Topgolf Callaway Brands Corp (MODG) 2009 Q3 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 Q3 2009 Callaway Golf 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.

Mr.

Holiday, you may begin your conference.

Welcome, everyone, to Callaway Golf Company third quarter 2009 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 related to estimated 2009 sales, gross margin, operating expenses and loss per share, estimated benefits and charges related to the Company's gross margin initiatives, future inventory levels, anticipated level of fourth quarter promotional activity, the collectability of accounts receivable, the Company's estimated 2009 capital expenditures and depreciation, and amortization expenses and comments regarding future economic and market conditions, and foreign currency exchange rates, as well as 2010 outlook, growth, sales, margin improvement and profitability 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 two item 1A of our Form 10-Q for the second quarter ended June 30, 2009, 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, and on a currency neutral basis.

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.

Thanks, Brad, and thank you all for joining us.

During the third quarter, the economy as well as the golf industry continued to reflect the general malaise and uncertainty characterizing the last 12 months.

While the downward trajectory experienced by virtually all discretionary spending categories was sustained, importantly signs of a lessening of the slope of those declines began to appear.

Some of the improvement is undoubtedly a function of the aggressive promotional activity undertaken by the golf industry, we being front and center in those efforts, but some as well due to a slowly improving economic picture in the US and some other regions around the world.

The net take-away from all the data in the quarter leads us to be cautiously optimistic about current business trends and the outlook for 2010.

Just a quick reprieve of some of the signs that give us support for this view.

First, the general and growing consensus that the recession has ended in the June, July time frame this year.

The Callaway share gains in all major club and accessory areas, both in the US as well as most international markets.

Strong positive trends being experienced in Asia, particularly China and Korea.

Strong response to our 2010 line by our trade partners.

And the fact that our prebooks for the 2010 line are running ahead of our expectations.

And most importantly, the recent vote to include golf in the 2016 Olympics, which we believe sets the stage for growth in all regions, but particularly in the international markets.

Clearly, the overall results this year are not anywhere close to what we had hoped for.

The actions taken to breathe life into a rather (inaudible) market early in the year were not inexpensive but felt to be necessary in order to prevent even more severe declines in the clearly deferable category.

With a strong belief in the resilience of the golf consumer, we targeted to strike a balance between aggressive cost controls and that maintain liquidity with selective reinvestment in driving short term consumption and other projects focused on strengthening the Company's long-term market position.

As a result, we believe Callaway is in a very solid position to take advantage of the economic and category recovery as they continue to unfold.

The results of the strategy somewhat clouded by the overall market weakness would seem to bear out the correctness of this approach.

The share gains as we have mentioned before, the emerging market growth that we're experiencing, China for example continues its steep climb, still off a small base, but nevertheless quite impressive, and India soon to be open, promising a major long-term going forward.

Highly successful margin improvement initiatives, which are on target to deliver the promised savings.

New category growth.

Our uPro product has really caught on in the marketplace, and will in fact be accretive this year.

And we closed the third quarter with essentially no debt and over $100 million in cash.

The balance of 2009 will continue to be a battle as the season draws to a close in most areas.

However, trade as well as our inventories are in generally good shape, leaving a surprisingly uncluttered environment as we move into the new year.

We look forward to 2010 with, as I said earlier, cautious optimism.

But recognizing the remaining uncertainty surrounding the economic recovery, we will be planning our business in an appropriately conservative manner to ensure a return to meaningful profitability.

I'd now like to turn the call back over to Brad to give you some more specifics on the quarter.

Thanks, George.

The third quarter showed similar trends as the second quarter, in that we continued to see overall softness in retail sales, as well as consumers shifting their purchases to lower price points as they took advantage of the continued promotional activity at retail.

The decline in year-over-year sales did begin to improve in the third quarter compared to the first two quarters, as the negative impact of foreign currency translation lessened, and as we begin to anniversary lower second half comps from last year.

Gross margins declined compared to last year, due primarily to increased promotional activity this year.

