Topgolf Callaway Brands Corp (MODG) 2010 Q1 法說會逐字稿

Good afternoon.

I will be your conference operator today.

At this time, I'd like to welcome everyone to the Callaway Golf first quarter 2010 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'll now turn the call over to Mr.

Brad Holiday, Chief Financial Officer.

Mr.

Holiday, you may begin your conference.

Thank you.

Welcome, everyone, to the Callaway Golf Company's first quarter 2010 earnings conference call.

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

During today's conference call, George will provide a few opening remarks and I will provide 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 an economic or golf industry recovery and estimated 2010 sales, gross margins, operating expenses, earnings and charges for the Company's global operations strategy, as well as estimated 2010 tax rates, capital expenditures, and depreciation and amortization expenses are forward-looking statements subject to Safe Harbor protections under the federal securities law.

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

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, including unfavorable economic conditions and foreign currency exchange rates, the level of promotional activity in the marketplace, the level of consumer discretionary purchasing activity and consumer acceptance and demand for the Company's products.

For details concerning these and other risks and uncertainties, you should consult our earnings release issued today, as well as Part 1, Item 1A of our most recent Form 10-K filed with the SEC together with the Company's other reports subsequently filed with the SEC from time to time.

In addition, during the call, in order to provide investors with additional information about the underlying performance of the Company, we will provide certain pro forma financial information related to the Company's performance in 2010 and 2009 including certain financial results calculated on a currency neutral basis and earnings information excluding interest, tax and depreciation and amortization expenses.

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

The earnings release and other related schedules we issued today included 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 Web site 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.

As anticipated, the recovery for the worldwide economy and particularly the golf industry is underway with some evidence for both.

While elements of the recovery are still somewhat mixed, the general trends are sufficiently positive for us to maintain our cautious optimism for the year.

Many of the positive signs that we look at and that we mentioned in the last call continue on a positive trend, although with some exceptions and augurs well for a positive golf industry outlook.

While I'm sure you're all well aware of them, highlighting a few key ones is worth mentioning.

On a macro basis, leading economic indicators have continued pointing upward for now 13 consecutive months with consumer confidence rising 5.6 points just in this last month.

Retail sales have registered positive comps for nine of the last 12 months with signs that bargain hunting, while not disappearing, is not dominating the landscape.

FX rates have recovered but slightly less than originally anticipated reflecting continued uncertainty over the economies in Greece and other European countries.

Getting more specifically to golf and Callaway, the weather has clearly been a negative in most parts of the world and has delayed or dampened, no pun intended, the opening of the golf season in most regions.

This has affected the first quarter to some degree but is hoped not to be a significant factor going forward.

Through February, rounds played were off 20%, clearly affecting the sell-through during the early season.

The trend, however, is improving with March playable hours up 11%.

We don't have the rounds figure yet for the month of March, but obviously the playable hours are a good indicator.

Reception of our 2010 new lineup continues to be quite positive.

Now, just to remind everyone, we were the recipients of 15 medals, ten of which were gold in Golf Digest's review of the 2010 new products.

Those were more than any other manufacturer.

The trade was equally positive about our lineup, prebooking at the expected levels which we believe is quite a vote of confidence in an uncertain environment.

And a very noteworthy development with the start of the tour season, we have had spectacular success with our new FT drivers with seven victories out of the last 11 events.

This performance is quite unprecedented.

But as we have consistently cautioned, the second quarter is the ultimate measure of how consumers react to all these factors and a better indicator of how the year will come out.

Anecdotal reports from those demo dates not interrupted by weather are quite positive not only from the point of view of total sales which were up measurably from 2009, but also in the quality of those sales.

The higher priced products are selling well with our $1,000 Diablo Forged iron sets, for example, now on back order due to strong demand.

This is a good news/bad news story.

More importantly than the anecdotes, share data through the latest March reports are very encouraging and I'd encourage you to take notes on this.

Woods.

The January share for Callaway in woods was 13.9%.

The March share for Callaway was 20.9%, a significant increase.

In irons, we started the year at 20.6% in January and are now at 20.9%.

In balls, we started the year in January at 10.7% and have now increased in March 12.8%.

And in putters, the January share was 36.5% and in March that was 37.7%.

All very, very positive and all on an increasing trend.

Now, these excellent share numbers are somewhat tempered by the fact the markets were depressed by the late start of the season.

Here, again, I would encourage to you take some numbers down.

The woods category was down approximately 14% in 2009 and started January down 18.3%.

