Topgolf Callaway Brands Corp (MODG) 2010 Q4 法說會逐字稿

Please stand by for real-time transcript presentation.

Good afternoon.

My name is Marcello and I will be your conference operator today.

At this time, I would like to welcome everyone to the Q4 2010 Callaway Golf earnings conference call.

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

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

(Operator Instructions)

Thank you.

I will now turn the call over to our host, Mr.

Brad Holiday, Chief Financial Officer.

Mr.

Holiday, please go ahead.

Thank you, Marcello, and welcome everyone to Callaway Golf Company's fourth 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 some opening remarks and I will provide an overview of the company's financial results, and we will then open the call for questions.

We've also issued today a press release and schedules to the press release which provide additional detail concerning our results.

I would like to point out that any comments made about future performance, events, prospects, or circumstances, including statements relating to an economic or golf industry recovery, future growth or operating improvement, estimated sales, gross margin, operating expenses, and earnings per share, estimated charges and benefits related to the Company's gross margin initiative and the company's estimated 2011 tax rate, capital expenditures, and depreciation-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 One, Item 1A of our most recent form 10-K for the year ended December 31, 2009 filed with the SEC together with the Company's other reports subsequently filed with the SEC from time to time.

In addition, during the call in order to assist interested parties with period-over-period comparisons on a consistent and comparable basis, we will provide certain pro forma information as to the Company's performance for 2010 and 2009 excluding charges associated with the companies' gross margin initiatives and for 2010 non-cash impairment charges related to Top-Flite intangible assets.

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

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

And the non-cash Top-Flite intangible asset charge.

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

The information provided on the call today and the earnings release we issued today, include a reconciliation of such non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with GAAP.

The earnings release is available on the Investor Relations section of the Company's website at www.callawaygolf.com.

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

Thanks, Brad.

And thank you all for joining us.

While overall 2010 results were disappointing, a number of market metrics would support the point of view that the market has begun, or in fact continues its slow but inexorable climb back to some normalcy.

That is not to say that the picture is without obstacles yet to be overcome, however.

The US economic recovery remains somewhat choppy.

Consumer discretionary durables have not yet shown robustness.

The euro's known issues while trending somewhat more positively have certainly not been resolved.

And Japan and Korea, their economic and/or political turmoil certainly remain front-page fodder.

And finally of course, La Nina has not been helpful with playing rounds given the fact that they have declined 2% year-to-date through November.

But having said all of that, there are many signs that can support some very cautious optimism.

The hard goods market while still in decline leveled substantially down approximately 2% year-to-date through November in the US.

General indications would point to a similar level in many of the international markets as well.

While any decline is nothing to cheer about, this compares quite favorably to the 12% decline experience in 2009 versus 2008 and establishes a very positive recovery trend.

Industries such as automotive and financial services that traditionally have been strong supporters of golf have registered marked turnarounds and have been moving to more normal visibility levels in the golf world.

Promotion levels, while not yet back to normal levels, have declined measurably in 2010, evidencing that golf consumers are less inclined to bargain hunt and somewhat more apt to buy the newest and more expensive products.

From a Callaway perspective, non-operational impairment and gross margin initiative charges aside, operating performance has improved measurably with 2010 operating loss of $4 million versus a loss of $24 million in 2009.

Clearly not where we want to be, but a significant move in the right direction.

Net sales were essentially flat despite the category decline of approximately 2%.

Pro forma gross margins have improved by 230 basis points as a consequence of our reduced promotional activity, favorable ethics trend and continued contribution of our margin improvement and global operations initiatives.

Our balanced approach of tight OpEx control and targeted investment strategy has begun to pay dividends, and promises to be a significant contributor as the recovery takes hold.

Specifically, discretionary operating expenses have been cut to fuel growth initiatives with the following results.

Emerging market investments have lead to growth of 25% in China, southeast Asia, and India.

Apparel and accessories business has expended by 8%.

And gross margin initiatives contributed another $15 million in savings, bringing the cumulative total to $85 million with another $25 million to $35 million to come in the period 2011 through 2013.

