Topgolf Callaway Brands Corp (MODG) 2009 Q2 法說會逐字稿

Good afternoon.

I will be your conference operator today.

At this time, I would like to welcome everyone to the Callaway Golf second quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers remarks there will be a question-and-answer session.

(Operator Instructions).

Thank you.

I will now turn the call over to Mr.

Brad Holiday, Chief Financial Officer for Callaway Golf.

Mr.

Holiday, you may begin your conference.

Thank you Marcello and welcome everyone to Callaway Golf Company second quarter 2009 earnings conference call.

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

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

I would like to point out that any comments made about future performance, events, or circumstances including statements relating to estimated sales, gross margins, operating expenses, preferred equity dilution, collectability of accounts receivable, estimated future inventory levels, and the Company's estimated 2009 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 risk and uncertainties, you should consult our earnings release issued today as well as the Company's current report on Form 8-K filed with SEC on June 8, 2009, 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 and on a currency neutral basis.

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

A reconciliation of such non-GAAP financial measures to those most directly comparable financial measures prepared in accordance with GAAP will be provided on today's call and additional reconciling information is provided in the earnings release we issued today.

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 at all for joining us.

As you know, during the first half of 2009, the golf landscape continued to reflect the overall uncertainty of the worldwide economy and sustained its downward trajectory during the second quarter, albeit as a somewhat reduced rate.

This was not unexpected given the record pace achieved through this period a year ago.

While signs of recovery are evident in a number of areas, the pace appears to be slower than originally hoped based on the most recent data, and we feel call for a somewhat more conservative projection for the balance of the year.

The important take away however, is that we are focused on the rate of recovery and stability rather than expectation of further uncertain declines.

The strategy we applied to navigate these difficult times targeted striking a balance between aggressive cost control to maintain liquidity with selective reinvestment in projects focused on strengthen the company's long-term market position to better take advantage of the recovery when it gets into full swing.

Toward these ends, the company has exercised tight expense management, significantly reducing discretionary expenditures as well as executing major risks eliminating over 300 positions this year.

At the same time, selective investments have been made in several areas, including international market expansion, additional margin improvement initiatives, the uPlay acquisition, and an aggressive first mover promotional activity to help kick-off the golf retail season.

These investments are beginning to payoff and we believe will contribute to the company's recovery as market conditions return to normal.

The international business environment mirrors the US in many respects.

Signs of stability or recovery, particularly in Korea, Japan and Australia, continued strong performance in China and a stabilizing in much of Europe.

Further based on recent investments in infrastructure in Singapore, Malaysia, India and Latin America, these markets are beginning to provide growth opportunities that will benefit the business in the mid to longer-term.

The uPlay acquisition completed in December of 2008, is being very well received in the marketplace and demand is out stripping supply at this moment.

This business will be profitable and accretive in 2009.

As an industry leader, we felt important to take aggressive first mover action to stimulate the retail golf market in order to get the season kicked off, given all the economic uncertainty.

Clearly this was not in expensive, but it has achieved its objective and benefited the Callaway market position in the US and most international markets.

Year-to-date in the US, we have picked up 3.1 share points in drivers, 2.1 share points in irons, and 2 share points in putter, with most international markets performing in a like fashion.

These performance results bode well as we approach the end of the 2009 season and prepare for an anticipated better 2010.

Additionally, in order to secure liquidity for the balance of this economically uncertain period, we issued $140 million of convertible preferred equity.

While this liquidity did not come without its cost, and we are quite sensitive to its impact on our shareholders, it was the best alternative in a a very tight credit market and one that we believe is in the best interest of long-term shareholder value creation, even while its short-term affects are painful.

Brad will cover this key topic in more detail shortly.

Clearly this year is disappointing to all of us, prior to the unprecedented economic downturn at the end of 2008, we have been on track towards achieving record results.

As a result of this temporary set back, we are embarked on a close and thorough re-examination of every element of our business model with an eye towards reducing costs further and making all other necessary changes to adjust to new business realities that exist in this new economy.

All in an effort to get back on track towards achieving long-term financial goals of best in class performance in the consumer durable and apparel industry.

Now I would like to turn the call to Brad to give you more detail on the quarter end results, after which we will have some Q&A.

To reiterate a bit on what George has already covered, overall market conditions remain soft during the second quarter resulting in a continued decline in industry-wide sales of golf equipment compared to 2008.

