Topgolf Callaway Brands Corp (MODG) 2009 Q4 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 Q4 2009 Callaway Golf earnings conference call.

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

(Operator Instructions).

I will now turn the call over to Mr.

Brad Holiday, Chief Financial Officer.

Mr.

Holiday, you may begin.

Thank you, and good afternoon everyone.

Welcome to Callaway Golf Company's fourth 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 relating to future growth, estimated sales, gross margins, operating expenses, earnings per share, estimated charges and benefits related to the Company's gross margin initiatives, the company's estimated 2010 tax rate, foreign currency rates, 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 are 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 the most recent 10Q for the quarter ended June 30th, 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 for 2009 and 2008, excluding charges associated with the Company's gross margin initiatives, and for 2008 a gain associated with the Company's prior reversal of an energy derivative valuation account.

We will also provide information as to the Company's operating results on a currency neutral basis.

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

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

The information provided on the call today in 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.

The worldwide economy in general, and the golf industry specifically, have weathered the most severe downturn since the great depression, and certainly in most of our collective professional careers.

That fact has been certainly proclaimed quite prominently ad nauseum by most economic pundits.

What is more important to note now, however, is that we have come through this most trying period in a very solid condition and importantly are cautiously optimistic about prospects for a significantly improved 2010.

While we would be naive to think that all bad influences are fully behind us, it would be far too negative not to recognize the many improving signs pointing toward recovery in significant part, if not in total, during the 2010 season.

Brian will go into more detail, but just to highlight some of the indicators that give us some optimism.

Leading economic indicators have been pointing up for nine consecutive months, supporting the point of view that the recession has indeed ended, and we are in a recovery mode, although not necessary a rapid one.

Asia and South Pacific are clearly on the upswing, and have been for more than one quarter.

These regions appear to be leading the US and Europe in their economic recovery, and represent a very important and profitable part of our business.

FX headwinds have reversed, and are likely to restore a meaningful portion of what was taken in 2009.

The trade outlook, while cautious, is generally quite positive, with pre-books of the new products in line with our expectations.

Overall, retail inventories are in very healthy shape, and may represent an opportunity as the season progresses.

While we do not believe inventories will return to pre-recession levels, some build back of major brands could occur in 2010.

We have received a strong positive response to our new offerings, not only from the trade but from the golf media as well, receiving 15 medals, ten of which were gold, in Golf Digest's annual product preview, more than any other manufacturer.

Our strength and competitive position going into the New Year reflects weakened secondary brands, and our share growth in most equipment categories in 2009 versus 2008, and this represents a stronger platform from which to grow as the season opens.

This is true for both the US and most international markets as well, and early Sun Belt [sales] data appears positive despite weather issues encountered early on.

We believe the appropriate point of view to draw when balancing the continued uncertainties we face, versus the positive market signs that are clearly surfacing, is to plan a conservative recovery budget with flexibility to ramp up or down as the market and season reveals itself.

Aggressive marketing efforts will be balanced by prudent continuing operating expense controls that proved to be quite important in 2009.

Additionally, we will continue to spend behind longer-term growth opportunities, like India and China, margin improvement initiatives, and new business such as uPro, which reflect our confidence that the golf industry will be restored to at least its traditional growth levels and perhaps beyond, as the economy recovers and is further spurred on by the fertile international market opportunities and the long-term beneficial affects of the Olympics.

As we have in the past, Brad will provide our outlook for 2010 in some more detail, but suffice to say our 2010 profitability and long-term outlook are in line with projections provided to you last November.

Let me now turn the call over to Brad to give you some greater detail.

Brad?

Thanks, George.

Consolidated net sales for 2009 were $951 million, with a pro forma net loss of $17 million, or a fully diluted pro forma loss per share of $0.27.

These results are in line with the guidance provided at our last earnings call, and compared to 2008 net sales of $1.117 billion and pro forma earnings of $60 million, or fully diluted pro forma earnings per share of $0.94 cents.

Excluded from the 2009 pro forma results are charges associated with our gross margin initiative of $0.06 per share.

Excluded from the 2008 pro forma results were a charge of $0.12 per share for gross margin initiatives and a benefit of $0.22 per share related to the reversal of a $19.9 million energy derivative account that was established in 2001 associated with the termination of long-term energy supply contract.

Consolidated net sales for the fourth quarter of 2009 were $186 million, a 9% increase compared to $171 million last year.

The Company reported a pro forma net loss of $17 million or $0.27 per share, compared to pro forma loss in 2008 of $15 million or $0.24 per share.

Excluded from the 2009 results were charges associated with our gross margin initiatives of $0.02 per share.