While a great majority of our promotions ended during this quarter, the fulfillment of these promotions to our retailers and the impact on gross margins continued through the end of the quarter.

We estimate the level of promotional activity on our business to lessen dramatically in the fourth quarter, even with some smaller holiday promotions we will have in place during the quarter.

Despite the overall market conditions being what they've been this year, we believe the promotions implemented at the beginning of the season drove traffic at retail, and resulted in market share gains for us in all club categories this year.

While these promotions were fairly expensive, we were able to partially offset the costs with continued savings generated by our gross margin initiatives and reductions in operating expenses.

Now, turning to the financial results for the quarter, we reported consolidated net sales of $191 million, an 11% decrease compared to last year's sales of $213 million.

We incurred a net loss for the quarter of $13.4 million compared to a loss of $7.4 million last year.

And the loss per share was $0.25, compared to a loss of $0.12 per share in the prior year.

The loss per share for the quarter was adversely affected by $0.04 per share related to the Company's preferred stock and a penny per share associated with our gross margin initiatives.

Last year's results were impacted by after-tax charges of $0.04 per share for our gross margin initiatives.

Through the first nine months, we achieved sales of $765 million compared to sales last year of $946 million.

And a loss per share of $0.04 compared to fully diluted earnings per share last year of $1.08.

The loss per share for the first nine months of 2009 was adversely affected by $0.05 per share dilution related to the Company's preferred stock, and $0.04 associated with our gross margin initiative.

Last year's results were impacted by after-tax charges of $0.09 per share for our gross margin initiative.

Taking a quick look at our overall sales by product category, our wood sales for the quarter were up slightly to $36 million, compared to $35 million in 2008, due to the positive impact of our sales promotions.

Year-to-date, our wood sales have decreased 19% to $192 million, compared to $237 million last year.

Sales of irons for the quarter were $49 million, a decrease of $0.23(Sic-see press release) compared to third quarter sales last year of $64 million.

Year-to-date sales in our irons category decreased 28% to $187 million compared to $260 million last year.

Putter sales for the quarter declined $17 million, versus $21 million last year.

With year-to-date sales of $71 million, a decrease of 20% compared to last year's sales of $89 million.

As I mentioned earlier, dollar market share for these three categories have increased on a year-to-date basis.

Golf ball sales were $41 million for the quarter compared to last year's sales of $48 million.

Year-to-date, our total golf ball sales declined to $146 million compared to $181 million last year, impacted by increased promotional activity, and the fact that our premium ball segments are in the second year of their life cycle compared to several new competitive offerings in 2009.

Accessory sales for the quarter increased 5% to $48 million compared to $45 million last year, due to incremental sales of uPlay GPS units.

Through the first nine months, accessory sales were $169 million, a decrease of 5% compared to $179 million in 2008.

Turning to our regional breakout, US sales declined 10% to $94 million for the quarter, compared to $105 million last year.

International sales decreased 11% to $97 million for the quarter, compared to last year's sales of $109 million.

Foreign currency had a negative impact of $3 million on sales this quarter compared to last year.

So in constant dollars, our international sales would have been $100 million or a decrease of 8%.

The strengthening of the US dollar began to impact our financial results during the third quarter of last year.

So the negative impact of foreign currency for the second half of the year should begin to lessen compared to the first half, and may positively impact our fourth quarter results when compared to last year.

Through the first nine months, US sales were $399 million, a 14% decrease compared to $465 million last year.

International sales were $366 million, a decrease of 24% compared to last year.

Foreign currency had a negative impact of $45 million on sales for the first nine months of the year.

So in constant dollars, international sales would have decreased 15%.

Gross margins were 31.2% for the quarter, compared to 37.5% last year.

This decrease in gross margin percentage is primarily due to the heavy level of promotional activity during the quarter that I already mentioned, as well as an overall shift by consumers to lower priced products.

Adjusted for gross margin initiatives, third quarter pro forma gross margins were 31.7% compared to 39.2% last year.

Year-to-date gross margins were 37.3%, compared to 45.1% in '08.