It's important to know that these savings are not one-time events, but repeatable ongoing savings that will fuel profitability, and provide the funding necessary to drive revenue growth as the market returns to normal.

For the fifth straight year, Callaway new products have garnered more overall and gold medals in the Golf Digest equipment review, once again evidencing the Company's technological leadership.

And while only anecdotal, early consumer response to the new products at Demo Days in the Sunbelt have been quite encouraging, equipment shares have generally held or grown nominally despite our reduction in promotional activity.

Now, while this is not a totally unblemished picture, the recovery we anticipated when entering the recession is taking hold albeit at a slower pace than originally hoped for.

Prospects for 2011 are indeed brighter than 2010, but not without some caution called for.

The planning assumptions for 2011 that Brad will take you through shortly are a reflection of our belief that golf is clearly on its way back, but not without recognition of the fact that all issues are not yet resolved, and that conservative assumptions believed to be in place for 2010 were not conservative enough.

So with that, let me turn the meeting back over to Brad so that he can give you some detail and color on the year.

Thanks, George.

I will quickly cover some of the highlights for the year and then we'll open the call for questions.

Consolidated net sales for 2010 were $968 million with a net loss of $19 million or a fully diluted loss per share of $0.46.

These results compare to 2009 results of $951 million in net sales, a net loss of $15 million, and a fully diluted loss per share of $0.33.

Included in the 2010 results are some charges I would like to highlight that make year-over-year comparisons of operating results easier to analyze.

First, the 2010 results including non-cash impairment charge of $0.08 associated with our Top-Flite intangibles that I will discuss more fully in a few minutes.

Additionally, they include a $0.14 charge associated with our global operations strategy as we are in the midst of moving our Carlsbad club assembly and a portion of our Chicopee Golf Ball operations to Mexico.

This compares to a similar charge of $0.06 last year.

I would also like to point out that included in the Other income line is an $0.11 charge associated with the required mark-to-market accounting treatment of foreign exchange hedge contracts that were outstanding through the year.These contracts are in place to reduce foreign currency volatility on a portion of our anticipated 2011 international business.

This charge was larger than originally anticipated due to a weakening dollar at the end of the year.

There was no similar impact in the 2009 Other income results.

I point these items out in order to provide a more clear comparison of year-over-year results.

These items and the aggregate adversely affected 2010 results by $0.33 per share compared to $0.06 per share in 2009.

I should also point out that our 2010 earning results were negatively impacted by an incremental $0.07 per share compared to 2009, related to the full-year impact of our June 2009 preferred equity offering.

Let me cover a couple of these items in more detail.

First, let me discuss The Top-Flite impairment.

On an annual basis we conduct an impairment analysis on all of our intangible assets to assure that they are property valued.

As you know, we acquired the Top-Flite and Ben Hogan brands in 2003.

Top-Flite products are targeted primarily for distribution through the sporting goods and mass market channels, which historically sell more value-branded golf balls.

Over the past couple of years there has been an increase in premium-branded golf balls being sold in these channels, which has negatively impacted Top-Flite golf ball sales.

We thought the situation would abate over time as the economy began to improve.

But in our analysis, it appears that this practice is more permanent in nature and therefore required an impairment charge against the intangible asset to assure the valuation was appropriate.

Having said that, Top-Flite remains an important brand within our portfolio.

Secondly, as you know, we are in the midst of our global operations strategy,which includes relocating our club assembly operation from Carlsbad and a portion of our Chicopee operations to our new facility in Monterey, Mexico.

It also includes transitioning our distribution footprint from an owned and operated model to a partnership model using third-party logistic specialists.

This stage of our gross-margin-improvement initiatives began in the planning stages back in 2009, with the heavy investment and transition in manufacturing and distribution taking place in 2010 and 2011.

As I pointed out earlier, the charges included in 2010 results increased to $0.14 per share compared to $0.06 per share in 2009.

The investment level against these initiatives will increase to an estimated charge of $0.22 per share in 2011, which we expect to be the last year of significant investment against these initiatives.

I would remind you that through 2010 and as George pointed out, the initiatives have generated approximately $85 million in savings with an additional $25 million to $35 million estimated over the next three years out through 2013.