Excluded from the 2008 results were a charge of $0.03 per share for the gross margin initiatives, and a benefit of $0.22 per share related to the energy supply contract I just mentioned.

As we have mentioned throughout the year, there were a few key factors that negatively impacted our business in 2009.

These key factors include a downturn in the global economy, which began h the second half of 2008; a stronger US dollar, which negatively impacted the currency translation of our international businesses; and a contraction of retail inventories throughout the year.

The weak economy had a significant impact on consumer demand for golf products, which resulted in increased levels of discounting at retail.

A strengthening US dollar, beginning in the latter part of 2008, negatively impacted the translation of our international results, impacting full year 2009 consolidated sales by $36 million or 3% on a currency neutral basis.

Lastly, retailers reacted to the tough environment this past year by reducing the amount of inventory they purchased compared to more normal years.

The good news is that inventory levels at retail entering 2010 are at relatively low levels, which should be at worse neutral, but possibly a positive factor for the upcoming year.

Also, we were able to grow share in most major product categories during the year, despite the tough environment.

The actions we took in addressing the conditions in 2009 were balanced between cutting expenses to offset the downturn in the economy, while continuing to invest in some initiatives we felt were important to position the company for future growth.

We feel this approach was the correct one, and it positioned our Company as well as can be expected to generate growth as the economy recovers.

In looking at regional breakout, US sales declined 14% to $475 million for the year, compared to a $554 million last year.

For the quarter US sales were $76 million, compared to $89 million last year.

International results were negatively impacted by both the translation effect of the strengthening US dollar, and weak global economy throughout the year.

International sales for the full year were $475 million, a decline of 16%, compared to last year's sales of $563 million.

On a currency neutral basis, international sales would have decreased by 9%.

While the economy affected a majority of our regions we did see solid growth in China and Korea during the year.

Full year gross margin declined to 36% of sales compared to 44% in 2008, due to the significant discounting throughout the year as well as lower volumes.

We were able to partially offset this decline through our continued focus on gross margin initiatives, which generated $14 million of savings in 2009 and $70 million over the past three years.

Operating expenses for year declined 7% to $374 million, compared to $403 million in 2008.

This decline was driven by tight management of discretionary spending, suspension of several employee benefits, the positive effect of currency translation on foreign operating expenses, and savings associated with the reduction in head count.

Partially offsetting these reductions were investments in growth initiatives, including the UK acquisition, investing in emerging markets like China, Thailand and Malaysia, and the creation of the soft good sales force with a focus on our apparel category.

Looking at the balance sheet, we ended the year with $78 million in cash and no outstanding balance on our credit facility.

Consolidated net receivables were $140 million at the end of the year compared to $120 million last year, due in part to an increase in fourth quarter sales.

Consolidated DSO was 69 days compared to 65 days last year.

This increase was due to the carry forward of increased credit terms implemented during the year.

The overall quality of our accounts receivable is good.

As a matter of fact, our past due receivables as a percent of total AR actually decreased compared to 2008.

Net inventories were $219 million at the end of the year compared to $257 million in 2008.

This is the lowest year-end level in the past five years, even including incremental inventory associated with apparel and uPlay products.

As a percent of trailing 12-month sales, inventory was 23%, flat as compared to the same time last year.

Capital expenditures for the year were $39 million compared to $51 million in 2008, and slightly favorable to our previous estimate.

Depreciation and amortization expense was $41 million for the year compared to $38 million last year, in line with our last estimate.

As we look at this upcoming year, we are consciously optimistic that the economy and overall market conditions will improve.

The question is how much and how quickly.

It's early, and while the estimates will most likely change over the course of the year, we feel that it's important to give your our range of financial expectations for 2010.

Net sales are estimated to range from $990 million to $1.05 billion, or growth over 2009 results of 4% to 10%.

We took several factors into consideration in developing this estimate, which include number one, overall currency -- foreign currency rates are estimated to improve for the Company in 2010 compared to 2009.

Spot rates are favorable compared to last year, ranging from low single-digit to mid-teen percentages, depending on the currency.

An overall average for our international business of this favorability ranges from approximately 4% to 5%, or about half of this rate when you look at it on a consolidated company basis.

Number two, the IMF, or the International Monetary Fund, reported last week that China, India, and other emerging Asian economies are leading the global recovery, and returning to their pre-crisis growth levels, and was going to raise their 2010 global growth forecast from their current estimate of 3.1%.

Number three, key leading US economic indicators, as George mentioned, were up again in December, for the 9th consecutive month.

