Topgolf Callaway Brands Corp (MODG) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

I will be your conference operator today.

At this time, I would like to welcome everyone to the Callaway Golf second quarter 2010 earnings conference call.

(Operator Instructions).

Thank you.

I will now turn the call over to Brad Holiday, Chief Financial Officer.

Thank you, and I would like to welcome you to the Callaway Golf Company second quarter 2010 earnings conference call.

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

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

I'd like to point out that any comments made about future performance, events or circumstances, including statements relating to the economic or golf industry recovery, the outlook for 2010, estimated 2010 gross margins and operating expenses, the estimated timing charges and savings relating to the Company's Global Operations strategy initiative, future inventory levels and the estimated 2010 capital expenditures and depreciation and amortization expenses are forward-looking statements, subject to Safe Harbor protection under the Federal Securities laws.

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

Actual results could differ materially from those projected in the forward-looking statements as a result of certain risks and uncertainties applicable to the Company and its business.

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

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

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

The year-to-date performance of the golf industry has been disappointing relative the expectations we had in front of the year.

A number of short-term factors have combined to slow the expected recovery and to increase the level of uncertainty relating to overall 2010 performance.

While the near-term remains cloudier that we would like, the longer-term prognosis for the industry as a whole and Calloway specifically remains, we firmly believe, quite positive.

The golf industry will recovery as the economy does.

It is the pace of this economic recovery that is most in question.

Let me elaborate on our take on the current and coming marketplace.

Early first quarter metrics on the economy, while positive, fell short of the pace we had hoped for.

These caution-inducing results have become somewhat more problematic in the near-term, contributing to our recent announcement on second quarter results.

Let me cite a few.

Overall U.S.

retail sales comps were up 5.5% in the first quarter, but had attenuated in both May and June, leaving question as to the outlook of the balance of the year.

More relevant to Callaway, consumer durables spending has lagged the overall retail sales recovery by 5 percentage points.

Global consumer confidence and spending measures have turned negative over the last several months -- importantly, the height of the golf selling season.

Employment growth or unemployment statistics have also stalled, potentially indicating the recovery is losing what little steam it appeared to have.

International, political and economic metrics and outlook have not improved noticeably and continue to weigh heavily on the worldwide economic scene.

All these factors together with weather issues -- which were reflected in decreased rounds played -- and weakening FX trends have created a short-term environment that has reduced our cautious optimism for 2010 to just plain cautious.

But as disappointing as these short-term trends are, they are just short-term, and recovering from them is only a matter of time.

We believe our balanced approach to the economic downturn has shown itself to be an appropriate course of action.

Let me cite a few bright spots lest we walk away with too negative a picture.

Callaway worldwide share in Combined Classes of Trade, which include golf specialty, sporting goods and mass, and Combined Categories, which include clubs, balls, apparel and accessories, is flat to up despite our focusing on reducing reliance on promotional pricing.

While price is still a significant factor in the marketplace, its dominance as the deciding factor in purchase has abated somewhat versus 2009 levels.

Trade and Company inventories are in good shape and should not provide an impediment to new product introductions for the 2011 season or for successive end-of-year deal activity; again, a marked improvement versus 2009.

Our developing market investments continued to share a significant growth with China, India, accessories and apparel sales performance figures outdistancing the market.

Operating expenses for the year are being tightly controlled and projected to be flat to 2009, despite the restoration of some employee benefits temporarily suspended last year.

Margin improvement initiatives continue a pace, and will deliver between $15 million and $20 million in savings in 2010, bringing the total since 2006 to between $85 million and $90 million.

Gross margins year-to-date are up 360 basis points and are projected to be up solidly for the year.

Our most recent announcement regarding the restructuring of our global manufacturing and distribution footprint, an effort we have talked about for about the last year, promises not only to better service the expected global growth, but also to do so at significantly lesser costs.

With these changes, our overall cost savings and margin improvement initiatives will have saved the Company an estimated $115 million to $125 million by the end of 2013.

The effects of all these efforts have been dilutive in the short-term by the impact of current economic conditions, but are inherently built into our operations and will have their full effect when the economy returns to normal.

The effects of golf participation in the Olympics are beginning to be felt, albeit at low levels, with heightened activity and discussions in many international venues regarding course building, youth programs, et cetera..

The positives to global participation (inaudible) is sure to be meaningful, with particular effect outside the U.S..