The March figure continues to show a decline but at a substantially reduced rate.

March was down only 4%.

Irons were down 15% in 2009.

They started the year down 11% in January.

The March figure was down 3.2%.

Again, still negative, but a very significant improvement.

The ball figures, they were down 7.7% in 2009.

They started January at 10.5%.

The March figure was down 4.3%.

Once again, the trend is positive even though the numbers are still not particularly attractive.

Now once, again, the slow start to the season clearly has had an impact on the first quarter, but as you can see, as the weather begins to turn, and the rounds being played and the playable hours improve, the markets are coming back to where we believe they should be.

So while the start of the year is low, the positive trend is moving in the right direction and is expected to reach the modest growth estimates that we have built into our guidance.

An additional positive is our belief that the marketing efforts behind the 2010 plan is our most innovative and high impact program Callaway has ever executed.

Starting with (inaudible) initiatives our Super Bowl launch reaching the largest TV audience in history followed by advertising on the NCAA tournament were new directions for Callaway.

These were complemented by strong value-oriented promotions such as the free Kodak camera promotion that just began, the free driver of Phil Wins the Masters program which, of course, ended a short time ago and with more to come.

We are very confident that we can drive the consumer market's recovery through the balance of the season.

It should be emphasized that the focus of our promotional activity is on creating enhanced consumer value without resorting to price in order to protect our margins.

Looking at the basics, our business fundamentals are quite sound with sales up 11%, 6% currency neutral.

Our margins are up 260 basis points to 45.3% and our OpEx down to 36% from 38% of sales despite the restoration of the employee benefits that we suspended last year.

We will, of course, continue our balanced approach to spending, maintaining our investments in growth opportunities, such as India and China, and margin improvement initiatives that continue to deliver significant savings while we also continue to exercise the tight expense controls and spending disciplines that we have exercised throughout 2009.

So in summary, while the first quarter was somewhat lighter than we had planned, current trends support our optimism that our guidance for 2010 is deliverable.

As additional support it is interesting to note our 11% sales increase this quarter compares quite favorably to the approximately 48% of the S&P average reporting to date where their sales increases were only up 6% and we were able to achieve that 11% despite the impact of weather on the golf market.

So let me now turn the call over to Brad for some further details.

Thanks, George.

As George just mentioned in his comments, our overall expectations coming into this year were a general recovery in both the economy and our business compared to last year.

We didn't expect a complete return to previous years' levels but expected this year to be a solid first step.

Now that we're through the first quarter, I would say the positives we are seeing are certainly outweighing the negatives at this time.

Sales have increased compared to last year.

The impacts of foreign currency translation has improved.

Our products have been well received by our customers, consumers and the media, and they have performed well on the professional tour globally.

We are particularly pleased with the launch and reception of our Diablo family of products and are seeing stronger consumer reception, especially at demo days across the country.

Our gross margins have improved compared to last year and we continue to manage our business tightly with regards to inventory, cash, and operating expenses.

The only offsets to these positive factors to date have been a delay in the opening of the market due to the poor weather across many of our regions and a slower than expected economic recovery in Europe.

Having said that, we remain cautiously optimistic about this year and, with what was a very exciting Masters tournament a few weeks ago, expect the season will begin to break open during the second quarter.

Looking at our financial results for the first quarter, net sales increased 11% to $303 million compared to $272 million last year.

Foreign currency rates were in line with January spot rates that we mentioned on our January call and positively impacted sales by $15 million during the quarter.

On a constant dollar basis, sales increased 6%.

We reported net income for the quarter of $20 million compared to $7 million last year and diluted earnings per share of $0.24 on 83.9 million shares compared to $0.11on 63.3 million shares a year ago.

Earnings per share include for each of 2010 and 2009 after-tax charges of $0.01 associated with the Company's global operations strategy.

In looking at our sales by product segment, as I just mentioned, we are very pleased with the new Diablo Edge and Diablo Forged family of clubs which launched during the quarter and have received positive press and performed well at retail.

Both the woods and irons version of the Diablo Edge are outperforming the first generation of Diablo products introduced last year.

The Fusion Technology drivers, the FTiZ and FT Tour, have also received a lot of interest at retail particularly with their stellar performance on tour this year.

In addition, the new White Ice line of putters and the new Backstryke model have exceeded expectations in the putter category.

Our wood sales for the quarter increased 18% to $94 million compared to $80 million in 2009.

This increase in sales was due to an improving marketplace and an increase in both unit volumes as well as the average selling price.