Number four, the overall improvement in the economy and low golf retail inventories will positively impact the marketplace in 2010, resulting in what we believe will be significantly less discounting of product at retail.

Number five, a favorable reception to our 2010 products by trade publications in their annual equipment reviews, as well as our customers and consumers.

Number six, included in our estimates are incremental sales due to new apparel arrangements with Perry Ellis, where we will capture traditional golf channel revenues, as well as incremental sales in our uPlay product category in emerging markets such as India and southeast Asia.

From a timing perspective, we historically generate between 60% and 65% of our annual revenues in the first half of the year, and would expect this year to be consistent with that average.

Gross margins are estimated to improve to 42% to 44%.

The key drivers here include an expectation of less discounting at retail, the favorable impact of an anticipated weaker dollar, improved manufacturing leverage from higher volumes, and continued savings from our gross margin initiatives.

Operating expense is estimated at between $375 million to $405 million.

As I mentioned a few minutes ago, 2009 OpEx was reduced significantly during the year, due to several actions we took to offset the impact of the down economy.

The annual estimate for 2010 represents continued savings from last year's actions, offset by incremental expense associated with new market expansion, the full year impact of the soft goods sales team, the reinstatement of employee benefits that were suspended last year, and the negative translation impact of a weaker US dollar.

Excluding the impact of FX and reinstatement of benefits, operating OpEx is expected be lower year-over-year.

Tax rates for 2010 are estimated at 38%, and given these estimates our earnings per share are estimated to range from $0.25 to $0.35 for the year.

This estimate excludes approximately $0.10 for continued gross margin initiatives, but includes the impact of the preferred equity issued last June.

For 2010, CapEx is estimated to be $30 million to $35 million, and depreciation and amortization expense is estimated at $40 million to $45 million.

We would now like to open the call for questions.

(Operator Instructions).

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

Please go ahead with your question.

Hey, thanks.

First question, looking at some of the recent press concerning sharp declines in sponsorships and [gear shifts], et cetera, I guess for George, does this change really the way you approach certain elements of the business in 2010, I guess in particular maybe endorsements or other kinds of marketing?

Well we continually shift our marketing spending to reflect what the current marketplace conditions are.

But the issue of tournament sponsorships is really a function of the economy, and you have to recognize that a very significant portion of the tour was sponsored by financial services companies, as well as automobile companies; now that clearly has been impacted very severely over the course of this last year, but we are seeing it start to come back a little bit, and I suspect while it may be a couple of rough spots for the balance of 2010, I think the sponsorships are ultimately going to come back.

Our real issue is less sponsorships of the events themselves than it is consumer interest and willingness to play the game of golf, and just to remind you that the overall rounds played in 2009 despite the severity of the economics were relatively flat.

So the fundamental interest in playing the game, playing the game, has really not changed dramatically, and we think that together with the signs that the economy is recovering should bring more consumers back into the marketplace.

We clearly indicated that we don't anticipate 2010 to restore itself to pre-recession levels, but we think we are going to make up a significant amount of ground, and we have budgeted accordingly, and just prudently obviously put the appropriate flexibilities into our overall plan to be able to adjust it, both upward and downward, depending on how the market opens up and progresses through the year.

So yes, we are always making adjustments, and I think if 2009 taught us anything it's to be a bit more agile and be more anticipatory to the market, rather than staying with the plan as currently written.

So we think we are in a pretty good place actually, and based on the early signs I think we've planned appropriately.

Okay.

I know it's very early with a lot of product coming out post-PGA merchandise show, but are you seeing any signs from some of new product, you know, we have seen a $250 driver that's being introduced, a few buy this, get a $50 gift card; has anything surprised you that you've seen so far from a competitive or from a promotional standpoint?

No, not really.

Again, it's rather early.

I think we clearly anticipated that the hangover, if you will, from the economy would probably heighten the proportion of the business that would go towards the lower price products, but you know fundamentally, with perhaps one exception, this is a rational marketplace.

I anticipate that the overall promotional dealing will be less than it was in 2009, but probably somewhat more than a traditional year.

You know, we certainly accommodated that in our financial planning.

So at this point in time I haven't really seen anything that's dramatically off that planning assumption.

That's fair.

Last one is sort of housekeeping, but what share count are you assuming for 2010?

64 million, Tom.

All right.

Thanks, guys.

Best of luck this year.

Thank you.

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

Please go ahead with your question.

Thanks.

George, first on the weakness in the US market, can you give -- do you have a sense of how much of that reflects just a large number of the smaller independent retailers have closed their doors, and how much reflects softness that your larger accounts that have been aggressively paring back on inventory?