In looking at our 2010 results and taking these factors into consideration, it looks like our pro forma results through the operating profit line were pretty much in line with our previous guidance.

There was a difference versus our previous guidance in other income which was due to the US dollar weakening at the end of the year, which required the mark-to-market adjustment to reduce the carry value of outstanding hedge contracts that I just covered.

Also, tax rates changed from our previous guidance due to the impact of a smaller pre-tax loss in 2010 on certain non-taxable discreet items which factor into the calculation.

So to quickly summarize the highlights that George already covered.

Net sales increased slightly in 2010 despite the US golf industry declining by approximately 2%.

In constant dollars, net sales declined by 1% compared to last year.

Pro forma financial results, which exclude charges associated with our global operations initiatives and the Top-Flite impairment were as follows-- Pro forma gross margins improved 230 basis points compared to 2009 due to the positive impact of foreign currency rates, lower discounts, and additional savings generated from our global operations initiatives.

Pro forma operating expenses were relatively flat as a percent of sales, as cuts in our core OpEx nearly offset incremental investments in our key growth initiatives, and the reinstatement of several employee benefits that had been suspended in 2009.

Pro forma operating results improved $20 million from a loss of $24 million last year to a loss of $4 million in 2010.

Looking quickly at fourth-quarter results consolidated net sales for the fourth quarter of 2010 were $186 million flat compared to last year.

The company reported a net loss of $32 million or $0.54 per share compared to a loss in 2009 of $16 million or $0.29 per share.

Included in the 2010 results are the $0.07 Top-Flite impairment charge, $0.07 associated with our global operations strategy, and $0.04 for hedging contracts.

2010 results were also adversely impacted by approximately $0.09 per share due to a difference in tax rates compared to 2009.

Included in the 2009 results is a $0.02 charge for our global operations strategy.

In looking at our full-year regional breakout, US sales declined modestly by 2% to $468 million compared to $475 million last year.

For the quarter, US sales increased 3% to $79 million compared to $76 million last year.

International sales for the full year were $499 million, an increase of 5% compared to last year's sales of $475 million with growth in all regions except Europe.

In constant dollars in international sales would have decreased by 1%.

For the quarter, international sales decreased 2% compared to last year.

And in constant dollars, would have declined 6%.

Looking at the balance sheet, we ended the year at $55 million in cash and no outstanding balance on our credit facility.

Consolidated net receivables were $145 million at the end of the year compared to $140 million last year, on consolidated DSO was 71 days compared to 69 days last year.

The overall quality of our accounts receivables remains in good shape as compared to last year.

Net inventories were $269 million at the end of the year compared to $219 million in 2009.

This increase is driven primarily by higher inventory on our 2011 new products due to earlier retail launch dates as well as the impact on a supply chain of an earlier Chinese New Year, and the need to accelerate deliveries from our suppliers.

The increase was also due to lower sales on some 2009 products due to the continued delay in the golf industry recovery, but this inventory will be sold in normal course throughout the balance of this year.

Overall the quality of our inventory is good, and if you take the average inventory value as a percent of net sales on a trailing 12-month basis, 2010 was relatively flat compared to 2009.

Capital expenditures for the year declined to $22 million compared to $39 million in 2009, and were slightly favorable to our previous estimate of $25 million.

Depreciation and amortization expense was $41 million for the year, flat with 2009 and in line with our last estimate.

As we look at the upcoming year, we are beginning to see signs of an overall recovery in the global economies.

Additionally in the US, we are seeing marked improvement in the financial performance of the auto industry as well as the financial sector, both of which are typically big supporters of golf whether in sponsorships, advertising, or entertainment of customers.

We are hopeful that these improving trends are a positive leading indicator that the golf industry will continue to trend positively year-over-year as we saw this past year.

White it is early and these estimates will most likely change over the course of the year, we feel that it is important to give you our range of financial expectations for 2011.

Net sales are estimated to range from $980 million to $1.02 billion or growth over 2010 results of 1% to 5%.

The key drivers for this growth include continued recovery in key global economies, our strong 2011 product line, an increase in average selling prices, and continued strong growth in our emerging markets and soft goods and accessories category.