Adjusted for gross margin initiatives, year-to-date pro forma gross margins were 37.9%, compared to 46.1% last year.

Operating expenses for the quarter declined 8% to $85 million, compared to $93 million last year.

Year-to-date operating expenses also declined 8% to $287 million, compared to $314 million last year.

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

Moving to the balance sheet, consolidated net receivables were $155 million at quarter end, compared to $153 million at the end of the third quarter last year.

Consolidated DSO increased to 74 days, compared to 66 days last year, due to an increase in customer incentive programs.

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

We estimate that our DSOs in 2010 will return to more normal historical levels.

Net inventories fell below $200 million for the first time in several years to $199 million, a decrease of 10% compared to $220 million last year.

This is the lowest level of net inventory for the third quarter in the past five years, and is a result of the many process improvements made to our supply chain as part of our gross margin improvement initiatives.

Inventory as a percent of trailing 12 month sales was 21.2%, compared to 19.7% in 2008, but down from 23.8% at the end of the second quarter, despite the impact in 2009 of apparel inventory associated with the transition to our Perry Ellis partnership this year, which was not in last year's results, and adjusting for the negative FX impact on net sales.

Given the significant sales decline this year, we are pleased with the responsiveness of our supply chain during this challenging time.

We ended the quarter with $159 million in cash and no debt, and we're in compliance with the covenants of our credit facility.

CapEx for the quarter was $10 million, and for the first nine months, was $30 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 nine months was $30 million.

And our estimate for the full year remains at approximately $40 million.

In looking at our full year guidance, we currently estimate sales will be down approximately 16% compared to 2008, due to the economic conditions, and unfavorable foreign currency exchange rates we've experienced this year.

Gross margins are estimated to be approximately 37%, which is slightly lower than our forecast last quarter due to higher participation rate in the sales promotions we had in place during the second and third quarters.

Operating expenses are still estimated to be between $370 million and $380 million, and continue to reflect our balanced approach to spending this year, which was to cut non-essential spending while still investing in programs and initiatives we felt would position us for growth when the economy begins to recover.

We estimate a full year loss of $0.30 to $0.35 per share, which includes after-tax charges of $0.05 per share for our gross margin initiative, and dilution of approximately $0.09 per share associated with our preferred equity issued earlier this year.

While our attention remains on delivering our forecast for this year, we are beginning to shift our attention to next year with a focus on how we can maximize opportunities as the economy begins to recover.

As George mentioned, we are cautiously optimistic about 2010.

But with the uncertainty surrounding consumer spending recovery, we will be planning our business, as well as guidance, very conservatively on the assumption of a nominal top line growth, but with some margin recovery and tight cost controls to assure we return to profitability next year.

We will provide additional details on our 2010 expectations during our earnings call in January.

I would also like to point out that due to the timing of the PGA show in January, we will not be issuing a pre-release of results, but will instead issue a normal earnings press release on the day of our earnings conference call.

Also, we will be hosting a conference call on November 12 where George and I will provide a longer term outlook for Callaway Golf.

We would now like to open the call for questions.

(Operator Instructions).

Our first question is from the line of Dan Wewer with Raymond James.

Please go ahead with your question.

Thanks.

George, in thinking about 2010, you're noting that you're seeing a favorable response to your new product lineup.

I'm also kind of curious as to what the nature of the conversations are with your customers.

I would assume that the Green Grass pro shops, they have to be in tough shape right now with a lot of club memberships below their capacity, the off-course specialty chains appear to be struggling, and it doesn't look like the mass market is restocking yet.

So just kind of curious, what kind of feedback are you getting from these guys to what their inventory plans could be for next year?

For most of the people that we talk to, they're cautious about 2010.

There's no one going into the year with a particularly strong attitude, but very much like ours, they are cautiously optimistic because I think in spotty cases they're beginning to see a little bit of a return from the point of view of consumer interest.

I do not think that any of them are going to go back to the inventory levels that they used to carry, so clearly from a cash point of view, they're going to be a lot more cautious going into next year.