So summing up, we conclude the following; what is directly under our control is performing as expected -- spending, costs, inventories, et cetera.

The open variable is the top line, when and when consumers will feel confident to spend on discretionary durables.

The golf industry, formerly believed to be somewhat economy-resistant, has clearly shown significant vulnerability when the economy and certain important segments, such as financial services, are disproportionately depressed.

Recovery for consumer durable discretionary categories will take longer to rebound given the severity of the economic downturn and the anemic pace of recovery.

Now, some discretionary categories have begun to show signs of return, giving hope that discretionary durables will soon follow.

We do not believe the recovery is in question, but clearly timing is.

We continue to be of the firm belief that golf will recover as the economy does.

In the meantime, we will continue with our balanced approach of tight expense and working capital control while continuing to make selective investment in short and long-term initiatives that strengthen our position to take advantage of the recovery as it does occur.

Great new products, innovative marketing, gross margin initiatives and developing market investments will continue to be key progress for Callaway.

I'd like to turn back over to Brad.

Thanks, George.

In reviewing the financial results for the quarter, we reported consolidated net sells of $304 million, an increase of 1% compared to last year's sales of $302 million.

Net income for the quarter was $11.5 million compared to $6.9 million last year, and diluted earnings per share was $0.14 on 84.3 million shares compared to $0.10 per share on 66.8 million shares in the prior year.

Earnings were impacted by after-tax charges of a $0.01 into 2010 and $0.02 in 2009 associated with our Global Operations initiatives.

Through the first six months, we achieved sales of $606 million, a 6% increase compared to sales last year of $574 million, and diluted earnings per share of $0.38 on 84.1 million shares compared to $0.21 on 65.1 million shares last year.

Earnings were impacted by after-tax charges of $00.2 in 2010 and $0.03 in 2009 for Global Operations initiatives.

Taking a quick look at our overall sales by product category, our wood sales in the quarter were $63 million compared to $76 million in 2009.

Year-to-date, our wood sales have increased 1% to $158 million to compared to $156 million last year.

The most significant change in the woods category is the decrease in promotional activity at retail compared to last year, where there were several Buy One, Get One Free promotions.

Sales of irons and wedges is the quarter were $71 million, essentially flat compared to second quarter sales of $72 million last year.

Year-to-date sales in the iron category were $129 million compared to $137 million last year.

The key reason for the decline in sales was lower volume due to the timing of new product launches this year and lower average selling prices due to the mix of lower priced Diablo irons compared to our X-22 line last year.

Golf ball sales were $58 million for the quarter, flat compared to last year's sales despite a drop in rounds played this year.

Year-to-date, our total golf ball sales increased 3% to $109 million compared to $106 million last year, due primarily to increases in both buying and average selling price driven by the launch of our new premium ball.

Putter sales for the quarter increased 27% to $34 million versus $26 million last year, with year-to-date putter sales increasing 32% to $72 million compared last year's sales of $54 million.

The sales growth was driven by increases in both volume and average selling prices associated with the successful launch of our Odyssey White Ice line introduced this year.

Accessory sales for the quarter increased 11% to $77 million compared to $69 million last year.

Through the first six months, accessory sales were $139 million, an increase of 15% compared to $121 million in 2009.

This increase in sales is due to higher sales associated with our new Perry Ellis apparel relationship, the launch of our Women's Solaire Club line and golf bag sales.

Turning to our regional breakout, U.S.

sales declined 1% to $162 million for the quarter compared to $164 million last year.

International sales increased 2% to $141 million for the quarter compared to last year's sales of $138 million.

Foreign currency had a positive impact of $6 million on sales this quarter compared to last year.

Through these first six months, U.S.

sales were $313 million, a 3% increase compared to $305 million last year.

International sales were $293 million, a 9% increase compared to last year's sales of $269 million.

Foreign currency has had a positive impact of $21 million in sales for the first half of the year.

We have seen solid growth in our Korea, China and South Pacific markets, offset partially by lower sales in our Europe region due to issues in the Euro zone ,and a slight decline in our Japan region.

Gross margins improved to 41% in the quarter compared to 36% last year.

Year-to-date gross margins were 43% compared to 39% in 2009.

This increase is due to lower product costs associated with our global operation initiatives and the positive impact of foreign currency translation.

Operating expenses for the quarter were $99 million, essentially flat compared to last year, and reflect the elimination of performance based compensation for 2010.