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

Pro forma financial estimates exclude pre-tax charges of approximately $23 million associated with our global operations strategy and are as follows.Pro forma gross margins are estimated to improve to 41% to 43% due to improved sales mix, less discounting, and savings from our global operations initiatives.

Operating expense is estimated at $375 million to $395 million.

Cuts in infrastructure we took at the end of the year, are estimated to save approximately $10 million in core OpEx, which will partially offset continued investments in growth initiatives as well as an annual bonus of certain financial goals are achieved.

Tax rates are estimated at 38.5%.

Given these estimates, our pro forma earnings per share are estimated to range from $0.15 to $0.25 for the year.

This estimate includes- excludes approximately $0.22 per gross margin initiatives.

For 2011, CapEx is estimated to be approximately $30 million, and depreciation and amortization expense is estimated at $40 million.

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 is from the line of James Hardiman with Longbow Research.

Please go ahead with your question.

This is Bobby Jackson.

I'm a private shareholder.

A couple of things you were mentioning in your press release about improving on margins.

Can you expand on how you're looking to sell through much more marginable arenas like selling on your website.

What are you guys doing to sell more goods and services to draw more customers to your website to increase margins?

Well, the increase, the primary generation of increased margins are really going to come through the retail channel.

We clearly have an active E commerce site, but at this point in time, we channeled most of the E commerce sales through our existing trade channels.

There's a very high level of sensitivity in the industry to competing with retail sales channels, and we found this compromise has been working quite well for us.

But the increase in margins, one as website, the gross margin initiatives continue to deliver savings on an ongoing basis and as the volume restores itself to more normal levels, those things are going to become a lot more important.

The reduction in promotional activity, that we initiated in 2010, that we are in fact continuing into 2011 and that will also contribute to improved margins.

So, E commerce at this point in time, will not be the driver, certainly not at this stage of increased margins.

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

Please go ahead with your question.

Good afternoon, guys.

Just following up on Bobby's question there on margins, Brad, if you could kind of take down 2010 gross margin and just maybe give us an order of magnitude of where the improvement came from in some of those big buckets and then a little bit more clarity on where you see this, 200 to 400 basis points of improvement materializing in 2011.

Well, I mean, I kind of mentioned the big three big ones.

It was certainly gross margin initiatives we talked about generated about $15 million in savings.

We certainly did see a reduction in discounting throughout the year which we had anticipated and as George pointed out, we were able to pretty maintain market share despite returning at least somewhere toward a more normal pricing environment.

And then FX had a positive impact also.

So those were the three main drivers.

Okay, so for '11 though, should we think of those three drivers equally contributing?

No, I think what we'll see in 2011 will be continued GMIs.

It will be an increase in, I would say, average selling prices as people start to come back into the marketplace.

And if you take a look at some of our new products, there tend to be more in the marketplace at the higher price points.

Plus it's another year for us where as we bring the Razor line of irons, they are kind of the X series if you will, they are higher price points.

So I would say it's going to be continued GMIs, a higher average selling prices because of our strength so a higher mix of products.

And right now, I would just plan FX as being neutral its too hard to predict.We are not including that in our forecast right now.

Okay.

And then just George looking at what you're seeing with your initial talks with retailers at this point.

How do they stand with inventory and how willing are they to take on stuff early in the season.

The inventory levels at the trade level are actually quite good.

They've been very careful over the course of the last two years, and essentially, certainly throughout '09 and even to some extent in '10, they cut back their inventories to the point even further to the point where I don't really see any serious obstacle to new product introduction as f ar as store level inventories are concerned.

Our prebooks have gone pretty much according to plan.

We anticipated the fact that their willingness to take inventories verses prior years.And that prebook selling period is essentially delivering as we would expect.

So, they're cautious.

But there doesn't seem to be any serious impediment to taking on new products.

Quite the contrary, I think, having gone through a rather difficult two year period of time, everybody is quite anxious to see the industry recover and I think they are quite interested in seeing the new products do well.

How is your mix shifted from the on course retailers to the off course of the last couple of years?