But also recognizing that they've reduced the number of brands and/or SKUs they're carrying from some of the secondary and tertiary brands, even with a reduction in inventory, that should leave the major manufacturers with a sufficient open to buy, if you will, that I don't think it's going to impede significantly any consumer return.

Then a separate follow-up question about the product cycle, and historically it looks like Callaway had worked on a 18 to 24 month product cycle.

That appears to be shortening to about 12 months.

Curious if you think that's going to continue in future years?

And also, what kind of impact can that have on your indices and clearance markdowns when the life span of a club now is one year instead of two?

Well, I think in the case of woods, your statement is correct.

I think the product life cycle has certainly shortened.

We have, as I think I've mentioned on previous calls, we have a three to four year cycle that we work on in terms of product development, and we're quite comfortable that we have a rather robust pipeline of products to back up what we currently have.

So there's no issue from our point of you view of being able to supply new product to the marketplace each and every year.

The life cycle on irons tends to -- still remain in the roughly two year range, and there again, the pipeline is pretty strong.

So we're not particularly concerned.

Given our focus on technology and focus on R&D, the new product flow, if you will, is not going to be impeded going forward.

So we don't see much change as far as that's concerned.

I think that balls are generally on a two year cycle.

Woods are generally on a one year cycle.

Irons are roughly on a two year cycle, and putters vary because we generally have new models every year, but the rotation of the entire line takes probably more like three years or so.

And just real quickly, you noted that your market share is increasing.

How are you estimating the size of the market shrinking in 2009?

Because I mean, these are some fairly significant declines in your club business.

But I was curious as to how you see the overall market itself shrinking in '09?

Well, there was really -- there were really two important components to the reduction in the marketplace.

First obviously is from a consumer point of view, and the sell-through to the individual consumer is down anywhere from 15% to 20%, depending on the subcategory you're looking at.

What isn't as apparent is the fact that there was an associated inventory reduction that went on at the same time, which -- so if you're looking at the marketplace and its size from a manufacturer's point of view, you really have to take those two pieces as almost edited.

So that the manufacturer's market shrunk substantially more in '09 than the consumer market shrunk.

Now we think that there will be some -- there's a particular effect in the first half.

It's ameliorating to some degree in the second half.

I think that there will be a minor return of some inventory for the major manufacturers going into 2010, but if you can look at a good thing about an inventory reduction, once it's done, it's done.

It's not a repeating exercise.

So that that's behind us.

The real open issue for all of us at this point is exactly what's going to happen from a consumer point of view next year.

Now, all of the metrics that we look at from a consumer spending point of view, appear to be moving sideways for the last several months.

That obviously is the most important thing in terms of the ultimate success of 2010.

We are hoping that as some of the stimulus programs have more of an effect, and as we get further and further away from the bottom of the recession, which everybody seems to think is -- was in June or July, we'll begin to see a creeping up of the consumer spending metric, at which point I think we'll feel a lot more confident about what 2010 is going to be like.

Okay, great, thank you.

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

Please go ahead with your question.

Thank you.

Brad, just a little more color on the FX.

You gave the amount on a year-to-date basis of $45 million headwind to sales.

Any color on what that was to EPS or the EBIT line?

Yes, Tim, as we have said in the past, that's very difficult really to calculate.

There's just so many moving pieces.

What we have said typically in the past is that the effect on the top line on average, would probably be in the 60% to 70% kind of range, when you take a look at operating income.

That really depends on quarter because it does have an impact on sales, as well as operating expenses for foreign operations.

But I'd say just a general rule of thumb is roughly 60% to 70% flow-through on whatever the impact is on top line.

Okay.

Okay.

Gives a little bit of idea there.

And then for the full year, obviously you would anticipate, I think you alluded to some reversal on the FX effect in the fourth quarter.

Any guesstimate, given sort of the outlying sales was about $938 million for the year, any guesstimate or are we looking at an FX impact of maybe around $40 million or $38 million for the year?

No forecast on it, Tim.

It's so hard to project what currencies are going to do.

If you take a look at the current spot rate, would appear that they're a little bit favorable compared to last year.