Year-to-date operating expenses were $207 million compared to $202 million last year.

While currency had a positive impact on sales, it had a $4 million negative impact on 2010 operating expense.

Moving to the balance sheet, we have no outstanding debt on the balance sheet and ended the quarter with $54 million cash.

Consolidated net receivables were $255 million compared to $263 million last year.

Consolidated DSO improved to 76 days compared to 79 last year.

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

Net inventories were $214 million, a decrease of 6%, compared to $228 million last year.

Inventory as a percent of trailing 12-month sales was 22% compared to 24% in 2009.

Our supply chain has been able to respond quickly to the slower recover this year, and we don't see excessive inventory in the retail channel at this time.

Capital expenditures through the first six months were $8 million.

We estimate 2010 capital expenditures to range from $30 million to $35 million for the year.

Depreciation and amortization was $20 million for the first six months, with a full-year estimate of approximately $40 million.

As indicated in our press release yesterday, we are embarking on a significant restructuring of our Global Operations.

This is the next important phase of our initiatives targeted at improving gross margins that we began over three years ago, with an original goal of reducing costs by $50 million to $60 million.

Through 2009 or the first three years of these initiatives, we have captured approximately $70 million in savings.

Additionally, we had previously forecasted incremental savings of $25 million to $45 million over the next three years through 2012 based on additional initiatives.

We have further expanded the scope of these initiatives, including the operations redesign announced yesterday, and we are adjusting the total savings estimate to the top end of the range of $35 million to $45 million over the next three years, with an additional $10 million estimated in 2013.

Savings generated by these initiatives are estimated to generate a ten-year return in excess of 25%, well above our cost of capital and internal targets.

This operations redesign phase took into consideration factors such as cost inflation in China, as well as our desire to diversify our supply chain to better serve future anticipated international growth and improve overall customer service.

This restructuring will in essence relocate a majority of our North American Club manufacturing from Carlsbad to Monterrey, Mexico, a hub for many U.S.

based companies.

Once fully operational, the majority of our Club sourcing will be fairly evenly distributed between Mexico and Asia.

This initiative will also realign our current Company's operating distribution centers to locations in Dallas, Texas and Toronto, Canada, utilizing third party distribution providers, resulting in greater efficiency and capacity flexibility during our peak season.

This phase begins immediately and will take approximately 18 months to fully complete.

Our estimate of costs over the next two years for all of the Global Operations strategy initiatives include, for 2010, expense of approximately $16 million or $0.16 per share and capital of $10 million to $12 million; and for 2011, expense of approximately $15 million or $0.15 per share and capital of $5 million to $7 million.

I would point out that the timing of spending of expense and capital between years could shift, but this is our best estimate by year at this time.

We've also filed a Form 8-K today with the SEC that breaks out our estimated charges relating to the actions announced yesterday.

I would like to make one final comment regarding our outlook for the balance of the year.

As you can appreciate, when we develop forecasts, we incorporate several factors, including economic and consumer trends.

As George mentioned, given the data we had earlier this year, we had anticipated a certain level of economic recovery globally and factored that into our full-year outlook.

Obviously, the magnitude and timing at the recovery has changed since that time for several reasons, and despite the Company's improved financial performance through the first half of the year, it is on the whole lower than our original expectations.

Given the volatility and uncertainty of these external factors, it is very difficult to forecast sales with a high degree of confidence.

Therefore, we will not be providing a full-year outlook.

I can say with a fairly high level of confidence, however, that our gross margins will improve compared to last year due to continued savings from our Global Operations initiatives and a lower level of discounting at retail we have seen this year.

Our operating expenses will be fairly flat compared to last year, despite reinstating employee benefits that were suspended last year, investment in international emerging market and soft goods growth initiative, and the fact that FX was negatively impacting it this year.

We believe the global economy will recover, and with it, so will the golf industry.

For Callaway Golf, over a longer time horizon we believe that growth in our international business will continue to accelerate and become a majority, along with a higher quality of margins overall.

Our global soft goods and accessories businesses have grown significantly over the past few years, and represent additional growth opportunities, and we will continue to drive improved margins by reducing costs to our Global Operations initiatives and future projects.

We will now open the call for questions.

(Operator Instructions).

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

Please go ahead with your question.

Thanks.