We are encouraged by the fact that consumers are demonstrating their willingness to trade up to higher priced products like our FTiZ driver which sells for $399 when they have a chance to try the products at demo days and see the positive results of its performance.

This is a marked departure from the consumer attitudes experienced last year and is helping to regain our market share which has improved by 7 share points compared to January.

Sales of irons were $57 million, a decline of 12% compared to $65 million last year.

The decrease in sales was due to lower volumes as well as average selling price due to lower retail prices on the Diablo Edge line compared with the X-22 irons introduced last year.

Golf ball sales increased 8% to $51 million for the quarter compared to last year's sales of $47 million.

This increase was due to higher unit volumes and an increase in average selling price associated with introduction of our two new premium balls, the Tour iS and iZ models.

Accessories and other sales increased 19% to $62 million for the quarter compared to last year's sales of $52 million.

This growth was due to increases in packaged club sets driven by the new women's Solaire offering, additional apparel sales under the new Perry Ellis agreement, incremental uPlay sales and gloves.

Putter sales increased 38% to $38 million compared to $28 million in sales last year due to the introduction of our new White Ice line of putters that drove both an increase in unit volume as well as average selling prices.

Now turning to our regional breakout.

U.S.

sales were $151 million for the quarter, an increase of 7% compared to $141 million last year.

International sales increased 16% to $152 million compared to $131 million in 2009.

Foreign currency translation, as I already mentioned, positively impacted sales by $15 million.

On a currency neutral basis, international sales would have increased by 5%.

All regions experienced year-over-year growth during the quarter with the exception of Europe, which has been hampered by weather and a slower recovery in their economy.

Our rest of Asia business increased by nearly 50% driven primarily by stock growth in Korea and China.

First quarter gross margins were 45% of net sales compared to 43% last year, an increase of 260 basis points.

Please keep in mind that the first quarter is heavily weighted toward shipments of new products into the retail channel.

Since the heavy discounting we experienced last year didn't begin until the second quarter, product price and mix this year were very similar to last year.

The increase in margin percent generated in the first quarter was due to lower product costs, supply chain efficiencies and a positive impact of foreign currency translation.

Operating expenses for the quarter were $109 million or 36% of sales compared to $103 million or 38% of sales last year.

This year-over-year dollar increase reflects higher costs associated with the restoration of employee incentive compensation and benefits that were reversed or suspended last year, incremental expense associated with new market expansions and other growth initiatives, as well as the negative impact of foreign currency translation.

This increase was nearly offset by reductions in head count we made last year as well as reductions in marketing and advertising costs.

Given the currency volatility experienced last year we took a more active approach to hedging this year, which resulted in a gain in other income of $1.6 million or approximately $0.01 in earnings per share.

We also had a favorable settlement of various tax audits issued during the quarter that resulted in a lower tax rate and positively impacted our earnings per share by approximately $0.02.

Our balance sheet remains strong.

We finished the quarter with $42 million in cash and $31 million outstanding on our credit facility compared to $147 million at this time last year.

EBITDA for the first quarter on a trailing 12-month basis was $31 million and we were in full compliance with all of the covenants associated with our credit facility.

Consolidated net receivables were $277 million compared to $239 million last year due primarily to the year-over-year increase in sales.

Consolidated DSO increased to 83 days compared to 80 days last year due primarily to an increase in customer incentive programs.

Collections on AR remains strong and the overall quality of our AR is good.

Net inventory totaled $231 million, a decrease of 12% or $31 million compared to last year.

Net inventories as a percent of trailing 12-month sales improved to 23.5% through the first quarter compared to 25.6% for the same period last year and reflect continued efficiencies within our supply chain.

Capital expenditures for the quarter were $4 million.

We estimate 2010 capital expenditures to be in the $30 million to $35 million range consistent with our prior full-year estimate.

Depreciation and amortization was $10 million for the quarter and we estimate it for the full year to be about $40 million.

As george mentioned, at this point in time, we remain comfortable with our full-year forecast provided on our last call, which to remind you, is sales increasing 4% to 10% or a dollar sales range of $990 million to $1.05 billion.

As mentioned already, and consistent with normal seasonality of the golf business, second quarter is usually the largest quarter of the year in the golf industry and has the biggest impact on achieving our full-year forecast.

Consumer sell-through and reorders are both critical and hard to estimate, but at this time we continue to be comfortable with our annual forecast.

While poor weather delayed the opening of the season in several of our markets, the response to our product where the season has opened, as well as the willingness of the consumers to trade up to higher price points, has been encouraging.

