the employee compensation plans.

And then lastly, our CapEx is up about 9 to $10 million.

Those are the three big items.

Okay.

Great, thank you.

You're welcome.

Our next question comes from the line of Hayley Wolff with Rochdale Securities.

Please go ahead.

Hi, guys.

Hi, Haley.

I have a couple of questions.

First, can you kind of go over contingency plans for -- in the event of the Ashworth tailor-made marriage?

Yes, we've anticipated some issue here for quite some time.

We're in latter-stage discussion with a number of alternatives.

So we anticipate very little, if any, hiccup in the transition from Ashworth to another supplier, if you will.

Would it still be a licensing-type arrangement?

We're looking at a number of alternative constructs in that regard.

We are not going to be manufacturing the product.

That's not what we do.

But there are some alternative selling structures and arrangements that we're looking at with several of our potential partners.

Okay.

And in terms of product , you talked a lot about consumers purchasing lower-priced products, and there is a fair amount of potentially distressed inventory that might hit.

How do we reconcile that with the high-priced new products selling through well?

Are you concerned that there is some pricing risk on these new products, if the current weakness

Obviously, we're looking carefully at that; but certainly the early indications would not necessarily give us that concern.

I think what's characteristic of the early part of the market is that the avids come in and they are typically higher-priced purchasers and they are less daunted by some of the economic issues.

So in fact, the early sell-through on the product we shipped for holiday is running ahead of our expectations, not seemingly being troubled by the economic questions.

So -- and also in terms of pricing, I guess the iQ is the only product that really is up at the upper ranges; and in and of itself it does not represent a huge proportion of our expectations for next year.

So we really don't think we're that vulnerable in that regard.

Okay.

And then just in terms of -- a lot of companies have talked about, you know, sales dropping off meaningfully in September and continuing that way into October.

Can you give a little color on, you know, what you've seen in October at retail?

I think the one thing to keep in mind, of course, is that September and October -- and actually into the early part of November -- is a very, very low ebb for the category in general.

The -- there's a -- there's sort of a pickup for holiday that occurs in the latter part of November, and into the early part of December; but September and October are typically very low, so when people talk about drop-offs in those two months, percentages may be larger but the actual impact in terms of dollars is quite a bit smaller than that.

I think that the concern on the part of the retailer -- and I guess you would be best asking them -- is still cautiousness as it relates to October.

But I really do believe -- and I think I'm not alone in this particular regard -- I think the election is having a fairly pronounced effect on some consumer confidence, which I really believe very strongly will change on November -- or begin to change on November 5th.

I'm increasingly of the opinion that when the benefit of trash-talking the economy and everything else that is going on that currently exists on the part of all political parties, goes by the boards, i.e., when the election is over, I think that the tenor of the social discourse is going to begin to improvement, and I think that will begin to have some effect on later in the year purchases and holiday.

So at this stage, September and October are cautious; but again they're very, very low months for the category.

So it's not something I'd get particularly concerned about right now.

Okay.

And is Justin Timberlake going to be at the Analyst Meeting?

Well, how much is it worth to you?

No, he -- we're very excited about that.

I think we've been talking about initiatives that we can embark on, that increase, you know -- grow the category from some grass-roots activities.

And Justin Timberlake is really an iconic representation of a new-generation of golfers.

I mean, he's a very avid golfer, he's a six handicap, and he represents this new generation of people coming up to play golf, and we think he represents a very positive role model for us in terms of growing the category among these younger golfers.

So we think it is a very positive move for -- not just us, but for the golf industry in general.

Will you use him -- I mean, I know a while back you did something with (inaudible).

I mean, is there a plan to use these people in some of your marketing, maybe like the Alice Cooper Days?

Maybe not like the Alice Cooper Days, but, yes, I think he clearly speaks to a segment of the marketplace that is very important to us.

And that is exactly what we hope to do.

Thank you.

Thank you.

We have a question from the line of Dan Wewer with Raymond James.

Please go ahead.

Thanks.

George, could you talk about retail, what you're seeing between off-course specialty, green grass, and the big box stores?

Do you think one is holding up better than the other, or is just everything weak?

I think it's -- well, it's very mixed the green-grass part of the world, to be honest with you.

I mean, we had a meeting the last couple of days with our master staff, who are representatives of some of the bigger golf courses around the country, and in talking to a whole bunch of them, we got a very mixed story.

I was talking to one gentleman from Chicago, for example, who said his rounds were up quite significantly.

It depends on a number of factors.

It depends on how hard the economy hit particular segments of the country.

It depends on whether -- in general if you take a look at it, overall rounds are only down a half of a percent year to date, which is not atypical of some -- of perhaps the last five years.

So that part of the business hasn't been impacted that dramatically.

And as you would expect, you have ups and downs as you go across the country.