George, first, regarding the weak sales you are alluding to, is this fairly consistent through your different retail partners, do you see it skewed more to green grass pro shops or to your big box customers?

Well, oddly enough, it seemed to run counter to what we have seen in the past.

The early part of the season actually started off more strongly with green grass, and the larger off-course specialties were having a somewhat slower start.

As the year progressed a little bit, it shifted.

The regional off-course guys continue to do reasonably well.

The larger off-course guys are a mixed bag, and green grass continues to be essentially okay.

The green grass guys represent approximately 20% to 25% of our business, so the off-course guys are the ones that we watch very carefully.

But those issues are, in fact, going to be most affected by the economic recovery that we are hoping for.

I know that Dick's has been sounding a lot more upbeat on their golf business, and they have been suggesting they are not seeing the -- maybe some of the headwinds that Callaway has publicized in the last month.

We are actually doing quite well in Dick's.

So do you think a lot of the weakness then is with some of the independents that have been disappearing, or just undercapitalized and can't buy inventory?

No, I don't think really that's that significant.

I mean, a lot of them -- we lost about 250 doors last year.

So much of that winnowing has occurred.

I think there's a fair disparity among the larger of course guys in terms of how well they're doing this year based on a whole variety of competitive reasons.

So we happen to be doing quite well with both Dick's and Galaxy, and that would mirror what their business is.

I think essentially we are mirroring what each account is seeing as far as their overall business is concerned.

It should also be noted, though, if you take a look at the data, that sporting goods stores will tend to look a lot better right now because sporting goods in general is doing better; but golf, to some degree, is lagging overall sporting goods.

I mean, it is, after all, a more expensive sport, and we do have weather issues and things that obviously very heavily impact golf.

So you've got to look carefully at who is reporting what and what the bulk of their business happens to be constituted by before we ever conclude a thing.

Are you concerned that last year a lot of clubs were -- a lot of new clubs were sold, but with the Buy One, Get One Free promotion; and given the industry, with the limits on technology improvements, there's nothing significantly different from a year ago, that perhaps that's contributing to the soft hardline sales we're seeing this year?

To be honest with you, look, it would be silly to say that something of that nature wouldn't have some effect.

But I really don't believe that's a dominant effect this year.

I think -- just take a look at the consumer confidence levels and the overall consumer spending levels.

The reality is, that drives our economy.

Consumer spending is approximately 70% of our GRP, and that is not looking good.

The earnings improvements that a lot of companies are showing either relate to certain categories that have shown recovery or just relate to very successful cost savings programs, but not necessarily the overall consumer spending levels are robust.

If you just read the papers over the last couple of days, as I know of course you do, consumer saving levels have gone back up again, consumer confidence has actually turned negative in the last several months, and consumer spending has turned negative -- or the trends have turned negative.

So I think there is just a great deal of uncertainty out there.

I think that's affecting the overall purchase of clubs this year far more than any hangover from last year's promotional activities, although I wouldn't discount that as having some effect.

And just the last question I have, obviously you hate to see manufacturing jobs move outside the U.S..

I know that you've put a lot of dollars into things like robotics in your assembly and Carlsbad.

Can you just kind of walk through what the advantages will be in moving those manufacturing jobs into Mexico?

Well, couple of years ago or so when we started looking at where our global footprint was going to end up, we detected and we were concerned about some of the potential changes that were going to occur in China.

We really felt -- the operations people and the supply chain people really felt that currency issues were ultimately going to come back and bite.

Certainly a wage push was going to happening in China; and it's not that our crystal ball was any better than anyone else's, but we acted on it a lot more quickly, I think, and started a study.

Now sure enough, you take a look at it, indeed, both of those things have occurred.

The wage push is really, really starting to take hold, and even shortages in labor to fill some of those factories have begun to be supply problems for us.

So this will give us infinitely more flexibility to be able to move our manufacturing process around to take into account any discreet or any particularly important moves in either pricing our supply.

So that flexibility, I think, is a very important one.

Number two, from a supply chain point of view, Monterrey, Mexico is a whole lot closer to the U.S.

market that is China.

And we have pointed that we are very conscious of working capital, very conscious of bringing down inventories, all of which are very heavily impacted by the length of that supply chain.

so -- giving us some alternatives that allow us more flexibility in those regards as well, I think, are very important longer-term.

As far as the robotics are concerned, I have to tell you that we just had conversations today with the operations people.