As mentioned in our last call, we typically generate 60% to 65% of our annual sales in the first half of the year and remain comfortable with this first half/second half mix.

Gross margins are estimated to improve to 42% to 44% for the full year.

We continue to believe that the discounting environment at retail will be much improved compared to last year and will be the key driver in margin improvement especially during the second and third quarters which is when the heavy discounting occurred last year.

We also estimated improvements due to improved foreign currency, savings from our initiatives associated with our global operations strategy and leverage due to higher manufacturing volumes.

OpEx is estimated at $375 million to $405 million.

As I mentioned earlier, this estimate reflects the restoration of employee incentive compensation and benefits which were suspended last year, additional expenses associated with market expansion including our newest market in India, as well as the negative impact of foreign currency translation.

These increases are being partially offset by reductions in demand creation spending and the head count reduction taken last year.

Excluding the incremental investments we have made over the past three years to support various growth initiatives, our operating expenses would actually be less than 2007 levels reflecting our efforts to eliminate expense in other areas of our Company to fund this growth.

The full-year tax rate is estimated to be approximately 37%, an improvement over the last estimate due to the favorable resolution of various tax audit issues I mentioned earlier.

Pro forma earnings per share is still estimated to range from $0.25 to $0.35 on 64 million basic shares outstanding and excludes after-tax charges of approximately $0.10 cents for charges associated with our global operations strategy.

To clarify the earnings per share calculation given the convertible preferred shares outstanding, there are two calculations that need to be made each quarter and for the full year.

The basic method takes net income, subtracts dividends due preferred shareholders and divides this amount by the basic shares outstanding of approximately 64 million shares.

The diluted method takes the net income and assumes conversion of the preferred shares into 19.9 million common shares resulting in approximately 84 million diluted shares outstanding.

Under this method, the preferred dividend is not subtracted from net income since the preferred shares have already been assumed into the conversion into common shares.

The reported earnings per share will be the lower of the two results.

If you have any additional questions on this, please feel free to give us a call.

Also beginning with the second quarter, we will no longer be issuing a pre-release but will just be hosting our normal earnings conference call.

We're doing this because we feel the pre-release doesn't always us the opportunity to provide the appropriate level of detail on our results and answer relevant questions of clarification that you might have.

We would now like to open the call for questions.

(Operator Instructions) We'll pause for just a moment to compile the Q&A roster.

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

Please go ahead with your question.

Thank you.

First question I had was on the foreign exchange benefit during the quarter.

That doesn't appear to account for the entire swing in that other category year-over-year.

Brad, I don't know if you could give some insight as to what else was moving in that line item?

Let me just pull that up here.

I think we had a loss last year in that particular line item so the increase would be compared to a loss last year.

Exactly.

I think the swing was closer to like $0.03 a share.

Wasn't sure what the other $0.02 is originating from.

We had a gain this year of about $6 million and a loss last year on currency about $2 million.

The net was $4 million between the two.

Minus the $8 million, right?

I'm sorry, what was -- run that by me again?

I'm sorry, go ahead, Dan.

It was flowing from a negative to a positive, so I think it's the swing of a little more than that.

Okay.

And the second question I had was relating to what you're seeing at retail and if you have any comments, you can talk about big box compared to off-course specialty.

Sure.

The off-course specialty is sort of mixed.

I think right now we're seeing much stronger early response in green grass, and the off-course specialty largely because of the weather, I think,starting off a bit more slowly but fundamentally their promotional activity in a lot of consumer activities that they embark on really begins around now.

So we don't attribute much to the differences that we see at this point.

I think we'll be in a much better position to see how the markets are developing in another month or so.

And then the last question that I had, thinking about competitors and promotional activity.

What are your thoughts on Fortune Brands selling the Cobra brand, excuse me and historically that's been more their promotional brand than Titleist.

Now that that's owned by Puma, do you think that's going to be better or less favorable for promotional activity on the industry?

I don't really anticipate that it'll change the promotional levels particularly.

It's a little hard to tell exactly what Puma's business model is going to be coming into the marketplace.

Until they settle out the organization and really figure out exactly what they're going to do with the business.

But again, Cobra's not been that big a player overall in the market, and I don't think their ability to move the market at least in the short term is going to be that pronounced.

Okay.

Great.

Thank you.

No problem.

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

Please go ahead with your question.

Thank you, and good afternoon.

Any comments about April, the early going of the second quarter as to what you're seeing in terms of sell-throughs at retail, I guess, most significantly, how they are tracking versus your expectations?