Not a great deal.

I think there have been some shifts -- the on course guys still represent approximately 25% of the volume in the US.

It's a somewhat higher percentage, depending on the markets overseas.

For example, in Europe, the on course percentage tends to be higher.

In the US, there's been some movement between sporting goods, mass, and off course specialty.

I think over the course of the last year, mass has declined a couple of percentage points.

Sporting goods has picked up those percentages.And off course specialty has essentially maintained their share of the business.

Okay.

Great, thank you.

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

Please go ahead with your question.

Thanks.

Yeah, a few questions.

George, first, looking at the 2011 revenues guide in the 1% to 5% increase you outlined three items, global recovery, increase in average selling prices and market share growth.

Looking at the first two, global recover and increased average selling prices.

Certainly all of the headlines for Europe, Japan, maybe to a lesser extent the US reveals ongoing de-leveraging, demand from the consumer, weakens before it gets better.

So, trying to figure out what your crystal ball shows in terms of the global recovery.

And tied to that for the last couple of years, the theme in the golf industry has been growing demand at the lower price points.

And the industry has done a great job.

And showing the customer you got great equipment at these lower price points.

I'm curious as to why you might think that might reverse itself.

Well, let's address the first thing, the most serious economic question would really be in Japan at this particular point in time.

They are between the political uncertainties going on there in addition to the economic uncertainties.

Japan is a question mark in our mind.

Europe, on the other hand, we see a recovery, particularly in the UK.

As it turned out.

We suffered this in Europe, more specifically in the UK in '10.

But I think that was more self-imposed than the marketplace.

And our sales in Europe has I think reflected the fact that we've corrected some of those issues, particularly in the UK.

And we see a recovery of our business versus the '10 levels going on there.

As far as the US is concerned, we have clearly seen an improvement in the overall business.

It's a little frustrating because it's not at the pace that we'd like to see.

We see a continuation of those fairly nominal improvement levels going on here.

My crystal ball is not much different from anyone else's, but what I'm describing to you is in fact what we're seeing happening.

I don't know what other indicators you're getting.

Well, just looking at the austerity programs in the UK for instance and what's happening with public service employees.

I think they would have the wallet to be buying the higher selling prices lower ESPs.

It depends on what you determine as a higher selling price.

We have also this year very specifically introduced European versions of some products that in many instances, the discounting in Europe was more a reflection of internet reflecting what was going on in the US and Europe having to follow.

By having very specific European products we really decouple that relationship.

Point in fact relative to what we're selling in the US has always been the case in Europe.

And particularly in central Europe.

I think that continues to be the case.

Also, I'm not sure that you're giving enough credit to the fact that we've had two years of relative pent-up demand in the marketplace that we see beginning to reflect itself toward the end of '10.

And I think we'll continue in that direction albeit not in a dramatic level necessarily, but continuing that direction going into '11.

I think the overall economic press that you're looking at is a bit more severe sounding than I think the real impact on the golf industry as far as the European market is concerned.

Okay.

As far as the discounting, I would not agree that the golf industry has done a good job showing consumers that they get good products at cheap prices.

I think the golf industry has reacted very dramatically toward- to the economy and I think discounted more heavily than we should have.

That abated substantially or it depends on the manufacturer of course, but it abated measurably in '010 and will continue to do so in '011.

I think that our early indicators from again, it's anecdotal more than anything else in the sunbelt would seem to reflect that people are coming out and looking at full priced products.

Now, let's talk about what products we're selling.

Clearly, the 299 price point for the drivers is still disproportionately larger than it was traditionally, and 399 and above is a lesser part of the mix.

But the reliance on heavily discounted closeout products that is go down as low as $149 has lessened.

So I think that the overall pricing profile, if you will, has begun to shift back up to higher pricing, but no, it's not at the levels that it was in '07 by any stretch of the imagination.

But it is clearly better than '010 was better than '09.

And '011 better.

One more question on the global initiative charges.

A little bit concerned about how rapidly this is increasing from $6 million in 2009 to $15 million last year now $23 million in 2011.

And I guess two things I wanted to find out about.

One, why do you exclude those items from your guidance when the benefits are included?