Some of the robotics that we put in place here and that will be in place in Mexico, if costs and FX continue in the direction that they appear to be going, those same robotics might be very well applicable to China as well.

So none of that technology in any way, shape or form is wasted, and in fact may have applicability much more broadly than I think we originally intended.

Okay, great.

Thank you.

No problem.

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

Please go ahead with your question.

Hi, good afternoon, guys.

This is actually Nathan [Mendez] in for Rick Nelson.

I wanted to start off with July.

Can you comment on what you're seeing so far in the month in terms of sell-throughs at retail, specifically by product category?

Are you seeing anything as a big driver for performance?

It's a little early to start giving any definitve information about sell-through.

You ought to know that the (inaudible) data we have -- and again, I repeat that the golf data tech numbers are more directional than they are accurate -- the [woods] market through May is down 8.4%, irons are down 1.4%, putters are down 6.1%, and balls are down 3.7%.

None of those figures will tell you that you have a particularly robust retail environment.

And my suspicion when we start seeing the July data is that we are not going to see marked differences in those trends.

So given that -- I mean, given that kind of an outlook is essentially what caused us to put out our release of some weeks ago to essentially alert all of you, frankly, that we're seeing some clouds on the horizon; and while we still very, very strongly feel that they're short-term, we didn't want anybody to get surprised by them, and I think -- and the other part that you really have to take into account, obviously, is the extent of which this category is clearly seasonal.

These uncertainties -- economic, employment, et cetera -- are all coming at the height of the selling season.

So you've got to be pretty Pollyanna to look at all of that and say things are just fine.

So given that, we've raised some caution and we've adjusted our outlook accordingly, and we've adjusted our plans in spending and inventories and everything else appropriate to, we think, a somewhat clouding of the outlook.

Thank you.

And kind of as a follow up to that, can you talk about market share changes by category that happened this quarter?

I can give you the exact market changes through May, which are the last months that we have the results; and I think -- let me see if I can -- let me see if I can dig those out for you.

I know we've had some very substantial growth from January to the current period.

Let's see if I can find the page here.

Our wood share has grown about 50% in dollars from its January starting point and about 37% a unit.

The irons -- again, we continue to be a -- clearly the leading iron manufacturer and seller, and it's our 13 year of that.

Putters, we have a very dominant position.

This is just U.S.

data.

These are just U.S.

data.

Now, I have fragmentary data from other parts of the world, and also some fragmentary data from other sources; but the reason I'm reluctant to quote all these numbers for you is that they are not comparable to one another and I can't speak to their accuracy, so I'm more concerned that I would be misleading you than helping you.

I can say that pretty much from January to the latest figures that we have in May, our share has grown pretty substantially, albeit off of reduced space at the end of last year because of the insanity that was going on at that point in time.

So we are looking more at the trends, and we are feeling reasonably good about the trends.

We are not feeling reasonably good about the overall market size, which as I indicated to you, have come down.

On actually your commentary, was that the year-to-date numbers that you were -- ?

No, I was giving you a number -- January share to the May share, which has grown quite -- on a year-to-date basis, we are pretty close to being flat, and I think we are down a couple of percentage points in the irons business.

But a lot of that is a distortion, I think, caused by the nature of the promotional activity that occurred toward the latter part of last year.

And Nathan, we can probably cover on some of the -- We can give you the details offline -- give you plenty of that.

Sounds good.

Thank you guys very much.

Good luck.

No problem, thanks.

Our next question is the line of James Hardiman with Longbow Research.

Please go ahead with your question.

Good afternoon, and thanks for taking my call.

Obviously, this is a difficult industry to really forecast, but I was hoping just anecdotally or qualitatively you could sort of compare their current thoughts on a number of different dimensions versus what you were thinking six, seven, eight months ago when you first started talking about 2010 results.

And you sort of laid out a number of different fronts that gave you some optimism towards the year.

Obviously, from what you have said, economic trends have not been sort of what you had hoped.

But on a couple of different fronts, I was hoping you could give us some idea how you'd sort of feel today versus which you initially thought.

A., in terms of currency, obviously it's still a positive, but is it a meaningfully less positive than what you initially expected?

B., sort of the inventory situation at retail and their desire to be promotional and/or increase or decrease inventories?

And then C., you sort of touched on market share just now, but are the gains -- I guess on a year-over-year basis, gains or losses, I guess I should say -- are those sort of what you expected them to be, or have they fallen short of your expectations?