These conditions along with aggressive pricing and promotional environment, unfavorable foreign currency exchange rates and reduction in retail inventory levels continue to have a negative impact on our business with our financial results down compared to a record first half of 2008.

Despite these conditions we have been able to gain market share in almost all product categories and continued to invest in certain areas for long-term growth.

In reviewing the financial results for the quarter, we reported consolidated net sales of $302 million, a 17% decrease compared to last year sales of $366 million.

Net income for the quarter was $6.9 million compared to $37.1 million last year and diluted earnings per share was $0.10, compared to $0.58 per share in the prior year.

Excluding 2009 after-tax charges of $0.02 and 2008 after-tax charges of $0.05 associated with our gross margin improvement initiatives our pro forma earnings per share for 2009 was $0.12 compared to $0.63 in 2008.

Through the first six months we achieved sales of $574 million, compared to record sales last year of $732 million, and diluted earnings per share of $0.21 compared to $1.19 last year, excluding 2009 after-tax charges of $0.03, and 2008 after-tax charges of $0.06 for gross margin initiatives our pro forma earnings per share for 2009 was $0.24 compared to $1.25 in 2008.

Taking a quick look at overall sales by product category, our wood sales for the quarter were $76 million, compared to $86 million in 2008.

Year-to-date our wood sales have decreased 23% to $156 million compared to $203 million last year.

While our results have been impacted by industry-wide decline if the woods category along with the negative impact of foreign currency and conservative retail inventory levels we gained over 3 share points in the US in dollar share through the first six months, which is a reasonable proxy for most of our international markets.

Sales of irons and wedges for the quarter were $72 million.

Compared to second quarter sales last year of $100 million.

Year-to-date sales in our iron category were $137 million compared to $197 million last year.

Once again, despite the factors I just mentioned we have gained over two share points in the US on a year-to-date basis.

Golf ball sales $58 million for the quarter compared to last year sales of $74 million.

Year-to-date our total golf ball sales declined to $106 million compared to $133 million last year, due primarily to increased promotional activity and the fact we have no new premium products this year compared to several new competitive offerings Our year-to-date US market shares declined 2 share points.

Putter sales for the quarter declined to $26 million versus $33 million last year, with year-to-date sales at $54 million compared to last year of $67 million.

US market share has increased by 2 share points through the first half of the year.

Accessory sales for the quarter decreased 5% to $69 million, compared to $73 million last year.

Through the first six months, accessory sales were $121 million a decrease of 9%, compared to 2008 the decline was partially offset by sales of new uPro GPS devices.

Turning to regional breakout us sales declined 7% to $164 million for the quarter, compared to $176 million last year.

International sales decreased 27%, to $138 million for the quarter compared to last year sales of $190 million.

Foreign currency had a negative impact of $19 million on sales this quarter compared to last year, so in constant dollars international sales would have been $157million decrease of 17%.

Through the first six months US sales were $305 million, 15% decrease compared to $360 million last year, international sales were $269 million, a decrease of 28% compared to last year sales of $372 million.

Foreign currency once again had a negative impact of $42 million on sales for the first half of the year, so in constant dollars international sales decreased 16%.

We have seen solid growth in Korea and China markets and while Japan's results have been down through the first six months we are beginning to see some positive trends in July.

Gross margins were 36.3% for the quarter compared to 46.7% last year.

This decrease in gross margin percentage is primarily due to the heavy levels of promotions during the quarter as well as a shift by consumers to lower priced products.

Adjusted for gross margin initiatives, second quarter pro forma gross margins were 36.9% compared to 48% last year.

Year-to-date gross margins were 39.4% compared to 47.3% in 2008.

Adjusted for gross margin initiatives year-to-date pro forma gross margins were 40% compared to 48.1% last year.

Operating expenses for the quarter were down 10% to $100 million compared to $111 million last year.

Year-to-date operating expenses down 9% to $202 million compared to $221 million last year.

As George mentioned earlier, tight expense control this year in light of the economic conditions has more than offset incremental spending against uPlay acquisition, regional expansion in Thailand and Malaysia and the expense associated with the April headcount reduction.

As you know we recently completed the preferred equity offering that George mentioned in his opening remarks.

On the first quarter call, we indicated that due to the unfavorable economic conditions, it was likely we would be in violation of the leverage ratio covenant under credit facility at the end of the second quarter unless we took action.

We engaged in discussions with lenders and worked with internal and outside financial and legal advisors to consider various possible courses of action.