I think all of it is really a reflection of the consumer more than anything else.

There were really a measurable number of independent retailers that closed their doors in 2009, I seen estimates approximating 250 perhaps, but there is no shortage of retail outlets for the golf industry, and that business will ultimately go to the remaining players.

So I don't think from a consumer point of view there is going to be any lack of availability of product.

So the weakness both from the number of doors that closed to the overall declining consumer purchases are really a reflection of whether or not the consumer is willing to put their hands in their pockets and go out and buy products, and that was clearly impacted in 2009, but based on all the things that I sort of mentioned prologue here, we think is going to be less of a factor in 2010.

Less of, -- not not a factor, but less of a factor in 2010.

We see it recovering.

So you are expecting your domestic revenues to increase in 2010 as part of the overall forecast of a 4% to 9% increase?

That's correct.

The second question I had is on the profitability of the golf ball business both in the fourth quarter and the year.

I recognize that your product lineup was more mature than your competitors, but is there anything else that is impacting the profitability of that segment?

Actually, a lot of the steps we are taking from the margin improvement initiative will enhance the profitability under normal circumstances.

I think clearly the latter part of 2009, or for that matter most of 2009, was impacted by a lot of commercial dealing involved, and that certainly impacted the profitability in the short-term.

But on an ongoing basis with less promotional pressure, we clearly expect ball profitability to be restored to more typical levels for us.

And again, on a gross margin -- on a gross margin basis, based on efficiencies that we are bringing to the party in terms of our process, in terms of having a higher proportion of it produced offshore, our overall gross margins on ball should go up, actually.

The last question I have right now, George, is both the company and the industry did a terrific job of educating customers last year to wait for a deal.

You know, I understand why you're thinking that the margin rates will be better than they were in 2009 but perhaps not as strong as they were in the past, but I think in real life, consumers are still looking for a deal right now, and I'm just confused as to how the industry thinks they can sell more units without offering the same promotions as they did in 2009?

There is an awful lot of talk about the new reality, but I have to tell you we gone through these periods before.

There have been periods of stronger promotional activity, and when the trade and the manufacturers fundamentally want to get back to normal, we work our way back, just simply by not promoting nearly as heavily as we did in 2009, and the consumer responds to it.

The other part which you really can't ignore is the fact that there is a buildup of purchasing desire and power, if you will, that was deferred in 2009 because of the uncertainty relating to jobs and income, et cetera.

The golfer, like most consumers, can be held back only a certain period of time; once the economy stabilizes, which it appears to be doing, normal purchasing patterns typically are restored.

I see nothing -- other than the severity of what happened in 2009, I see nothing different in this recessionary period from other periods that have occurred in the past.

And, in fact, people came from back heavy promotional dealing to more normalized trading, and I don't know why people seem to think that this is going to be a permanent reduction, because I see no signs that would indicate that it is going to be --

Well, I guess it's because if unemployment stays north of 10% --

Well, unemployment is 10%, but the people who are employed are buying, and their income is not impacted.

Certainly the 10% are not buying, or are going to restrict their buying, but again as I say, as the economy recovers, which clearly means that unemployment has to go back down again, those people are slowly going to come back into the purchasing pool, but with -- and I don't mean to make light of 10% unemployment, because it's obviously horrible, but 90% of the people are continuing to be employed and are continuing to receive their income as before, and as they become more secure that the overall layoffs, et cetera, are not going to continue, they are going to go on with their lives and do what they have done in the past.

Witness a case in point, rounds played last year did not suffer anywhere nearly the level that new purchases did, and that reflects the fact that people are still out there living their lives.

Thanks and good luck.

Thank you.

Our next question is from the line of Rick Nelson with Stephens Inc.

Please go ahead with your question.

Thanks, and good afternoon.

Interested to know what product categories you think will be the big sales drivers in 2010?

I wish I had that kind of a crystal ball, but -- you know, we have an extraordinarily strong line across the board.

This is going to sound like a message from your sponsor, and I guess it is, but we have very strong entries in the new driver and the entire woods areas, we have some very strong iron introductions this year, we have a very, very strong putter line, and we are introducing two new brand new golf balls at the upper end of our [IS] line.

So pretty much across the board, we've brought out a very solid new product offering.

We have not cut back in any way our R&D activities, because we always -- we certainly felt that throughout 2009 and obviously continue to do so now, that this is a temporary hiccup, if you will, in the business, and that the golf industry is clearly going to recover.

So we are approaching the marketplace in exactly that fashion.

So I actually expect a pretty strong performance across the board.

So some pretty big growth year-over-year in putters and accessories in the fourth quarter, you just reported.