Well, let me try to cover as much as I remember.

I think clearly, our expectation was that the recovery this year was going to be better than we are seeing.

We clearly did not feel that 2010 was going to make up for what had happened in 2009, but we thought it was going to go in that direction.

Clearly, the recovery has stalled.

Jobs haven't been created.

You know all of the statistics as well as I do.

And the key metrics that we look at -- frankly, with all due respect to all the other things that the economists look at -- are, frankly, consumer spending and consumer confidence, because that ultimately drives our business.

Now, we had the additional blessing of horrendous weather in many parts of the world that clearly delayed the start of the golf season and delayed it in some cases right into the headwinds that the economy started to face.

So those things came together in not a particularly positive way.

As far as the international environment, clearly, the Euro zone crisis was unanticipated and certainly happened at a much higher level than we had hoped.

And frankly, the difficulties that we are seeing in Japan were somewhat of a surprise.

We saw some recovery in Japan in the early part of the year.

In fact, it was quite positive; and then it just literally hit a wall.

And Japan at this point in time, I think, is -- it may in fact be, at least in the short-term, a problem area for us.

As far as the inventories are concerned, the one thing that I think we've been talking about, that we have a fair degree of pride for the last several years is that as we redid our supply chain, we added a great deal of flexibility and responsiveness to it, and as a consequence we were able to adjust to what we saw happening from a consumption and a trade buying and inventory point of view.

So we have been able to control our inventories quite well; and in fact, as Brad said earlier, have brought the numbers down in the absolute as well as, as a percent, and that's all for the good because it takes pressure off the end of the year in terms of any discounting that might have been necessary had the inventories gotten out of line.

The other good part is that the trade has been very, very careful.

We'd indicated that they'd entered the year with a fair amount of conservatism in terms of how much they were going to buy.

That's always a mixed blessing from a manufacturer's point of view, but in this particular case I think it worked to both their as well as our advantage.

The inventories that we're seeing out there, certainly on our products, is pretty well contained and controlled, so we, on the positive side, don't view that as being an impediment to our ability to sell the 2011 line, which we will begin to do in September.

So from that point of view, we're feeling okay that we've been able to adjust into that quite nicely.

The margin improvement initiatives, as we also indicated, have moved along very much at pace, and we're those commitments.

Now, the problem, of course, is that a lot of those positive actions are being shrouded by the overall economic issues.

But the thing that gives us a lot of heart, certainly, as we look into 2011, is that none of those things go away.

They're all there, they're intrinsically built into our cost system and will begin to show themselves to full value when the economy does recover.

So as far as looking out concerned, we are feeling a whole lot better about the forward look than we are about the current one, frankly, and certainly the retro look

I don't know, did I -- and as far as FX is concerned, yes, clearly FX is not as much of a tailwind as we anticipated.

Clearly, the Euro collapse followed by the Pound collapse affected our expectations this year.

The Yen has been holding up rather surprisingly, considering their economic outlook, and has offset some of the negatives that we're seeing in the Euro zone.

But we're watching it very carefully, because the things in Asia tend to happen rather -- the pendulum swings are rather wide and they happen rather quickly, so we're watching it very carefully to make sure we don't get a surprise.

That's very helpful, but just to piggy back or follow-up real quick on the promotional environment, I think your initial expectations were that this year in the channel would be sort of a midpoint between last year and the normal promotional environment.

Has it been -- it sounds like it's been better than last year at least, but have you seen the improvement from a promotional standpoint that you would have initially expected?

Yes.

And I think partly it may be a function of the trade being a lot more careful about their inventories and not finding the pressure of inventory requiring them to do some stuff.

I mean, it's caused some problems for a lot of the guys trying to anniversary their huge promotions last year.

Now, the fact is that we have -- the reason I'm very pleased about our share performance to date, even though it's flat essentially, is that we have done it without having to resort to heavy promotional activity.

We were perfectly comfortable having our share shaved, if you will, in order to protect margins, because we said that that was one of our very significant objectives going into this year, and certainly to date we have been able to do that, I think, rather well.

The really heavy promotional activity that occurred very early last year has not occurred as yet.

There's still some year to go.

I would fully expect that the promotional activity will pick up as we get further into this season, as it does every year.

But all signs that I'm looking at would seem to indicate that they will not come close to reaching the levels that we saw in '09.