These are cash expenses, I guess.

And then second, could you give us a little bit more disclosure about what's included in these global initiatives?

Are there mark downs or clearance activity for inventory that's included?

No, those are not included.

Let me address the overall charges.

You know, we've undertaken over the course of the last four or five years, a very substantial re-construction, if you will, of our entire manufacturing and distribution process and footprint.

The fact that there have been some substantial charges that occurred in '010 and '011 are a reflection of the fact that we are now into actual plant closings and plant moves that are in fact the larger charges.

Earlier charges reflected substantial increases in automation and changes in process and in supply chain.

And now we're coming to literally bricks and mortar moves that are by definition more expensive.

But as Brad indicated, the last of the substantial charges relating to that footprint change will be in '011.

The Monterey plant is up and beginning to operate.

The North American distribution center changes are in the process of being made and are in fact operating so that the -- those changes in terms of our entire manufacturing and distribution operation are at their final stages and unfortunately or fortunately, depending on how you look at it.

The primary cost for those things occur towards the end and that's where we are right now

We do not anticipate any substantial charges going forward beyond '011 because all of the big steps have been taken or are in the process of being taken right now.

Now as far as why do we exclude the benefit that -- exclude the charges and include the benefits?

That's more an accounting process than anything else.

I mean the fact is these are one time charges whereas the benefits are ongoing and continual.

The savings that we talk about and sometimes it gets lost in the translation, but those savings are ongoing savings that reoccur year after year.

The charge to move a plant occurs one time and once done, it's over with.

And that's the way we're treating it.

We're pretty transparent on exactly how that's being done.

So there's certainly no intention to cloud the issue.

To the extent that there are any further questions about that.

I'd be happy to amplify it to the last point, no, there are no closeouts or inventory adjustments or anything of that sort including any of those charges.

That was very helpful, thank you.

No problem.

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

Please go ahead with your question.

Thanks very much.

I'm wondering where you guys see that you are most innovating and won the accolades that you've received really begin to translate into bigger share gains and woods and irons, and secondly, putters were up for the year and down in the fourth quarter which is a dramatic turn.

I'm just wondering what's going on there.

Maybe you can flush that out a little bit.

And talk about the prognosis for 2011 in that category.

And lastly, I'm curious how you would assess your parallel initiatives and how you're strategizing this category for 2011.

Okay.

Let me take those in pieces.

The technology changes are, you know, the technology changes to the '010 line are quite dramatic in that we've introduced this new forged composite material.

The problem that we've been facing over the course of the last few years which is extraordinarily frustrating to us is we've brought some very, very important technological changes to the construction of golf equipment right in the face of a turn down in the economy of unprecedented proportions and it has essentially dissipated the value of a lot of that innovation.

The innovations that we're introducing this year, we believe will come up against a lot less of a head wind and we anticipate that we'll gain much more benefit from these changes than we did from the other ones.

You know, it's very hard to -- it's very hard to buck a tide that's on its way out.

We have chosen to continue our significant investment in R&D, we've continued to spend heavily against innovation and bringing technology to the party.

And we know the benefits are there.

But they're not going to show up to the fullest extent until the market turns around.

Now we believe we're at the early stages of the market turn around.

I would hope and expect that '011 would begin to reflect that.

As far as the putter issue that you talked about, it's very difficult to look quarter to quarter.

In '09, we had a significant introduction with White Ice in the fourth quarter that we did not anniversary in the fourth quarter of this year.

I think when you look at the a category like putters, it's better to look at the year on year trends rather than the quarter-to-quarter because they're very heavily influenced by new product introductory calendars-- and indeed the entire category is very heavily influenced by that.

Our putter's share is close to all time high.

So clearly we've been able to more than sustain our very strong position in that category.

We have some new introductions that are going to go into '011 line and we would anticipate that they are going to more than sustain our very, very strong share in that category.

So there's no real issue as far as putters are concerned that we can see.

And far as the apparel is concerned, we're quite pleased with the progress we're seeing in apparel.

Our new partner Perry Ellis, PEI-- is an extraordinarily talented group of people both from a styling, supply chain, and distribution point of view.