What goes behind that, and do you think the consumer is going to continue to trade down as we look at the new year?

Again the fourth quarter, and it's something that we've really started paying attention to in the last several years, the fourth quarter is a fairly big gift-giving period.

There has been, if you take a look at the consumption patterns, the November/December period really reverses the slow decline that occurs, say, starting in August.

So getting a bump in that latter part of the year is not surprising, but we also had some new products that went in at that point in time.

We introduced Jaws wedges, which are -- based on the new groove ruling that is currently being proposed by the USGA, are usable until 2024 by the vast majority of golfers.

We have an entirely new line of putters, White Ice putters, which are really quite extraordinary, that were introduced at the latter part of the year, and then a new uPro product, the uPro Go, that was also introduced for gift giving.

All three of those products, by the way, were introduced largely to take advantage of the end of the year gift-giving period.

I'm sorry, we also had a line of women's products called Solaire that was quite well received by the trade as well.

All of those we felt were very strong gift opportunities, and indeed it would appear that that is exactly what happened in the marketplace.

Now as far as whether people are going to continue to trade down, as I kind of mentioned, I think clearly the $299 price point for drivers will be disproportionately successful in the marketplace going into 2010, even more so than in -- perhaps in past years, again because there is still some uncertainty as far as unemployment and income, et cetera, are concerned.

But we budgeted accordingly.

We would expect that the $399 price point will be somewhat reduced again, certainly based on the results that we achieved in 2007.

So yes, we are expecting a continuation of some emphasis against some of the lower priced products, but that's pretty much in line with I guess what our philosophy is.

We expect 2010 to be better, but we don't expect 2010 to be restored to the levels that we saw in 2007.

Hey Rick, this is Brad.

You know, one thing I would point out is that just kind of year-over-year we introduced about the same amount of new products, George went through and mentioned some of the specifics.

The increase really for the quarter, a big chunk of that was made up just by FX rates compared to the prior year.

So it was up just slightly compared to last year on a currency neutral basis, and we had about the same amount of new products year-over-year.

Got you.

Thank you for that color.

George, I've got to ask you the Tiger Woods question; I would suppose that puts you at a competitive advantage versus Nike, and how does that change the way you approach the business from an advertising standpoint, perhaps sponsorships, et cetera?

You know, I think the sensationalism surrounding that has very little to do with the business, from our perspective.

The industry is very thankful to the Tiger effect, if you will, that occurred for so long.

He is going through a rather important personal crisis, but the reality is, and the focus should be on the fact that the game is much, much bigger than one individual.

The game is going to continue to prosper, there are some extraordinary young players coming up, as well as some extraordinary seasoned players, such as Phil and so many others.

I think far too much is being placed against that.

I expect the golf industry to continue to do well, and we all hope that Tiger is able to resolve the issues that are plaguing him right now.

But as far as our business approach is concerned, there is no effect of that.

Have you seen any market share shifts?

I'm sorry?

Have you seen any market share shifts away from Nike and towards Callaway?

No.

Again, please -- I'm not talk ducking your question.

I think far, far too much is being made of this.

No, the business continues on its current trends, pre and post that unfortunate event, and I don't see it changing.

Okay, thank you.

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

Please go ahead with your question.

Thanks very much, and good evening.

Hey, Todd.

My question is just a follow-up on the sales outlook.

With a range of 4% to 10% on the revenue guidance, I'm just wondering if you could just give us a little color on what that range assumes in terms of what you think in terms of economic environment, maybe you could talk a little about how the order book has changed since your third quarter commentary that was above expectations, and also talk a little about whether we should assume any inventory build, and also what you are assuming on Forex?

Let me let Brad give you the breakout, if you will, because I think you will find that when he gives you the breakout, it's quite reasonable.

No, we are not anticipating any inventory build, we don't think that that's a factor.

I mean to the extent it happens, that's obviously to the good.

But we built this budget from the ground up, really, with very specific assumptions in mind that I think Brad can give you some color on.

Todd, I would just tell you, if you kind of zero in on maybe the midpoint of the range we gave you, which is about 7% growth, about 2% to 2.5% of that we think will be foreign exchange translation.

If you also include the incremental product that we are going to get in terms of apparel, emerging markets, as well as some of the uPlay products, that what is really left for our core business I think we've tried to prudently forecast, and build our plan around what I would call a fairly prudent, what I call core growth.

So it's certainly something significantly less than 7%, but to George's point, we are trying to build a plan that allows us to flex up and down.

So if it comes in stronger than that, then we will be able to maybe do a little more things -- a few more things on the marketing front.