So put shortly, yes, I think there clearly has been a ratcheting back of the promotional activity.

What is continuing, however, is a disproportionate focus on the part of consumers on the lower price points -- the lower end of price points.

Now having said that, please understand the $299 price point for drivers was always the dominant price point.

And this year it continues to be so, and in fact, on a proportional basis, it's probably a little higher.

The heavy promotional activity that some of our competitions' got into in drivers last year, they continue to offer products way down there at that lower price point.

So the lower price points are continuing to be very, very important this year; it would be crazy to say that's not true.

But the really, really margin devastating kind of activity that we saw last year has not occurred.

Excellent.

Thanks, guys.

No problem.

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

Please go ahead with your question.

Thank you, and thank you, gentlemen.

On the restructuring or the charges -- George or Brad either one here -- the $0.10 that you had outlined, that was ongoing, and then should we view the $0.06 as the incremental related to the announcement that you made yesterday?

Is that the best way to kind of view that?

I think the $0.10 was kind of a preliminary estimate and we did add this particular initiative.

I wouldn't call it $0.06 and $0.10 because a lot of things changed from the beginning of the year, Tim.

Okay.

But our best estimate is roughly $0.16, and the announcement yesterday was really the refinement this year of this next initiative for us.

So it's probably fine-tuning of estimates as much as anything, but certainly an incremental portion of what we had originally thought we would do.

I guess maybe another way to ask the question, how much would you maybe -- of the $0.16 this year now, how much would you frame it as sort of being the ongoing, continuing to get better on the gross margin side versus more of a step function, more of a one-time type of thing?

Well, when you move the global manufacturing distribution footprint around, it's a bulk majority of it.

The majority of the $0.16 is going to be related to this, and it's really one-time.

Okay.

Over the next few years, it's one-time.

And the reason people keep saying you have all of these one-times, well, when you go out and start moving manufacturing, that is not a normal -- kind of normal course of business.

But I would say that this is probably one of the last big initiatives that we will have over the course of the next 18 months, and then I would think it would be back to more kind of a just normal operating in terms of the rest of the initiatives.

Okay, okay.

And then your commentary from June to now appeared to change a little bit regarding the outlook for the year.

In June, you said you continued to expect to be profitable, and now you're saying you expect the year to be better.

Any additional color there?

Do you still anticipate profitability or just year-over-year improvement?

And then, are those references just to net income or are you referencing to EPS?

I think the reference was to EPS, and look, our objective is to be profitable this year on an EPS basis as well.

The one thing we can't really predict as we sit here is the top line, and that's ultimately going to determine it.

As I indicated to you -- and it's not really ducking the issue, but the controllables we are controlling quite nicely.

The working capital controls that we have in place are doing quite well.

The OpEx controls we have in place are doing quite well.

All of the things that we can wrap our hands around are essentially coming in as we would anticipate.

The one thing that we are really concerned about and don't really have an answer to is the top line.

And until I can give you a better answer on that, it is very hard for me to predict what the bottom line EPS might or might not be.

It is clearly our intent to try to come in positive.

And if some of the indicators that I see are not as negative as I'm perhaps indicating to you -- and there's a very distinct possibility that may be the case -- then we're going to be able to deliver on the original expectation that we set in June.

If consumer confidence and everything else continues to turn south, which the last couple of months would indicate, I'm sorry to tell you that your guess is as good as mine.

Okay.

But we are going to run this business to maximize the profitability we can.

So the profitability, would that include or exclude the $0.16 worth of charges?

When we always talk about that, Tim, it's on an operational basis that's excluding that.

When we talked about that mid-year, that was on a proforma basis.

Okay, okay, so excluding those.

Okay.

And then finally, on a rough kind of ongoing normalized basis, you've got about what?

About 35%, 40% of your annual revenues left that will go to the back half of the year?

Approximately, yes.

Okay, okay, thank you.

Let's hope it's less than that, then maybe it's more.

Who knows?

Okay.

Thank you, gentlemen.

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

Baird.

Please go ahead with your question.

Hi, thanks for taking my questions.

You issued sort of a three-year plan in November for 2012.

How does this outlook impact your 2012 plan?

I think it would be nice to believe that the timing remains the same.

We are -- we feel the overall levels that we are trying to achieve are still the levels that we hope to achieve.

I think as we look at it now, considering the fact that 2010 is clearly a tougher year than our ingoing assumptions were, that failing anything else, I would push the target back a year.