Well, it varies significantly based on the weather.

At this point in time, I'd say that the economic issues that we were all very concerned about last year appear to be less of a factor perhaps, but weather obviously has become more of a factor.

So where the weather has been okay, the results that we see at demo days that we have in green grass have been quite good.

But clearly, as far as off-course is concerned where they don't hold them the same way that green grass does, they really have to wait for the weather to turn for real.

So I think the second half of April is generally when we see the market turn up, so it's a little bit early because we don't really have enough data coming in on the second half to really be able to reflect that.

But everything we see, and again, it's largely anecdotal at this point.

Everything we see appears to be positive when the weather allows.

A follow-up to that, George.

What product categories do you see as the big drivers?

I know putters and accessories we saw big growth, but you're capturing more share it looks like in the woods category.

That's correct.

Well, drivers are always the sort of star performer in every year, and certainly the early results that we see would support that.

We think that irons will come on a bit more strongly than they have to date, again, largely because we have to wait for the market to turn and rounds to start going up.

I think to the extent that there's a backup of buying power that occurred because of the deferrals in 2009, I think that we'll see some more aggressive movement in the irons market as well.

Putters have been quite strong, certainly from a sell-in point of view and the early sellout results.

We have a rather dramatic changeover of our line and the introduction of a very unique new line in Backstryke that's beginning to gain some traction in the marketplace in early days.

And putters to a large degree are an impulse purchase.

Every time you have a bad round, of course, the problem is the putter.

So a lot of people will go out and buy some additional ones to compensate.

So we think the putter business is going to be okay as well.

Rounds will, however have a very dramatic effect on the ball business.

And to the extent that playable days and hours come back and rounds go back up again, I think we'll see a recovery overall in the ball market.

We'll have to wait to see how that goes.

Thanks a lot and good luck.

Thank you.

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

Please go ahead with your question.

Thanks, guys.

Let me follow to Dan's initial question, he alluded to the Puma acquisition of Cobra.

I think yesterday we saw Sports Authority by Tommy Armour which they already had the exclusive on.

Do you get the sense, maybe, George, that there's an appetite out there for brands?

Do you expect to see further type deals as the year progresses?

That's really hard to tell.

I think a lot of the brands that are being purchased by retailers, it's really a reflection of the difficult times they faced in the second half of 2008 and 2009.

These captive brands that a lot of retailers are putting on it's really just another version of the private label if you look at it closely.

There's always been a market for private label up to a certain level.

I don't think that's dramatically changed.

Generally, these captive brands have a certain lifecycle at which point they sort of die out simply because the innovation and the newness that they provide fades mainly because these people can't necessarily devote the kind of money that we do to R&D and to innovation.

So I think to the extent that there are some smaller brands that are sufficiently weakened by the 2009 experience, there's the possibility that there may be some more deals during the course of the year, but I really don't think that's going to become a huge factor going forward.

Okay.

Let me shift over to the golf ball side.

The profitability improved year-over-year.

I guess, first, I'm curious if that's a function of volume or some other type efforts.

Then secondarily, maybe how you could tie that into gross margin initiatives and what are sort of the near-term or the 2010 targets that you guys are looking at to drive further profitability this year?

I think it really is a bunch of [votes].

Certainly volume has something to do with it as you can tell by the figures that Brad read off.

Also, our gross margin initiatives continue to contribute and have begun to contribute in the ball area as well.

We anticipate that to continue going forward.

And we've taken a big chunk of cost out of the Dual Core ball as we've gotten more experience with it and based on the margin improvement initiatives that we're talking about, as well as some sourcing moves that we've made taking some of the volume offshore.

So it really is a combination of all of the things.

Looking forward, clearly the gross margin initiatives will continue to benefit us.

There are additional costs we can take out but also volume clearly will help that as well.

As we indicated last year, we're in the second year of our premium ball.

By the introductions of the new iS and iZ balls this year, the average selling price has gone up.

And because of the newness and the innovation in those balls, we've seen some consumer response as well.

It's not an atypical cycle, if you will, for the ball category.

A second year product tends to dip a bit and the new products tend to kick the business up some more.

So 2010 is really our new ball cycle, and we're gaining the benefits from that.

Great.

Thanks, guys.

No problem.

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

Please go ahead with your question.

Thank you.

Good afternoon.

Good afternoon.

Just kind of encouraged by some of the comments you made early on, George.

Looking at your customer reaction to some of your new products early on ahead of your peak demand period.