But by the same token, if the core business comes in less than that, and I will tell you it's going to be in the low single digits in terms of our core growth, so I don't think we gotten way out in from when you take foreign exchange and just incremental new products year-over-year, as well as the emerging markets.

I don't think we've gotten too far out of line.

We've tried to be fairly conservative in our estimates.

Okay, and then -- I'm sorry, did you touch on the order book?

The order book, our pre-books have come in pretty much in line with expectations.

We had planned for pre-books to come in slightly behind last year, and indeed that -- because of the natural conservatism that we think the trade is feeling at this point.

The compensation for that is that the orders that are coming in now for immediate delivery, which are a reflection of sell-through, are coming in more heavily than they did last year, so that on balance we think it's actually a very healthy mix relative to past years, and that's another reason that I think we are feeling, as I said, cautiously optimistic.

Okay.

That's helpful, thank you.

I just want to move to gross margins, and maybe ask it in a -- to look at it in a similar way.

The 42% to 44%, if you could look at sort of the bucket, how much of that improvement from the gross margin initiatives, the $15 to $20 million in savings, is that still there, less promotional cadence, which you talked a lot about, and then Forex, if there's sort of a way to order of magnitude on those three major -- or those three items?

Well, without getting real specific, because we don't give that level of detail, but certainly FX is going to have a fairly significant impact on gross margins, kind of year-over-year.

Certainly we have some additional GMI savings built in there, as I mentioned we delivered $14 million, we have another I believe $25 million -- up to $35 million over the three-year period, so we've delivered $70 million to date, and we're certainly on target to deliver kind of the next round of $40 million to $60 million, of which we've delivered $14 million this year.

So it's really going be a combination of that.

But the most significant impact is really the discounting, and the fact that when you discount it is directed to your margins, and so we are anticipating, as George mentioned, a more -- not all the way back to normal, but a more rational marketplace out there with less discounting, and that by and far was the biggest impact in 2009 on our gross margins.

So we expect that having a more rational marketplace will drive a big portion of that gross margin improvement.

Okay, great.

Then just on all the Forex assumptions, are they based on current rates?

Yes, current rates.

Perfect.

All right, well thank you guys, all the best.

Thank you.

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

Please go ahead with your question.

Hi.

A couple of questions.

I'm not sure you gave this in the call, but could you talk about market share gains by category?

Yes.

We don't have all them for December -- at least I don't, George, you might have them, but most of them were through November.

I think through -- I've got the December woods share, and we pick up 1.8 share points year-to-year in woods.

I think I've got -- bear with me a second while I look up the specifics.

I think our -- there we go, I've got it now.

Our iron share year to year was up 0., almost a point.

Our putter share was up 1.1 share points.

As I indicated, the woods share was up 1.8 to 2 share points.

The only area, as we've indicated in the past, that we had some difficulties were -- was in ball, and again we had a product line that was in the second year with the new introductions that we have in 2010, we were expecting that to reverse itself.

So all things considered, all of the fundamental equipment parts of the business we come into 2010 in a stronger position than we did coming into 2009.

And then how much was the ball category?

How much was that down?

The ball category.

I think it was down probably on average about 1.5 points.

Yes, 1.4 share points in ball.

Okay.

That's helpful.

And soft goods was up 2.

Then can you talk about India and your -- the long-term opportunity there, and when we expect to see products at the market?

Sure.

The Indian introduction, as you know, just occurred a couple of weeks ago.

We will be shipping product in India starting February 15th, with product appearing on shelf approximately the middle of March.

But just to give you some perspective, and this is a superficial look from 30,000 feet but it should give you some idea, the penetration of the golf business in the United States is approximately 10%, and it is approximately 9% in Japan.

If we were to achieve, and again this is not an immediate thing certainly, this would be over time, if we were to achieve a penetration of the Indian market at one quarter of that level, or approximately 2% for argument's sake, and each golfer were to spend $50 a year, and the spending in the United States is approximately $123 a year, so spending at less than half the rate, the potential for India would be approximately $1.2 billion in retail sales.

So it's just enormous market.

The thing that is very hard to grasp is the enormity of the population base that exists in China and India, and the extent to which you only need relatively small penetrations in order to really arrive at a fairly large market.

That's what makes it so important.

We think that the -- golf is relatively native to India.

The second oldest golf course in the world is located in Calcutta, and it was created in 1829.

So the British influence on India, I think, has a big part to play in the fact that it is a natural and comfortable sport in the country.

There are approximately 500,000 golfers currently in India, which relative to the size of the country may seem rather small, but in the absolute it's quite a number.