And that's about as clear as I can get on it right now until we get a better sense of whether or not the hiccups we're seeing in 2010 are just that, or whether or not there's some more just basic problem that we're facing.

Thank you.

And Europe hasn't been as bad for some consumer durable businesses as maybe the papers would've indicated.

What are you seeing in the European market broadly speaking?

Again, I think it's very important for you to make a distinction between consumer durables and deferrable consumer durables, if you will -- discretionary consumer durables, sorry.

What we're seeing is that there are some consumer durable categories that are coming back, but discretionary consumer durables are lagging.

So -- now, if consumer durables are coming back, then I believe discretionary ones will follow.

The one thing that we are wrestling with is just at what time they're going to come back.

So, I haven't got an answer for you on that.

I can conjecture for you, but I'm not sure that my conjecture's going to be better than yours.

Okay, thank you.

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

Please go ahead with your question.

Yes, hi.

A couple of questions.

First of all, talk about weather.

How much of an impact - obviously, I know weather has impacted your business, but how much of an impact has it had on your business?

Is it mostly macro?

Macro in what respect?

I'm sorry.

(Inaudible).

Oh, I think macro economic conditions have had a very important part to play in it.

But remember, rounds are now down to approximately 3% through May.

Even in our bad year last year, rounds were pretty close to flat.

So rounds were down 3% this year, which would clearly indicate that weather has played a bigger role.

Weather will tend to have more of an effect on the ball or the consumable parts of the business, so the ball category and things of that sort.

The macro effects will clearly show up in the equipment part.

And as I kind of indicated to you, the woods business is down 8.4% through May.

That's clearly a macro factor, much more so than weather.

So it really depends on which part of the business you're looking at.

Okay.

And then as far as product launches in the back half of the year, any difference in timeline versus what you did a year ago?

Are you holding back on any launches given the environment?

Also for competitive reasons, I'm not going to -- I apologize, but I'm not going to answer that question.

I would at this point in time just assume the same as past.

Assume the same as what you did a year ago or so?

Yes, and -- but I will tell you that, that may not be accurate, but I'm certainly not going to signal what we are going to do at end of this year for all sorts of competitive reasons.

Okay, fair enough.

Yes, because we don't get to listen in on their call.

Maybe you can read their transcript.

Last quarter, you talked about some back order issues on certain products.

How did that play out during the quarter?

Back order issues are pretty much cleared up.

We had a couple of situations with some iron sets that actually did better in the first quarter than we had anticipated, but those have cleared up, and we had certain small issues with golf bags.

But for the most part, back orders were not a major factor for us in the quarter.

Thank you.

No problem.

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

Mr.

Fellows, do you have any further comments you'd like to make before closing the call?

Yes.

Again, we presented a fair number of statistics that are concerning.

And I think depending on how closely you were listening, you can walk away with a more negative point of view than I think you should.

There's nothing that we have looked at in this marketplace that is permanent or fundamental in nature.

We are clearly very much of the opinion that the macro economic conditions, that as they begin to ease, will in fact ease the pressure on the golf industry and it will come back.

There are all sorts of signs to show that the fundamental interest in golf has not diminished.

People's willingness and interest in playing the game has remained the same, taking into account some of these external things that have occurred this year.

So with us, it's really a question of timing.

And our approach to this year has been one of caution, but also continuing to make those investments, as is obvious from the recent release that we put out -- continuing to make the investments that we think are vital and important for the long-term health and well-being of our Company and that will pay dividends to us as the marketplace comes back.

I can tell you that I am much more optimistic about 2011, but your judgment is as good as mine depending on what you think the macro economic conditions are going to be.

But if they do come back, so will the golf industry.

There are no inventory issues out there.

There is pent-up demand, because now we have had two years of people holding back and not necessarily buying new products.

We do have new technologies and new products that we're putting out there that are really quite outstanding and will be very appealing to consumers when they feel comfortable about going back in and making those kinds of purchases.

So as I said, I can't tell you what the next quarter is like just simply because of the uncertain nature of what we are looking at, but I can with some degree of confidence tell you that we're feeling much, much better about the next two and three year timeframe that I am about the next quarter.

So we'll be back in three months, and we will talk about that outlook at that point.

Thank you.

Ladies and gentlemen, this does conclude today's conference call.

You may now disconnect.