Ultimately, we concluded that a capital infusion from a preferred stock offering was the best alternative and was in the best long-term interest of our company and shareholders.

The preferred stock offering was successful which allowed us to remain in compliance with the conveyance of our credit facility and finished the second quarter with no outstanding debt and $50 million in cash.

The offering also allows us to retain favorable pricing and other terms of the line of credit and provided us with the operational and financial flexibility to invest in and operate our business for long-term growth and shareholder value.

Now moving to the balance sheet.

Consolidated net receivables were $263 million, compared to $287 million last year.

Consolidated day sales outstanding increased to 79 days, compared to 71 days last year due to increase in customer incentive programs.

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

Net inventories were $228 million, a decrease of 3% compared to $236 million last year.

Inventory as a percent of trailing 12 month sales was 23.8% compared to 20.6% in 2008, but down significantly from the 25.6% at the end of the first quarter.

Excluding the impact of apparel inventory, which is associated with the transition to our [Perry Ellis] partnership this year, which was not in last year's results and also adjusting for the negative FX impact on net sales, the adjusted trailing 12 month percent could have been 21.9% compared to 20.6% last year, given the significant sales decline this year, we are pleased with the responsive of our supply chain during this challenging time and feel we are still on track to achieve the low 20% range by year end.

Capital expenditures for the quarter were $9 million, and for the first six months were $19 million.

We estimate 2009 CapEx to be approximately $40 million for the year.

Depreciation and amortization was $10 million for the quarter and for the first six months was $20 million and our estimate for the full year remains at approximately $40 million.

As we noted in our pre-release last week, we estimate full-year sales will be down 15% to 17% compared to 2008, due to what we believe will be continued softness in the retail sector.

Gross margin will be in the range of 38% to 40% for the year, primarily because of continued promotional activity and price compression at retail through the balance of the year.

A portion of this continued promotional activity, is because we believe that some of the smaller brands have that have been negatively impacted this year will be discounting more heavily to move their inventory through the retail channels.

The good news is that retailers have been ultra conservative this year so the amount of inventory in the channel generally is at a lower -- is lower than normal historical levels.

Operating expenses are estimated to be $370 to $380 million, as a net reduction reflecting not only the cuts we made this year in several areas, but also as I have already said includes investment spending against our uPlay acquisition, expansion into additional geographical markets as wells as nearly $3 million in charges associated with the headcount reductions taken this year.

I should also point out the the dilution from equity offering is estimated at approximately $0.09 for the full year.

We would now like to open the call for questions.

(Operator Instructions).

First question is from Dan Wewer with Raymond James.

Two questions, George, first, with the enterprise value of Callaway Golf now at the lowest point in 2010 years, are you or any members of the board concerned about the company possibly becoming an attractive unwanted acquisition for someone else?

We don't -- it's hard to comment on hypotheticals like that.

The fact is that we are taking all of the right steps in order to control our costs so there is no easy money on the table for somebody coming over the transit, but again it's hard to predict anything like that and conjecture doesn't help.

Second question in terms of the market share of growth, and with improvements 2% to 3% in woods and irons, but in prior calls you noted that the industry might drop 15% to 20%, during 2009 and yet we are seeing revenues year-to-date in irons off 30% and woods off 23%.

How do we square those significant declines in revenues year-over-year with this forecast of market share growth?

Sure.

There are two fundamental issues, one is consumer take away.

Which is the 15% to 20% that we were talking about and the second is a fairly large inventory adjustment that most of the trade has been taking and will continue to take through the balance of the year.

When you add those two up you end up with a market drop if you look at it from the perspective of the manufacture far in excess of the 15% to 20%, reductions in the neighborhood of 30% to 35%.

Toed that also, some of the numbers we are talking about are worldwide numbers there is a fairly significant FX affect on that as it relates to the international business and that comply the calculation business and that comply the calculation further.

Okay.

Thank you.

Next question is from Rick Nelson with Stephens, Inc.

Good afternoon.

Comment if you could on inventory levels both at Callaway Golf and as you see them in the retail channel and -- corollary to that how you size up the promotional environment as we enter the third quarter.

Recognize things were very promotional in second quarter.

Are those promotions accelerating?

We would expect -- let me adjust the inventory first.

As Brad indicated, our inventories are really in quite good shape.

Our supply chain responded very quickly to the downturn in the marketplace and, in fact, we still anticipate by the time the year is out that we will end up in the low 20s range as a percent of sales and substantially below last year's levels, so our inventories are quite good.