So I don't really have a forecast in terms of the actual dollar magnitude, but if they hold why its FX rates are at a position of being more favorable than they were at this time last year for the fourth quarter, but I don't have a specific forecast for you.

Okay, and then George, you made some comments I think on the last call, looking out into 2011, 2012, and maybe even 2013, some incremental impact or savings from gross margin and other initiatives.

I think you had given some ranges of $20 million, $30 million, if I recall right from the last conference call.

Correct.

Any update there?

As I mentioned in my brief comments, those programs are proceeding at pace.

They are still projecting to deliver the numbers that we had mentioned, and we continue to feel very confident that they in fact will deliver those.

Okay.

And could you just remind us again, just to make sure I had my numbers right.

Was it in that $20 million to $30 million--?

That's correct, yes.

Over that whole time period or each year?

No, 40 to 60 from 2009 to 2012 is what we said, Tim.

Okay.

Okay.

And will part of the call -- .

There were two tranches of 20 to 30, if you'll recall.

Okay.

Will we get some additional details of how you get there?

Is that what primarily the call on the twelfth is going to focus on?

We'll touch a little bit more on it Tim, at that point in time, and give a little bit more color, yes.

Okay, and then two others, if I may, real quick.

Promotions.

A couple of other companies have talked about what it took from a basis points and gross margin or whatever to move things through, above normal or whatever.

Any type of color you can give us on that angle for this year?

For 2010, you mean?

Well, for '09.

If you looked at the amount of promotional activity that everybody had to do, and compare that, say, relative to what you would term a baseline, what's the incremental impact on margins?

I know it's a gross sales down to net sales, but obviously it had some type of margin impact.

Again, some of our other companies, consumer companies have quantified that.

Was wondering if you guys could offer some guidance there.

Tim, this is Brad, I would love to see how they quantify it.

There's so many moving parts in that, if you didn't do it, what would sales have done?

Included in there is you have people that would have been trading down just because of the economy to lower price points, and you have others that took advantage of the promotion.

I don't know how we would pull it all apart at the end of the day, but that whole sales pricing mix, if you will, was the big driver of our margins down, and it's a combination of everything I just mentioned.

Plus, and it's an internal debate that we've had here for quite some time.

Unfortunately, GAAP requires you to charge a good deal of promotional activity in against cost of goods which affects your margin.

That in the old days, before some of the rule changes, would have been advertising/promotional expense.

So again, depending on where some of these expenses are classified, they do or they don't affect your gross margins, that's what makes it so very difficult to give you an answer to that question.

Okay, well I mean, we had like Brunswick earlier today, they're in quite a bit more flux than you guys are, and they were able to quantify some of that.

Just kind of curious.

Lastly, on reserves and with bad debt and warranty, any major changes there?

You know what, no.

As we take a look, I'll tell you, I've actually been kind of pleasantly surprised at how well the AR has held up in a pretty tough environment.

We are in a lot of contact with our accounts out there, but we -- if you take a look at kind of the ratio of past due with current, it hasn't changed year-over-year.

Okay.

And actually, feel pretty good about that.

Warranty, our warranty dropped just a little bit in terms of expense, and that's based on actual occurrence of defective product and it's actually gone down.

It just says that our products are holding up better and have been designed better and we have less warranty expense.

Okay, thank you, gentlemen.

You bet.

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

Please go ahead with your question.

Hey, good afternoon, guys.

Just in terms of the fourth quarter implied sales guidance, is kind of flat year-over-year.

I know you expect some benefit out of currency, but are there any new product launches that are going to be released in the fourth quarter that might help kind of boost sales?

There's a very, a relatively nominal amount of new products in the fourth quarter that relate to holiday.

I think those numbers are going to be below what they had been in the prior year.

So no, I don't expect that that will be a significant factor as far as the fourth quarter is concerned.

So none of the major new products are going to ship until 2010?

We have, like George said, some holiday products that will be introduced that make sense to introduce around the holiday season.