And there approximately 250 golf courses courses in India, with at least 50 currently being built or in the planning stages, so we see that rapidly expanding as well, and that together with the influence that we believe the Olympics will have on the emerging markets like India and China, we see these markets really expanding at a really substantial rate between now and 2016.

And in fact, if you were to take a look, albeit off a small base, the growth that we are seeing in China, it would tell you that both of these markets represent a very, very important potential down the road.

Great.

That's very helpful.

Lastly, talk about just marketing behind some of the new products.

Do you have a bigger push this year than what we have seen in the past or is it about the same?

Well, it's going to be a different push.

We are in the consumer products industry.

We may be selling golf clubs, but fundamentally we're in consumer products.

Clearly news, it's very important, and marketing and advertising is very important in order to make the marketplace aware of what you are bringing to the party.

The fact that we have a very, very strong new product offering with all of the medals that have been bestowed upon the line by the media that reviewed these products, all of these things would tell us that we have a very, very strong opportunity going into 2010.

So we will be very aggressive with our marketing behind these products, and the mix will be different than it was in 2009.

It will be different because the marketplace is different; it is a recovering marketplace rather than a contracting one, and also there are some fairly marked shifts in where moneys are being spent between traditional media and digital media, so our efforts will reflect all of those shifts as well.

We think we have a plan, if anything, that will be quite a bit stronger than what we did in 2009.

Okay, thank you.

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

Please go ahead with your question.

Good evening, thank you for taking my question.

A couple of questions on the promotional activities that you saw this year and expect going into 2010.

Any differences domestic versus international?

You also mentioned the emerging market opportunities, obviously it's a few years away, but where would you see the margins of those products?

Can you guesstimate, like would it be similar to the US, similar to an Asian market, or somewhere in between?

The margins internationally tend to be higher than the US, and the promotional activity internationally tends to be lower than the US, which is in part feeding, obviously, the gross margin differences.

The fact that more than half of our revenues come from outside the United States is all to the good in situations like that, you know the FX uncertainties are something you have to deal with, but in general the international marketplace is a very profitable one for our Company, and the fact that it's expanding as well as it is, and the fact that it appears to be, or at least portions of the international markets appear to be leading the economic recovery, are all to the good, as we see it for 2010.

Okay.

Quickly on mix, you mentioned that you expect the promotional activities to subside, I think by the end of 2011.

Do you think the mix will shift back to the 2007/2008 levels eventually as well, or are we probably going to be in a lower price point consumer level for the foreseeable future?

No, I really don't think we will stay at this level.

It's think it's going to drift up again.

But again, you've got to recognize, people pay for value.

If you can provide products that from a technological point of view, or otherwise, provide value, they will pay up for it.

It's been proven time and time again.

So I have no reason to believe that it will be any different this time around.

So once we get by -- you know, the memory fades about the severity of what happened in 2009, I think people will go back to paying for value, and I do see the price points drifting back up again.

Finally, you mentioned some retail door closings, with some of that market share shifting to other retailers.

Has that shift been to the mass markets, or are they other primarily golf and golf-focused retailers?

It's a little of both.

The mass market picks up something, but again the product lines tend to be somewhat different depending on the portions and the trades you are looking at.

Golf specialty, obviously, is the destination shop for serious golfers.

It may not be quite so pronounced as far as sporting goods is concerned.

But clearly, there is no shortage of availability from a retail point of view, and so while we don't like to see retail shrink, we don't think we are anywhere near the point where availability will be impacted in any serious way.

Thank you very much.

Thank you.

Our next question is from the line of Derek Leckow with Barrington Research.

Please go ahead with your question.

Thank you, good evening.

Just a follow-up question on the guidance commentary you gave of the elements there, and I think number four was that you felt that low inventory levels across the US market gave you some comfort that we won't see further degradation of inventories, but you are not anticipating any recovery in inventories in 2010; is that correct?

Yes.

Then, as we just heard on the question regarding the channel shrink and the closure of about -- I'm reading reports that show 12% retail door closure.

So what happens to the inventory that contracted there?

Are you saying that it's being made up by other retailers?

Yes, but remember a door closure is not a door closure; most of the doors that closed tended to be on the smaller side.

So I think when you deal with 250 doors -- and by the way, as far as the -- all commodity volume, if you are familiar with that term, those 250 doors represented is insignificant.

Okay.

So it's not something that -- like I said, it's not something we are happy about, but it's certainly not going to be sufficient to impact the business in any way.

So really the inventories of your products in the US retail environment looked to be fairly, I guess, flattish with what you are looking for for this year, to get to your guidance?