Just wondered if you could differentiate that for us relative to on-course versus retailer behavior.

Have you seen anything different in either of those two channels?

As I tried to indicate earlier, I think we're seeing a somewhat faster uptake on the [green] side this year than we normally might.

I guess if I could throw some conjecture out there, the fact is that green grass, good weather or bad up to a certain point, can hold demo days, and that brings out their buyers even if the conditions outside are not as Ideal.

The off-course guys, who clearly can't do demo days quite the same way, really have to delay a lot of their activity until the weather clears and people start going out and shopping.

I think we're beginning to see that now in April as the weather begins to turn.

So there may be a slight distortion of the normal percentage of business that goes either way but that will normalize as the season opens up.

I don't think that there are any long-term changes in the channel trends that we haven't seen in the past year.

Certainly not at this point.

As far as demand exceeding supply in some product categories, I think you mentioned some of your higher end product.

Would that impact the on-course business more than the retailer?

I mean, the bigger retailer, does that customer have some inventory they can rely on here or are they also in the same situation?

No, we try to be fairly careful about not favoring any one particular [place] over the other.

I think it's a reflection over the fact that all of us went into this year somewhat conservatively relative to pricing.

I think all of you expressed a great deal of concern about whether or not this would be another year of bargain hunting and so we were very careful with our inventories coming in.

As it turns out or as certainly the early indications seem to be that pricing appears not to be as big a factor.

It still is a factor.

There's no question that there's still a group of people out there shopping for bargains and for lower priced stuff.

And I think we'll see that for most of 2010.

But it appears to be a little less of a factor than we originally thought and as a consequence, the upsurge in demand for the more expensive stuff actually caught us a bit by surprise and we're crashing ahead to catch up.

Our supply chain is very agile and much, much more responsive than it has been in the past.

We expect to be able to get out of the problem much more quickly than perhaps we would have been able to do just a few short years ago.

But it seems like you're not really calling for that in terms of your guidance at this point in time, right?

You want to see that develop first?

Is that why I'm sensing that you're kind of conservative there on the guidance?

Well, no.

Again, I'm being cautious.

Remember, weather has not turned yet.

An El Nino year's a very unpredictable year.

So unless somebody else's crystal ball on weather is better than mine, I'd rather not count on a rapid turnaround there.

And the fact is that the economy is around the rest of the world while we appear to be improving in the U.S.

in a fairly steady, although not spectacular rate.

Europe continues to have its difficulties, no insult intended, but the biggest countries in Europe are causing some issues, and we're not certain as to how quickly that will turn around.

We're having some very solid success in the Asia Pacific regions, but Japan it beginning to feel some difficulty there.

So you put it all together I'd say that the general balance is on the positive side and that's what makes us feel pretty good about our forecast going forward.

But I don't think it would be particularly smart to start predicting significant improvements until we see a little more of how the year comes out.

Well, that's fair enough.

Let me just switch over to the last point that you made in terms of the Asia area there, we obviously feel that's a very important growth driver for the next, five, ten years.

Certainly your investment in India is something we probably want to talk about a little bit and just kind of gives us an update there.

But the growth rate that you saw, I mean that's very surprising and it's off a small base understandably, outside the U.S.

is now becoming a more important part of your business and if can give us some help on understanding the profitability in those markets that would be helpful, too.

Sure.

As we indicated, we think that while we still feel very strongly that there are growth opportunities in the U.S., and there really are, the more powerful the growth driver is going to be the international environment and Asia Pacific is certainly one of those.

We've seen a continuation of the rather dramatic year-to-year increases in China.

Korea has come back very, very strongly.

We've converted from some distributor markets in the Asia Pacific region to having our own sales force on the ground.

That always benefits our results.

So while we went into the year with the international year representing approximately 50% of our overall revenues, we certainly expect that to grow over time and we think that international will become and will stay the majority of our business going forward.

From a profitability point of view, the margins internationally and the pricing internationally tends to be much higher than the U.S.

They also tend to be somewhat less promotionally oriented.

As a consequence, the profitability is more attractive.

That also bodes well, if you will, for the future.

India, of course, has started out just in the early parts of this year.

The reception has been quite positive.

But there's a whole infrastructure that has to be built in India as far as golf courses are concerned.

We think that the Olympics are going to have a very positive effect on things like that.

We've already seen growing interest in China and in India and in some other countries through the prospect of being able to compete on an equal footing with the Western countries in a sport such as golf.

But, again, this is going to be a development that takes some time.