There are probably just a small portion of some clubs that we are going to want to get out in order to get into our retailer's warehouses in time to be put into stores early in January.

But that's a pretty nominal amount, to be quite honest with you, so most of it is just normal holiday products.

Okay, and just a follow up on the operating expenses, can you quantify what that one-time severance charge was, or if there's any other one-timers in that number for the year.

And then I'm just curious how much leakage we might expect on operating expenses as we roll into 2010 relative to where we are in 2009.

Well, I would tell you the expenses for the full year around severance is probably going to be around $5 million, that would truly be more of kind of a one-time since we've taken those actions, and not really prepared to talk about next year.

We may cover that either in January or we might cover it a little bit more in a couple of weeks.

Okay.

And then can you just quantify what the market share gains were for the categories on the domestic and international side?

Well, international's a little tougher, but I think the proxy in the US is not too far off.

And on a year-to-date basis, our woods are up 2.4%, irons up 1.1%, balls are down 1.5% for Callaway Golf balls, our footwear is flat.

I'm sorry, putters, I meant is up about 8/10 of a point.

Bags is up 1.7%.

And gloves is up about a half a point.

Those are US market share growth.

But it's a pretty similar proxy worldwide.

It's going to vary a little bit sometimes from country to country, but I think it's generally representative.

Okay.

Thank you.

And this doesn't include sporting goods, by the way.

This is just golf channels.

Okay.

Got it.

Thanks.

Thanks.

Our next question is from the line of Tom Shaw with Stifel Nicolaus.

Please go ahead with your question.

Hey, thanks, guys.

Couple questions, and may be a little bit of a preview for November 12.

First, on the Olympic decision, does this change the way you guys approach international businesses or international investments over the next couple of years?

Yes, I think it might.

I think it may accelerate some activity in some new markets that perhaps might have taken a little longer without that vote.

There's certain markets that are clearly going to be affected more aggressively by that decision.

In India, for example, China.

So yes, I think, as we have mentioned before, international is one of the drivers of our growth, and I think this decision, while it will affect the US and I believe positively affect the US, it's more likely to have a more pronounced effect on the international environment.

Okay.

And Brad, I think back in the 3Q pre-release, it had mentioned that the GMI was over-delivering.

Just curious, because it's so masked with what's going on in the promotional environment, where is it over-delivering and if you could remind us maybe what are some of the near term opportunities.

So in 2010, what's happening to kind of get or start the ball rolling on the $40 million to $60 million through 2012.

Tom, a couple things.

First of all, there's lots -- and George has commented about this on the past.

There are so many projects that are on the docket all the time that get completed and when they roll off, new projects come on.

We probably are going to deliver I would imagine in the neighborhood of $15 million worth of savings this year.

I don't really want to kind of preview what we'll probably spend a little more time talking about in a couple of weeks, but certainly -- well, I guess I would just defer and say in a couple of weeks we'll try to give a little more color with regards to what the next three years.

If you recall, we talked about 2009 through 2012, so we're probably on target to deliver about $15 million of savings this year.

It is being masked by what's going on in terms of margins at retail and the promotional environment.

But the savings are real and they are partially offsetting some of the costs that we've had to incur in this pretty challenging year.

But we'll talk a little bit more about the next three years and some of the things that we'll focus on as best we can, and we're going to be a little bit inhibited by, for competitive reasons on what we can say, but I think we certainly have proven that we can deliver.

We delivered $57 million in the first two years, and we're on track with roughly another $15 million.

So I think we've kind of proven that we can deliver, so we'll give you a little bit more detail though at the upcoming call.

Okay.

That's fair.

And last one, just the 37% gross margin guidance, does that -- is that inclusive or exclusive of GMI charges?

That would be excluding.

Excluding?

Excluding.

But you know, the charges this year are not as big as they've been.

The reason that we keep including these GMI charges is, last year they were bigger so for comparative purposes, but I would tell you for kind of where we are in the whole GMIs right now, it's pretty nominal.

We're just trying to point out what they are in each given year, just so you guys can do a comparison, so as you're trying to look at pure operations, you can compare us on an apples to apples basis.