The trade inventories are probable at this particular point in time cleaner than they have been in quite sometime, largely because the trade has been conservatory on their buy in and been very careful not to load.

IT is anticipated, however, that the third quarter and probably the fourth quarter will remain quiet promotional largely because there are many manufacturers who respect necessarily in quite as good inventory position as perhaps we are, there will be undoubtedly be dumping in the marketplace in the third and fourth quarter, that in and of itself will be very promotional.

As we go out of the year, we are anticipating there will continue to be this level of pressure for the balance of the six months of the year.

Thank you for that color.

Can you also provide some insight into product introductions that you are planning for a second half, maybe as it relates to the second half of last year in terms of numbers or --

I would rather not get in to specifics in that regard for the obvious competitive reasons.

As you are undoubtedly joined on this call by a number of people that are competing with us.

We will not have extra ordinary introductory activity this year and , in fact, it will be less than last year, our position is that we produce product as at the end of the year solely to take advantage of the Holiday Season and not necessarily to bolster any of the performance for the current year so we are not interested in cannibalizing 2010 for the purposes of making this year look any better.

We will be at relatively normal levels as far as

Thank you, George and good luck.

Thank you very much.

Our next question is from the line of Scott Hamann with KeyBanc Capital Markets.

George, could you comment on the situation that it seems like consumers are getting fairly conditioned to a discounted environment, I'm curious how this might impact some of your thinking and planning for 2010 in terms of kind of setting price points and determining which products you want to put the market weight behind.

I think it's our judgment that 2010 from a promotional point of view not reach the levels that we had this year but the consumers is cd on the lower priced products, so the 299 driver price point will be the dominant price point next year opposed to the 399 or 499 point.

We have probably broadest golf line in the industry, so we cover all of the price points.

It's a matter of the way we believe the mix will go.

Clearly with the economy being in the current condition, there are people that are buying higher price point products and we clearly have some very good new introductions that will address those needs.

We also will have a full compliment of very attractive new products a at the lower price points and anticipate that from a mixed point of view, those will probably be the dominant part of the business going in to next year.

Okay.

Then in our earlier prepared remarks you made a comment about gross margin initiatives, is there anything incremental that you would be prepared to talk about above the 20 or 30 million you talked about for the next two years, then the 20 or 30 on top of that what was the impact of the gross margin for this quarter.

Let me address first part of the question, we are continuing to pace with all of the gross margin initiatives that we talked about before, the two that you mentioned.

And as I mentioned in my comments earlier, we are because I think the economic realities are what they are and the marketplace is going to be different in 2010 than perhaps it has been in the past, we are re-examining our entire business model and how we go to market and we are looking for other opportunities to bring costs in to line with this kind of new reality.

It is still early days as far as that efforts concerned, so I am not prepared to quote any specific number at this stage, hopefully in the subsequent quarters when we get closer to some of those things we will be able to give you color and insight in to that.

As far as the amount of the affect that the current gross margin initiatives have had on the current quarter, let me see.

It was about $4 million for the quarter.

Just so you know, those are on going savings that we had.

Finally on the operating expenses, you done a good job trimming the bell and keeping that pretty tight this year, how sustainable are these moving in to next year, I know you have taken pay cuts and 401K things and I'm curious are we going to see that balloon up next year or can we keep it pretty flat?

I think the effort as far as OpEx will be to maintain a tight control on that, some of the employee benefit areas will undoubtedly be put back in the budget as we go into 2010, but we believe we identified other areas that will likely offset that.

As far as the OpEx expectations for next year is concerned I would without quoting a number at this stage, we are in the planning stage now, I would expect OpEx be under very very tight control next year.

Thank you.

Tom Shaw with Stifel Nicolaus.

Please go ahead with your question.

Guy, thanks.

First question kind of continuation of the trends that you talked about, people focusing on lower price points, potentially in next year, is there anything from a technology perspective, I think there is the rules change with the groups.

But anything else that should entice somebody to buy a 2010 club rather than potentially paying a promotional price for a 2009 or 2008 club?

Again, our company known for very extensive innovation and technology.

I would fully expect that the product offering that we have in 2010 given the changes are going to be a strong enticement to somebody who is a real golfer to try the new product.

The extent to which people are going to be attracted to the low priced offerings even though they maybe older technologies is hard to predict.

But again, being what it is and having golfers being who they are, I really believe given the importance of the sports of those individuals they are going to step up.

Will they step-up in great numbers to $499 driver?