We are planning on it -- we just think it's a prudent way to go.

Listen, credit availability hasn't markedly improved, so working capital will still have to be top of mind for most of our retailers.

I think they've learned, as we have, lessons on how to better inventory our positions against demand.

I think they've learned that they can probably get by with somewhat lesser inventory than before.

Remember that a lot of the -- some of the inventory contraction that took place really was, in part, their cutting back on some of the secondary and tertiary suppliers

Okay.

But again I think, just to reiterate the earlier point, we are in the consumer products business, and our focus has to be on sell-through, not sell-in, and we want inventories to be kept at a reasonable level, because when they are not they get in the way of sell-through.

So we are very much partnering with our major retailers or our retail partners to ensure that inventories remain balanced properly and don't get out of line, because that really hurts both them as well as us.

Yes, because the season is compressed, you have that risk of seeing the sell-through too late, and not being able to react to it.

Exactly.

What categories do you think have the most risk of that, or where do you feel very good about your ability to flexibly get into that reordering, and meet any changes in demand?

What categories do you think -- are you better positioned at, and which ones are you weaker in?

Well, we have made extraordinary -- I mean, it's just going to be tooting the horn of our operations and supply chain people, but those gross margin initiatives that had delivered so royally to us in terms of savings had another buy product which I think was very, very important, and that was responsiveness and flexibility.

We are infinitely more responsive to the marketplace and to changes today than we were just a few short years ago.

I think as we said in some prior calls, where we had lead times that were in the neighborhood of 145 to 175 days, in order to order additional quantities in many instances those lead times have shrunk down to 45 days.

So that gives you that many more forecasting cycles to go through before you have to pull the trigger, and it also gives you a much more responsive delivery system once you do pull the trigger.

So virtually across the board we have been able to become a much more agile manufacturer and supplier, and I think that will allow us, and has allowed us, to manage inventories a lot more carefully than we have in the past.

The numbers that Brad quoted, where we completed the year at $219 million, which is the lowest inventory level that we've had in five years, is partially a reflection of the fact that we have that much better a supply chain than we did in the past.

That's great news.

Just one follow-up on the margin question.

You talked a lot about gross margin, but looking at your operating margin back in -- you know, at a run rate of $1.1 billion, you were doing around an 8.5% or 8.8% operating margin.

Do some of the changes you put in place allow you to get back to that sort of level at a lower run rate, and also what sort of growth rate would you have to have in order to turn and 8%, 8.5%-plus operating margin?

Well, if you take a look at the three-year goals that we have, you will see that we are -- we still feel that we are capable of getting up to the levels that we had indicated before, albeit delayed obviously because of the impact of the last 18 months.

But nothing fundamental has changed in our ability to do that, and if the marketplace goes back to being a more rational market, which we certainly anticipate, all of the initiatives, the cost-saving initiatives and supply chain initiatives that we brought the party will, and continue even now, to deliver savings that they promised in the past.

So yes, aside from the time delay that we are talking about, we feel pretty good that our three-year goals are as we stated them last November.

So I should refer back to those and kind of use those as my guide then, not thinking that we will get back to that sort of rate on a quicker basis?

If you have a little bit stronger growth, it sounds like, from markets like China and India, which seem to be very exciting, and certainly in 2011, you will have a decent-sized business there?

Well, these things can change the tenor of the overall, but again it's a matter of how prudent you want to be, and how much you want to expect lightning to strike.

Clearly, if those markets explode at a rate that is not foreseeable at this moment, yes they will have an affect obviously, but to plan on that from our point of view I think would be a little careless.

So we are maintaining our point of view that the three-year plan that we put forward makes sense and is achievable, and we are working against that.

Okay, very good.

Thanks a lot, George.

All right.

Take care, now.

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

I will now turn the call back over to Mr.

George Fellows for any closing remarks.

Thank you.

Listen, we are still facing uncertainties, obviously, and I think it would be foolish not to at least recognize them.

We believe we have planned appropriately, both from the magnitude of what we think we can achieve but also from the flexibility we built into our overall operation and our budgeting.

And as I have said in the past, at this early stage of the season, I can't say anything other than we are cautiously optimistic that by our next call, which will be in three months' time, we will clearly have a lot more information about how the economy has recovered.

But the one thing I can absolutely assure you of is that we are operating in as tight and as controlled a fashion as we were under more difficult circumstances, and we will maximize the return that we can for shareholders regardless of what the marketplace brings.

Thank you all again for your time and attention, and we look forward to talking to you again in three months.

Ladies and gentlemen, thank you for your participation.

This concludes today's conference call.

You may now disconnect.