So while we aren't seeing grotesquely large improvements in the short term, we clearly expect that to become a more important part of our business as we get closer to 2016 for sure.

George, just to clarify something you said about the profitabilities being higher outside the U.S., you're talking about gross margin.

But is an operating margin a little bit lower or has that gotten better, too?

Derek, this is Brad, just to jump in and kind of talk a little bit about timing.

One of the comments I made is that in our OpEx is kind of flat back to 2007.

We have been cutting elsewhere in our business to fund these growth initiatives.

And China, as an example, the pro forma for break-even was about two and a half years, two and a half to three years.

So as you take a look at our OpEx, understand, we are investing in some of these growth areas and we will start to see profitability now in China.

But Thailand, Malaysia, our Southeast Asia operation and India we have the OpEx there now but we aren't really getting the benefit yet of the sales because they are still new in their lifecycle, if you will.

So we have continued, as George mentioned, this balanced approach of trying to invest while cutting elsewhere in our business to hold our OpEx kind of flat compared to 2007.

We should start to see that now generate the kind of growth that we're -- and the reason why we invested in them It takes time and so to answer your question, [profitability-wise], we'll start to see it in China now as we move forward because they're kind of past that break-even point.

Those other regions are still in kind of their infancy from our perspective.

But to your point, gross margins are higher.

Were it not for the fact we're driving business over there so would operating profit.

But in the short term, while we're making these investments, obviously, it's not going to show up quite so quickly.

Okay, that's it for now.

Thanks a lot.

Appreciate it.

Thank you.

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

Please go ahead with your question.

Hi.

First to follow up on international, you talked about the marketing that you're doing, unique marketing you're doing domestically with the Super Bowl, et cetera, or you've done domestically.

What are you doing on the international front as far as marketing?

We're doing comparable kinds of things.

Obviously, you tailor that to the marketplace.

So, for example, in Japan, we have a lady golfer by the name of [Moenko Yuaida].

She's fundamentally a rock star in this country so we've built some very unique promotions around her in Japan that have gained a great deal of traction.

What we try to do obviously is to tailor the promotional and/or advertising activity by market.

So things that work in the U.S.

clearly aren't going to have the same effect as you go outside of the U.S.

So I was just quoting the U.S.

stuff.

We have a very strong tour presence in Europe.

We have a very strong tour presence in Asia as well.

We build around that so people that don't necessarily mean a lot to U.S.

golfers do mean a lot to European golfers.

So I guess, the next time if you'd like, I'll try to give you more specifics about the unique kind of promotions that we run outside the U.S., but for now take my word for it that they are built on the local market and they are as creative and in some instances even more creative than some of the things we do in the U.S.

And the results, certainly in Asia right now, are reflecting that.

Okay.

Great.

And then, if we look at the discounting and promotional activity last year.

How far along into the second quarter did you begin discounting?

The discounting in the second quarter of last year began right at the early part of April.

Post Masters.

I'm sorry, it was right after the Masters.

As a matter of fact, it was a week after the Masters.

So the margin effect really showed up in the second quarter in 2009.

And the fact that we are obviously post Masters now and have not seen that kind of activity this year should reflect on a much better margin picture for 2010.

And then as we look at your fiscal year gross margin guidance, I guess between the 42% and 44%, I mean, what would cause you to come in at the low end or below that range versus the high end?

For one thing, the third quarter will always have some discounting because everyone is getting rid of excess stock that they may have left over from an inventory point of view.

So you would always expect some reflection of that in the third quarter.

Although, perhaps this year, we may see somewhat less of that.

But as we put together our plans with the anticipation of what our end of life strategy for second and third year product would be, we think that the range of 42% to 44% is pretty much where it should be.

If there is some uptick in promotional activity in the second half of the year, we will probably come in at the lower end of that range.

If the promotional activity remains as we see it right now, I would expect that we'd come in at the upper range.

We picked the middle point from our point of view just simply because it's too early for to us really tell.

And I think to George's point, I think as he mentioned, we came into the year and I think retailers came into the year fairly conservative around high price point products.

And we're seeing situations where people are willing to trade up.

It's just way too early to tell, if that trend were to continue, it might be different.

But I think to George's point, there's so much we don't know at this point in time.

That's why we gave the range we give.

Fair enough.

Thank you.

Our next question is from the line of Michael Walsh with Wells Fargo.

Please go ahead with your question.

Hi, guys.

Filling in for Tim Conder here.

I just wanted to see if you could touch on capital deployment priorities?