All right, thanks, guys.

You bet.

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

Please go ahead with your question.

The promos obviously cut into margins pretty significantly.

Just wondering if you guys have any thoughts about whether or not consumers might become reliant on promotions.

Should we be maybe thinking more about a lower sort of new normal in the gross margin rate going forward?

I think the -- our expectation is that the promotional activity next year is going to be markedly less than this year, but probably still up over what would be a norm year going back a few.

I think in other situations where there have been heavy promotional activities, you do have to wean your consumer back off it, but in the case of a category like golf where the avid is still looking for new products and good value for new technologies, I think getting them back over -- getting them back off the promotional train, if you will, is a very doable thing.

It's certainly our expectation for next year.

We are, as I indicated, planning that there will be a continuation of promotional activity above the norm, but nowhere near what we experienced this year.

Well, so, you said you expect the promo environment to be markedly less, and is that due to what you hope will be a stronger consumer or more rational competitive set or more disciplined inventory management?

What are the assumptions you're making in that?

I think it's going to be a combination of all of those.

We do think obviously the recovery in the economy is going to help in that regard.

I think the excited marketplace that we were involved in in '09 will have calmed down because people are -- while they still remain -- there's some uncertainty there, they're certainly not as crazed as, they won't be as crazed in 2010 as they certainly were this year.

So I think there will be a reduction in that pressure.

The fact is that the accounts themselves have lowered and controlled their inventories very substantially, so the impetus to be selling off merchandise at the end of the year I think will also be reduced.

So each of those things contribute to a lesser heated promotional environment.

Okay.

Fair enough.

And then, I'm not sure I got it so maybe you could touch on this again.

How much of the international improvement was FX related, and how much was organic, if you can give us a sense?

Well, on a year-to-date basis, FX was about $45 million, and on a quarter, it was a negative.

On the quarter it was about $3 million.

Negative 3, I'm sorry.

And what I'm saying, Todd, so it's 3 for the quarter negative, 45 negative for the year, and we think that it might actually be a bit positive in the fourth quarter because we'll be anniversarying an already strong dollar in last year's results.

Okay.

Thanks for the clarification.

And then lastly, just seems like the cash balance and no debt kind of mitigates some covenant risk here.

I'm just curious how you feel about first quarter covenant issues in light of the inventory build required for the spring/summer shipping period.

We feel fine about it, Todd.

I think with all the actions we've taken on managing our OpEx and with all of the accomplishments and results we're seeing on managing inventory, we feel fine with regards to the credit facility and don't see anything looming out there that is of any concern to us at this point in time.

And I think beyond that, we've been talking about the significant improvements we've really been able to bring to the supply chain.

Our supply chain is so significantly more responsive today than it was just a few short years ago.

We don't really need to build quite the same levels of inventory in order to satisfy our early season needs.

So that, in addition to everything else, is going to ease some of the pressure on our cash needs.

Great.

Well, good luck down the final stretch.

Thank you very much.

Thank you, Todd.

Our next question is from the line of Jeff Blaeser with Morgan Joseph and Company.

Please go ahead with your question.

Thanks, and good afternoon.

When looking at the top line, is there any way to quantify the impact of unit declines, consumers, product mix, consumer's pricing down or promotional activity?

That is, Jeff, really hard.

We've got a sales mix.

We know our average selling price has dropped but that's all built in because of the promotion and the tradedown.

It is really hard to pull it apart and break it down.

It honestly is.

There's just a lot of detail involved.

But it's very difficult to pull it apart and try to isolate one area or another.

But certainly, our Average Selling Prices is down, driven by the promotional environment as well as the consumer trading down to lower price point.

Okay, and then say on the consumers going on to a lower price point, are you seeing any international or geographic mix that's stronger in that category or is it pretty universal across all areas?

Well, you do actually see some variations, in Japan for example.

Our Legacy line, which is quite an expensive line, has done quite well, and for that consumer, a high content of technology in a product is very attractive and they're willing to pay up for it.