Probably not to the degree they have in the past that will be a smaller portion of the market place going forward.

Will they normalize prices of 299 and there abouts to be fundamentally the core of the golf market next year, I think so.

Again depending on how heavily other people dump in to the the market and to the extent at which they -- (inaudible) pricing of the industry,s that hard to predict .

Our products have been attractive and I think that we are going to draw the appropriate attention of the real golfer who is interested in real technology.

On top of that, you got to remember as our business trends more and more internationally the margins there are much higher than they are in the US, and I think that represents a if not a total insulation but a offset to any tendency to go to the lower margin products in the US, overall I would expect the margins to be substantially improved over this year as we go in

The higher international margins is that a function of price point?

It is a function of price point.

Continuing on the international theme, you talked about performance in China obviously investments in India, any updates I guess proudly speaking on the trends with golfers, round played, spending per et cetera?

In -- we are seeing some extraordinary things going on, hard to believe that I just went through a review yesterday of the south Pacific group which is fundamentally Australia and New Zealand, rounds played showed increases of 20 to 30%.

I never heard of numbers like in terms of rounds played, so there is a resurgence of the business, the real issue from our point of view is not the level of interest in golf and whether or not it is growing, but that is certainly happening outside the US, pretty dramatically, but to the extent to which the overall worldwide economy is going to prevent people from spending on equipment quite the to the same degree that they normally would.

We are seeing that come back and as I indicated coming back in the US slowly than we hoped as the economy approves so will the tendency of golfers to buy new equipment.

I think golf, rounds are sound and solid.

Up two points in the United States, they are continuing to grow in some of the developing markets like China, they are up substantially in places like Korea, rounds played appears to be healthy.

Our issue is the tendency to people, to be likely of people buying hardware, that's what we are keeping a close eye ons that is very much tied to the economic recovery.

Thanks.

Welcome.

Next question is from the line of Rommel Dionisio with Wedbush Morgan.

Went you referred to the inventories being lower than normal, were you referring to domestic or does they know international.

Includes international as well.

Second question, when you guys talked about peripheral brands, are you seeing any brands actually lose shelf space going forward.

Are they dumping the product us they are going to discontinue certain brands.

That's been happening and will continue to happen.

As the trade takes a look at their largest working capital issue which is inventory investment, they're cutting back on the periphery because those things don't turn or develop a return for them.

They can't afford to put money there, there hasn't been a coming back of the selection number of SKUS and the brands being carried.

Do you expect that you might gain shelf space as a result of that next year.

By definition we probably will do that because if you are a golf specialty store it's not like you have other alternatives to put the shelves, so, yes, the solid proven brands will pick up shelf space for that, yes.

Thanks, George.

You're welcome.

Our next question is from the line of Todd Slater with Lazard Capital Markets.

Thanks very much.

Couple of questions, wondering if you could give us color on the decline in ball market share and what your strategy is to make money in this business.

I think you expect to be soft this year but can the ball segment not just return profitable but also get to operating margin in the high single-digit, low double-digit area.

How long do you think that will take or what type of scale would you need to get there.

Let's talk about the current situation, I don't want to look at market through rose colored glasses, but recognize that the past 12 to 18 months has been extraordinary and out of character for the business.

A fair amount of dumping of balls on the market place, one caused by I'm trying to phrase this politely but a particular player who had to make a transition to different balls from the one that they were marketing and they had a fairly extensive inventory of those, there is a fair amount of dumping and lower prices associated with that.

And I think everybody is taking a good hard look at their inventory situation.

I think there has been over reaction by some to what was going on.

The dealing in the ball market has been quite heavy and quite above normal.

I don't think what we are seeing today is going to be typical going forward.

So when you get by this stage and the ball market returns to a more normalized state, I think a lot of that promotional pressure on margins, if not goes away, certainly becomes less.

Now as far as our -- we did not have any ball introductions this year, so we are in the second year of our lead offering, if you will.

We will be offering some new balls coming up later on this year and into next year.

That typically spurs the overall shipments and sale and in this case we will also spread the margins.

So, yes, I see us getting back to a more normalized state in terms of volume and margins, on top of that we are moving some balls offshore.

Which has a very positive margin affect as well and the more that happens of course that contributes to the overall profitability of the ball business.

We see a lot of things coming in 2010 that should work in favor of making the profitability more attractive.

Okay.

So you do see return to bull ball market, I had to say that.

A bull ball market.

You didn't really say that.