So green grass is a mixed picture.

I think the off-course guys have more of a traffic issue, some of which was impacted by the very, very high fuel costs that we faced for a good part of the year.

And part of it was exacerbated by the just awful talk on the part of the political world and on the part of the press, on the part of almost everyone you could think of, about how bad they perceived the economy to be.

I'm not so sure if one were to go by the specific metrics themselves you would necessarily have come to that conclusion.

Clearly, certain segments were hit very badly; but the economy in general I don't think was nearly as bad -- certainly not good, but nearly as bad as a lot of the talk would seem to indicate.

So yes, I think their traffic was down.

I think if you take a look at the releases in the quarter, the quarter as issued by many of them, that would certainly reflect it.

But --

And you think big box probably didn't drop as much as off-course specialty?

Big box did not, but big box, again, don't forget, is into a lot of different categories not just one.

So I think, you know, there are some categories that probably stood up reasonably well to a lot of what we were facing.

And if I'm talking big box mass merchandisers, they clearly go far, far beyond leisure activity.

They go to some fundamental basics, and we all know that the basics held up reasonably well.

So, yes, I think big box held up better than off course specialty, for sure.

I had a couple -- a question also on the golf ball segment.

First, could you maybe differentiate between the Callaway and Top-Flite brands, if you're seeing any differences there?

And then also operating margins in your golf ball segment are improving nicely.

Is that stemming from the gross margin initiatives or other developments?

Well, to answer the second one, it is really coming from two things.

The gross margin initiatives are a very significant part of that.

Our operations people and supply chain people have done an extraordinary job bringing the costs down and making the entire playing field a lot more efficient.

And this is moving sourcing to China and India?

No, not just that.

There are significant efficiencies that have been brought to the plants, as well; that have contributed to the overall margins.

But we also have a mix issue.

You know, part of what we were talking about earlier as related to Top-Flite was to begin to cut out a lot of low-margin, fairly non-productive SKUs that were in the line, and that has been ongoing now for the last couple of years.

And as a consequence, the absolute number balls, perhaps, have declined to some degree; but very importantly, the profitability of the Top-Flite line specifically has improved.

So it's really combination of both.

It is manufacturing efficiencies, but also cleaning the line out and marketing a much better and higher-margin product.

And, Dan, I would just add to that we probably absorbed 1 to $2 million worth of higher costs this year because of higher oil prices on balls.

I was just --

No, we actually absorbed $6 million in higher costs as it related to balls; but because of the significant margin improvement programs that we had going, we were able to offset a good portion of that so that the net effect to us was rather minimal.

The increase was even with some increases, so that just tells you the kind of leverage we've been able to get through the gross margin initiatives.

Then I guess -- just the last question I had -- on -- with the 50% drop in oil prices off late, how long will it take before that begins to benefit cost of goods sold (inaudible)?

It will be a lag.

It's going to carry into next year, for a couple of reasons.

You know, some of the products that we use for raw materials were impacted by the hurricanes down in the Gulf, and they haven't brought supply up to the levels they were before.

And it really depends -- there is kind of a trigger point where oil has got to get to a certain price for some of these raw materials before they switch to the lower cost materials.

But I would imagine we'll probably be into first quarter next year before we start seeing some of the impact of lower oil prices.

If the oil prices stay fundamentally at the level they are at right now, I think we will actually have a little bit of a tail wind relative to what our planning assumptions are.

All right.

Thank you.

Okay.

Our next question comes from the line of Rommel Dionisio with Wedbush, Morgan.

Please go ahead.

Yes, good afternoon.

Brad, when you talked about the foreign currency, I think you said it was a negative 1% in the quarter.

And we've obviously seen some changes since the end of the quarter.

And if we think about that -- just help me think through that.

You have a sizeable Japanese business, and if anything, that was actually weakened versus the yen.

So looking forward as a sort of magnitude, is a low single-digit negative impact kind of a number we should maybe look towards if currency rates remain the same?

Going into next year?

Q4 specifically, and then maybe early next year, yes.

Yes, you know what?

I don't really know right now, to be quite honest with you, Rommel.

It's just -- there are so many moving parts right now, it's kind of hard to peg it at this point in time.

I think a lot of the rate changes that are occurring both here as well as overseas are going to affect the currencies, and right now until they come to rest it's a little hard to make that judgment.

It's hard to forecast, to be honest.

Yes.

Okay.

That's fair enough.

Well, maybe just a bigger-picture question, then.

You guys have obviously done a lot with gross margins and, you know, supply chain initiatives over the years since your tenure, George.

And looking forward, to what extent do you feel that you've taken some of the low-hanging fruit off?

And maybe just to use a baseball analogy, what inning would you say we're in, in terms of how far along you've progressed in terms of where you want to take the supply chain?