I know the next couple months will be pretty busy.

Just wanted to see if you could touch on that?

Then a little bit more color on retail inventory levels.

You feel like you have the right product mix out there?

Maybe you can tie that in with the different geographies.

As far as, we continue to spend our money on our margin improvement initiatives.

They're very important to us.

Not to blow the horn of our ops people because they'll get swelled heads, but our investments there have really paid out in spades and continue to do so.

So clearly we're not taking our foot off the pedal as far as those investments are concerned.

The investments in places like China and India, that is going to be our growth engine and, therefore, we will continue to spend money there as well.

As far as the U.S.

is concerned, marketing is really the important issue here.

We are focusing in on certain categories in order to regain some share and to stretch the areas in which we have the greatest gross margin.

So as far as investments are concerned, we are being very careful.

We are being very selective in making sure that our priorities are pretty well established and in that regard, we said growth opportunities and margin improvement initiatives are where our investments are going to go first and foremost.

If we see the year developing more aggressively and better, we will probably up some of those investments in selected areas, but right now, certainly at this early stage of the year where we're going to hold to that game plan.

And I'll remind you also, Michael, and maybe you hadn't heard this before if you haven't been on the call, we kind of target anywhere from 60% to 65% towards growth initiatives and try to minimize the amount of maintenance capital we would invest within the business.

So to George's point, we want to focus on those things that can drive a return.

And as far as inventories are concerned,the trade has gone into the year very carefully.

And they've been very selective.

They've cut back on the number of SKUs they carry.

They've cut back in many instances, in a number of instances, on the number of brands they carry.

We were very comfortable with our sell-in, with our prebooks.

They went in pretty much according to our earlier expectations.

We think we have the proper product out there.

The issue that we're facing right now is product mix.

We anticipated the higher priced products to be somewhat lower as a percentage of mix, and it may turn out that they're going to be a little higher than originally expected.

So we're doing a little scrambling to rebalance, if you will.

But that isn't so much of a factor for us that it's going to concern us for the year.

Got you.

Thanks, guys.

No problem.

Our next question is from the line of Craig Kennison with Robert W.

Baird.

Please go ahead with your question.

Good afternoon, and thanks for taking my questions.

The apparel business was up nicely versus a year ago.

But I know the revenue model is different.

Is there a way to cut that business on an apples-to-apples basis to give us a feel for actual volume trends?

No, not really.

There are two things that are working in our favor.

The business model obviously is much improved from our point of view.

The partner that we're with is significantly improved.

We are gaining in a couple of different ways.

I'm afraid this is not going to be terribly granular for you, but just to give you some color, the quality of the styling and the fashion and the nature of the materials that we're using are much more contemporary, much more in line with the marketplace.

The ability of our partner to sell in non-golf-related channels is significantly better than what we had before.

Very importantly in the golf channel, not only do we have better control over the sale because our people are doing it and we formed a separate sales force to do that last year.

But our ability to join efforts between our equipment sales organization and the soft goods sales organization to have more effective demo days, to be able to make our events more seamless, if you will, than we were able to when we were dealing with different people.

All of that has contributed, I think, to the early success that we're looking at.

We only expect that to get better as we get further into the year, frankly.

Thanks.

You've addressed the other questions I had.

Thank you.

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

Mr.

Fellows, do you have any final remarks you'd lake to make?

Yes.

Again, these are early days.

We're feeling cautiously optimistic, I think, is the buzz word that we're using.

But we sincerely are feeling that way.

But please recognize that there are still a number of variables out there over which we have no control.

I think we are doing a creditable job on the things we do control.

Our product is absolutely right.

Our supply chain is working quite well.

Our sales and marketing organizations, I think, are really stepping up their game and doing quite a bit better.

So from a controllable point of view, we're feeling quite comfortable.

We don't know what weather is going to do going forward.

It looks like it's getting better but there are no assurances as far as that's concerned.

And we continue to be somewhat concerned about the overall economy with more attention to Europe than perhaps other regions of the world.

And we can't control that as well.

And unfortunately, that will also impact the foreign exchange issues that we talked about earlier.

Having said all of that, we are still feeling pretty comfortable with our guidance that we've given you earlier.

And we think that this year could indeed turn out to be exactly as we had projected.

So, obviously, stay tuned and we'll be back next quarter, and hopefully we'll have a good story to tell you then as well.

Ladies and gentlemen, this does conclude the Callaway Golf first quarter 2010 earnings conference call.

You may now disconnect.