I almost don't know how to respond to that.

Don't need to, let me get to my next question.

I see the bull ball market getting better.

How do you think the new apparel relationship with [Perry Ellis] is going.

How would you characterize that, how should we think about that opportunity going forward?

I think it's going quite well.

As you know this year is still characterized by our selling off the [Ashworth] inventory, and in fact the a lot of the styling for the early part of next year is still [Ashworth] styling, albeit , PDI was able to get it in to and tweak the designs and make them significantly better than they started out.

From that point of view it's looking quite good, our sales organization that we established to sell the accessories and the apparel had their sales meeting.

It was very very positive and again these are anecdotal stories but early contacts with some accounts are quite positive as well.

We think not only is the new relationship going to be better than we had before but the business model where we sell, Callaway sell directly to the golf trade and are able to achieve a margin of that sale is going to work out quite positively

Are the -- what are the size of those relative markets to you think the sporting goods market let's say versus traditional market that Perry Ellis will be selling.

It's hard to tell how big the traditional market is going to be because Ashworth was never very successful getting in to that market in any significant way, Perry Ellis has a significantly greater capability in that regard.

So it would be hard for me to give you a projection of how big that could be.

It's going to be bigger than it was; as far as our part of the business we believe because of our single minded focus on selling the Callaway line into the golf trade will be able to do a much better job on both distribution as well as placement within the doors that we do have distribution.

So we think we can bring something positive to that part of the business as well.

I'm afraid I can't stare in to the crystal ball now and give you projection other than our expectation is that it will be a stronger business now than it was before.

Maybe if you could touch on the margin side of it then.

Given that your marketing a big piece of that business for example you combine the two pieces, do you think that's higher operating margin business in total -- that's positive impact influence on the overall operating margin.

Yes.

To put it in perspective for you, under Ashworth we had a licensing fee if you will, and under the current circumstances we are getting now -- let me step back, the margin percentage will be different because licensing fee is 100% margin, but the margin dollars that we are going to be getting are going to be substantially bigger.

Got it.

Apparel is typically lower than our equipment sales.

From dollar perspective we think lit be bigger year-over-year.

Lastly, wondering the guidance in terms of how we should look to model tax rate in the interest income going forward.

Well the fact that we don't have outstanding debt right now, interest will be low for the balance of the year, the tax rate, I say let's stick with 38.5% that's our standard rate.

The only thing that changes from that basically would be any types of resolution audits or anything like that, but 38.5 is a good place to hold it at, Todd.

Okay.

Feeling about golf and getting in to the Olympics and that decision coming up September.

October actually.

October.

Again there are seven scores of iron for two positions, we feel good about current standing of golf among those seven.

And we -- these are all anecdotal stories but we hear back that we are certainly among the leading candidates if not the leading candidate to get back in.

At this moment in time we are feeling pretty good about it.

I think as we mentioned in some previous calls all of our international folks are really poised to jump on it because we have been making contacts with all of the Golf Federation in the countries around the world so if the vote goes the way we hope it does we hope to be right out in front.

If it goes through what is the biggest changes that occur that you think will influence some of the trends?

I think clearly, on several different levels, let's talk about the governmental levels, countries like China, India, places like that who clearly view the Olympics as a showcase for their emergence if you will from third world status to something else, we will want to do something special in that regard.

All the programs infrastructure building and investment in the sport, youth programs et cetera start taking place once they realize that in seven years time they have to be ready with the ability to fuel the respectable team.

From a governmental point of view, you see action really across the board in many many countries, by the way that will be true even in the countries that are developed as far as golf is concerned more significantly in countries where that's not the case.

At the other level, again, Olympic sports because of their prominence and attention, just attract more youth to get involved.

Because the sport becomes much more high profile than it is today and I would think that it would have over longer time frame have beneficial affect on participation rates at all levels in many countries we gain in terms of infrastructure building throughout the world and gain potentially in participation rates, both of which I think will be have very beneficial for the business overall.

Great, all the best to you guys.

Thank you very much.

Our next question is from the line of Jeff Blaeser with Morgan Joseph & Co.

Please go ahead with your question.

You mentioned earlier that you didn't want to -- products in the Q4 not to cannibalize 2010 sales did that happen in 2009?

We are in 2009.

Right.

You released products late last year.

Like I said we fund mentally ship in products we believe are going to take advantage of a Holiday Season, sometimes we guess right and sometimes wrong.

We shipped in adequate amounts in some, sometimes we shipped in too much.