Well, if you recall, I think we mentioned a number of calls ago that we have another 20 or 30 million that we think we identified.

And very frankly, the operations group and supply chain group are sort of heavily in the process of identifying more than that.

We haven't quantified them to the point where we're going be able to commit to them tomorrow, but they're certainly on the boards.

I would say that we're maybe half-way to 60% done, but we still have a lot of runway here.

Again, the low-hanging fruit stuff was -- I hate that term, actually -- but was somewhat easier to come by, although believe me it required an enormous amount of effort on the part of a lot of people to get it.

The next generation of stuff is going to be a little harder to get to; but the fact is that we're so much better at it today than we were when we first started that we feel pretty comfortable that we're going to continue to be -- we're going to continue our ability to bring some margin improvements probably for the next, I would say, three or four years.

And Rommel, you know, one other thing I would just comment is, not only have we been able to take our costs down, but our customer service and the ability to serve our customer has improved dramatically.

I think if you go out and talk to the trade this year, we have been able to deliver more product on time, and sometimes with increased demand we've been able to respond to it much more quickly.

And I think if you take a look even at our inventory levels through Q3 -- as I mentioned, you know, we had 19.7 % of trailing 12-month, with a year-end target of 20 -- we would have come in better than that had we not seen the drop in demand.

I think it talks to the supply chain and how more resilient it is for us today than it was, say, two or three years ago.

Yes, if I -- I can't remember the exact number, but if you go back a year or so, that number was closer to 26, 27%, and even higher than that at some stage.

And we're now down to 20, and we're not finished.

So we're feeling pretty good about -- I think at this point in time we're clearly best-in-class in this industry -- or for that matter, many industries.

Great.

Thanks very much.

Thanks, Rommel.

And our next question comes from the line of John Shanley with Susquehanna International.

Please go ahead.

Hi, guys.

This is actually Tom Haggerty for John.

Hey, Tom.

I was wondering if you could just comment a little bit on Europe.

I know you said the UK and Southern Europe are weak.

But I was wondering, you know, with this seemingly lagging behind the US economy, do you see it getting worse there before it gets better?

And maybe kind of a little bit on Eastern Europe in particular.

Is that holding up?

Sure.

I think the one thing you've got to remember of -- and again, it's not in our control-- but Europe had a very, very uncomfortable -- or very bad weather season which contributed, again, to the depth of their decline, if you will.

However, in the face of that, Eastern Europe held up quite well; and even with the economy turning weaker in Eastern Europe, we found certain markets -- specifically Germany -- held up very strongly despite that.

So there are -- there are cultural differences, if you will, that seemingly affect people's willingness to buy golf equipment, and Eastern Europe is certainly a lot stronger than the rest of Europe.

If the weather does not repeat itself next year and Europe stabilizes -- which I fully expect they will during the course of the year -- and let's not forget, the golf industry does not reopen again, particularly in Europe, until you get into the April-May period.

You know, we've got quite a bit of recovery time to go through yet before we have to worry about what the consumer thinks about golf equipment.

Between that and the weather, we're not unhopeful that Europe is going to be a lot better off next year than it is -- than it has been this year.

In any event, Eastern Europe continues to be relatively strong.

All right, great.

Thanks a lot.

That's all I had.

No problem.

Thank you.

Ladies and gentlemen, we're currently out of time for further questions, so I would now like to turn this call back to Mr.

George Fellows.

Again, you know, we're all facing a very uncertain period of time.

And I'm trying not to be Pollyanna about it, but I sincerely believe that -- again, as I mentioned earlier -- the public tenure of conversations regarding the economy are going to take a shift when the election has passed us and there is no real incentive to talk badly about the economy.

And none of that is to say that we think the economy is in great shape, or for that matter that there aren't a great number of difficulties out there.

Clearly there are, but I believe that we may very well be bouncing along the bottom a bit now.

And when the election is over, I think we will begin perhaps a slow, but nevertheless, recovery period.

If that in fact happens -- and the fact that we have about five months or so before most of the golf industry reopens-- we're not unhopeful about the quality of '09.

We add that together with the fact that our product line has finally gotten to the point where we are comfortable, that we will have a strong offering each and every year going forward, with particular emphasis on the strength of our '09 program, we're somewhat hopeful for '09.

We're feeling quite a bit better about it than we were perhaps just a month or so earlier.

Now, again, I don't have my crystal ball that well-polished, so I certainly can't give you any projections at this stage, and we certainly hope to be in a position to do so as we get to our Investor Day early next year.

But at this point in time, I don't think that we have quite as cloudy or negative a picture as perhaps would seem to be reflected by others in the marketplace.

So with that, please stay tuned and we'll see you next quarter.

Thank you.

Ladies and gentlemen, this concludes our conference for today, and thank you for using AT&T Executive Teleconference service.

You may now disconnect.