Clearly, in the United States the tendency towards lower price points and/or deals was much more pronounced.

So there are regional differences as far as that's concerned.

I think Korea and China would be some of the Asian markets that George was talking about that have been stronger this year, that have probably been less impacted by sales mix.

Great.

Thank you very much.

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

Please go ahead with your question.

Thanks.

Good afternoon.

I wonder if you guys could just provide a little more granularity on this positive feedback you're getting for the 2010 model line.

Are there specific models that you get the feeling are going to be hit products like maybe FT-iZ or the FTE Tour or the JAWS irons?

I think this is going to sound a little (inaudible), and I don't mean it to be.

But we've been quite surprised at the fairly consistent positive response to the line across the board.

Now clearly, I think the expectation next year is that the $299 price point will, from a mix point of view, be disproportionately large, and I think the buying patterns going in for the early pre-books reflect some of that.

But at the same time, the higher price point, the $399 iZ product is selling in quite well as well.

So, I think it really is a function of the attitude of the individual buyer, and just how they think their specific consumer's going to react.

I think it would be fair to say that the $299 price point will be disproportionately stronger in 2010 than would have been the case normally, but just how much stronger I think remains to be seen, depending on how the economy reacts.

But right now, I can honestly say that we are getting a very positive response across the board, high and low price points.

Okay, good to hear, and just a follow-up, George.

Given that it sounds like you're launching in most of the major categories, putters, irons, woods, balls, would we expect maybe that first half of the year to be pretty, higher than usual advertising expense line item?

Not going to talk about how our specific promotion and advertising program will break out.

I think you'll just have to enjoy it along with the consumer when that happens.

All right, fair enough.

Look forward to it.

Thanks, George.

Take care.

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

Please go ahead with your question.

Hi.

Was wondering if you could just give us a little more color on your market share gains and who you're taking market share from?

Are you seeing competitors fall out in the marketplace?

It's sort of mixed.

But I think we had indicated in some of our previous conversations that secondary and tertiary brands are getting affected quite dramatically.

That doesn't say that some of the more major brands or middling brands aren't being affected as well, but certainly the secondary tier is being hurt quite dramatically.

And there are a few players that are in the mid-tier that are feeling the pain as well.

Generally speaking, I would say that the leading brands are all prospering to one degree or another.

Okay.

And then just housekeeping question or looking at your guidance, Brad, can you give us an idea what to use for share count for fiscal 2009?

63 million, roughly.

Okay, great.

Thank you.

Our next question is from the line of William Florida with Advisory Research.

Please go ahead with your question.

Yes, I'll pass.

Thank you.

And that question has been withdrawn.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers.

Mr.

Fellows, do you have any additional comments you would like to make?

Yes, this has obviously been a very difficult year for all of us.

However, I think confidence in this category is the important issue that I think has carried us throughout.

We have seen as we have expected, signs of recovery for the category.

We've seen signs that the avid golfer has continued to play the game throughout even this most difficult year.

The pattern perhaps of their play has changed, but overall rounds are roughly flat.

Home courses have done a little bit better than destination courses, perhaps.

But the important thing is that we continue to feel very confident that the health and well-being of the golf industry is quite there, and as the economy recovers, so will this category.

We will continue to invest in the longer term for this Company.

We have I think survived by far the worst all of us are going to see, and the issue right now is to continue to sort of hold the course and do the things that are right for the business in the longer term, rather than to react to very short-term pressures.

We've done that so far to date.

I know it's been painful for some, for that to happen.

But I think in the long run, for the long-term value of the Company, it was the right thing to do, and it's something that we will continue to do.

So we look forward to seeing you at the end of the fourth quarter.

We hope many of you will join us for the investor conference call that will happen in November.

Where hopefully we'll be able to give you some additional insight as to some of our plans, both short and long-term.

And we continue to believe that both Callaway Golf as well as the industry in general are going to be just fine.

Ladies and gentlemen, this does conclude the Q3 2009 Callaway Golf earnings conference call.

We thank you for your participation.

You may now disconnect.