But the clear intent is just to ship in the product that we feel is appropriate to take advantage of a Holiday Season.

And, in fact, there is a clear Holiday Season if you look at consumption, there is a spike related to Holiday.

Its not limited to the United States it's a factor in many international markets as well.

Yes, that's what our intention is.

Okay.

On the domestic side obviously relative basis sequentially it was much improved versus international even with that FX, recessionary timing or more promotional environment domestically versus international any color on that?

I think partly recessionary timing if you recall while we were sort of descending in to this recessionary period in the United States, Japan was sailing along at a very very good pace as we started bottoming out, Japan fundamentally fell off a cliff.

Their entry in to this unfortunate period was steeper than most countries, yes, there is recessionary timing, by country.

I think Europe entered later than the United States as well so there was clearly timing issues, but I would say that the promotional environment in the US is much hotter than it is in most international markets and its fuel bid whole variety of different sources.

But we tend to be a bit more promotional here at times.

One final question I'm sure you are not going to discuss the legal issue, feel free if you like to.

Have you seen impact from the patent change Titlist had to do with the tour ball or market share gains.

Their market is so unsettled at this particular point in time with whole balls discounted, new balls put in and other guys dumping on the marketplace, it would be very difficult to draw any conclusion about that.

It will settle out probably next year and we will have a better handle on it then.

Fair enough.

Thank you very much.

Our next question is from the line of Tim Conder with Wells Fargo.

Please go ahead with your question.

Thank you, gentlemen.

Couple of items as usual here, could you quantify in the eps impact of FX brad in the quarter and year to date?

And then I guess along the similar lines, if you could quantify collectively product line unless you want to, but collective impact of promotions, what you anticipate either in the quarter, year to date or for the year?

Well, it's really hard to take FX as we talked about.

Easy to give you the sales impact, translation but there is an awful lot of movement that goes on be low the line.

We said in the path 70% flow through in terms of the impact so you can take sales and take normal margin if you will.

That's a tough one we can give it to you clearly on the revenue side.

It's tough to give to it you in terms of bottom line.

What was the other question I'm sorry on the what?

Earlier in the year on the FX side you guys quantified that you anticipate on the year-over-year basis, FX having --

Frankly, we are going to move ray way from that because there are so many moving parts when you get down below sales, it's a difficult thing because it has to do with timing of inventory moving in and et cetera.

It's a very difficult thing to do so revenues about the best we are going to be able to do going forward.

As a rule of thumb, it's roughly 60% to 70%, on average, but it's really hard to go quarter by quarter because of timing.

What was your second question, Tim I'm sorry.

Similar tip of thing brad on the promotional impact that you seen on gross margins and again just sort of trying to get a sense for the year as to what type of rebound I guess root of the FX question also.

That if everything held constant and the promotional environment went more normalized what type of rebound obviously that's a type of context we are asking.

For the quarter Tim, just to give you an idea, if you look at the drop in gross margins, the pricing mix, which would include the shift of consumers to price points and promotional activity represented about a 7 percentage point decline.

Just to put it in context, okay.

FX was a majority of the rest as you took a look at the quarterly numbers.

And so that's a rough shot but the sales, the price and sales mix that everything.

Promotional plus people shifting to lower price points as George mentioned people shifted to the 299 and letter because of the promotional activity it's a combo and hard to pull it apart.

Okay.

Would 50/50 be a good beginning stab at it.

Whatever you want to use, it's so hard to pull it apart.

On the gross margin initiatives you are getting, Brad you said 4 million benefit in the quarter on a year-over-year basis.

What point I guess good companies try to find incremental savings opportunities on on going basis, at what point do you slide in to the bucket to where this is the normal course of business rather than saying we are going to take a charge for this, this is a specific initiative.

That's a good question, Tim, as we embark on the GMI that was over a two year period because we have it in last year's numbers we eliminated expenses.

Over the next four years we are looking at a broader kinds of initiative that should get us another roughly $40 to $60 million, that's more of a bigger change in foot print and kind of the whole manufacturing distribution et cetera.

It's a bigger initiative and as we go forward and talk about the future and the things we are looking at we will give color with regards to the broader strategy.

The first two years was the GMI that we always talked about.

As we shift to go forward there will be additional costs as we under take the new initiatives.

Okay.

Then from a inventory perspective, brad or George, sounds like retailers George you referenced several times retailers with excessively cautious at the beginning of the year, continue to be cautious and maybe especially being cautious with some of the lesser brands out there, so you are gaining share.

Where are we do you think at a point to where you are going to get the one to one sell through, getting back sell through, shipment, type of ratio, has that come back from late first quarter, second quarter, the best you can tell?

I think it's going to be within this season.

We are entering in to pretty soon going to enter in to the tail end of season if you will when normally all of the trade tries to run inventory to lower level as possible.

Green grass guys going to shut down, try to do that and the golf specialty that largely in non-golfing areas do the same thing, so we are not going to get the one in one out stage now.

In to the new season next year and the new season in the Sun Belt, we will see more of the one in one out kind of a situation I expect there will be some inventory load for the beginning of the season, not a typical of what happens in the marketplace under normal circumstances, that inventory load will be smaller.

That will affect the quarterly breaks we see in the business in 2010.

My guess will be a lot less front loaded and distributed more even evenly than historically has been the case.

The second quarter is probably closer proximation of went that will happen.

Along that line, I think that the manufacturers that have a really good supply chain and respond quickly to those orders will be the ones that will probably benefit because of a new what I call marketplace out there.

Along that line, roughly two years ago, gentlemen were talking about showing what you were doing there in Carlsbad and talking about taking sort of a replication and putting it in Europe or maybe one in Asia long-term so you could respond quicker, where do we stand on that whole process.

We are right in the middle of broad review of what the manufacturing footprint for this business will have to be.

And that the model shifts a little bit.

A lot of the automation gives us flexibility to in a modular fashion create manufacturing sites elsewhere.

There are certain efficiencies in local labor markets, that offset that advantage.

We are working that proposition.

We clearly feel that there is labor costs we can take out of this, we feel that the distribution costs associated with the business are also subject to some further reduction and I think perhaps later this year, early next year we will be able to give you a much clearer picture of how we are coming out because what we want is the lowest cost manufacturing footprint and process that we can ultimately develop.

We are getting pretty close to it.

Lastly, you talked earlier about the ball production continuing to shift more offshore, at this point what do you see as a percentage of your ball sales this year, what's produced offshore, what will that be next year?

Not going to give you the specifics there for obvious reasons I can just tell you that it will be a higher percentage offshore next year than this year or any year prior and where the appropriate balance will ultimately fall because there will always be a reason to have some onshore production and exactly what that level is going to be depends a number of other things we are doing.

Be assured that the offshore manufacturing of ball is a higher percentage going in to 2010.

Thank you gentlemen as always

Ladies and gentlemen, I do apologize but we are running short of time, for the remainder of the Q&A, we will ask that all participants please limit themselves to one question per caller.

Next question is from the line of Kristine Koerber with JMP Securities.

Can you give us more color on the international trends throughout the quarter on a monthly basis, you said you saw positive signs during the month of July in Japan.

How were trends throughout the quarter?

Depends on the region.

Japan is showing significant life coming in to July or the end of the quarter and they are feeling pretty good about the rest of the year.

Australia, I think has looked pretty good for a good portion of the quarter, Korea looked pretty good for a good portion of the quarter in the case of Europe, asked Scandinavia is strong, UK is having difficulties, eastern Europe is doing well, but we are a little -- we are watching carefully the economic situation there, it's really hard to generalize for you because it is quite different as you go from region to region.

That's helpful, thank you.

Ladies and gentlemen, we have reached the end of the allotted times for question and answers.

Mr.

Fellows, do you have any closing remarks you would like to make?

Just to reiterate, I understand everybody discomfort with what is going on in the marketplace and I obviously share it.

The only thing I can reassure you about is we will continue to run the business trying to strike an appropriate balance between running a very tight ship as far as expenses are concerned.

To continue to look throughout the organization and the way we do business to take costs out of the process, but at the same time we are going to continue to make appropriate investments in areas that we believe, position the company properly to take advantage of the recovery when it takes place.

We believe that we are perhaps at the earlier stages of the recovery, I know that in the short-term that doesn't give the most attractive earnings picture but I can assure you that we believe very strongly in the long-term, it is a much better strategy to follow as far as creating shareholder value and one that we will continue to follow going forward.

So hang with us.

We think that things will improve, I hope they improve faster than it looks right now.

But we are very conscious of the marketplace and want to make sure that we are ready for it when it does, in fact, improve.

Thank you all for your attention and we will be happy to talk to you again next quarter.

That does conclude today's conference call, we would like thank you for your participation, you may now disconnect.