In the face of a fairly difficult economy our apparel and accessories business grew 8% in '010 which I think is really the early stages of our playing some catch up, having left our original licensee.

We see great progress by Ellis in the nontraditional golf channels in terms of gaining distribution for Callaway as a lifestyle apparel brand.

We have certainly seen some significant gains and distribution in apparel in the golf channel.

Again, remember that during the transition, we were selling really remnant stuff from our old licensee.

And the new Perry Ellis stuff didn't take hold until the second half of the '010 selling season.

So, the 8% increase on a year to year basis is quite positive.

Our selling of the line going to '011 is stronger than '010.

So, we anticipate that that part of the business will continue to grow at a reasonably high rate.

So, I think that whole area of accessories, soft goods being a part of that is one of the growth drivers we see affecting the business over the course of the next several years.

Great.

Thanks lot and best of luck.

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

Please go ahead with your question, sir.

And it looks like that question has been withdrawn.

We'll move to the next.

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

Baird.

Please go ahead.

Thanks for taking my question as well.

Short term, you're clearly tethered to the results of the golf industry.

But, George, what are your thoughts maybe longer term about diversifying beyond golf and how would you pursue that if you have plans?

Well, you know, I'll harken back to '07 when we were on a very, very solid and positive trajectory.

At this point in time, we saw things going in the golf industry quite positively.

Certainly generating a lot of money and at that time, we indicated to all of you folks that we were exploring the possibility of Callaway extending beyond the golf industry.

Unfortunately, the second half of '08 through '10 affected us.

And at that point in time I think it was really prudent for us to hunker down and get back to the golf industry and maximize what we could out of the business as it existed over the course of the last two and a half years.

That's still our thinking.

Until we see a solid and marked return to a more normal level in the golf industry, I think it would be inappropriate for us to dissipate either resources or some of our human energy to start looking outside of the golf industry.

However, having said that, that's still clearly on the back bench to be resurrected and dusted off at the point of time we feel that the golf industry is back to a normal level.

And I think I'd leave it at that.

Right now, our focus is ensuring that we return to solid profitability in the golf industry, that we do the things necessary to prosper in what has been a very difficult environment for the last two years, and we finally turning a corner and until we feel comfortable that that corner is indeed turned and is sustainable, we are not going to look elsewhere.

And then following up on that turning the corner, what type of revenue environment do you think would be necessary for you to earn kind of profitability that would make you feel comfortable about the golf business and kind of economic value you've got in that business?

Well, we had established a three year target some three year targets we issued a couple of years ago that clearly the economic downturn seriously affected the planning of those targets.

But as we look at the business and we look at the progress we're able to make in margins and look at reasonably conservative, but achievable growth levels that we think the golf industry will return to, we think the economic metrics that we established in those three year plans are still reachable.

Clearly, the time frame has changed.

We've lost this two and a half years during this rather dark period.

But nothing fundamental has changed that would alter our believe that we can get to the same levels.

We think low to mid-single digit growth at the top line is still clearly in the cards.

We think getting margins back up into the mid-40s give or take are certainly doable.

We think controlling OpEx down to a level that will ultimately give us operating margins in the low teens is low double digits to low teens is certainly doable.

And we think that the time frame for being able to do that again, depending on how quickly this recovery catches hold and gains some traction, is certainly in the cards over the course of the next, I don't know, three years perhaps.

Thank you.

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

Please go ahead with your questions.

George, you guys have been great about clarifying the expected cost savings for the shift to production down to Mexico-- could you talk about speed to market?

I know George, over the years talked about how the company has really improved the ability to deliver product a lot more quickly to the marketplace and react to reorders and can you talk about how you think about that giving that you're moving to a -new facility with new laborers and a few hundred bars of land as well-

Well, none of the changes that we've embarked on either from a distribution point of view or from a manufacturing assembly point of view really affect those targets in any serious way.

We've been able to substantially reduce the time to market for products in many cases from order to delivery of about 45 days, I think.

And that standard is going to be maintained under the current circumstance.

I think we're going to be more efficient about it.

Moving to a new distribution footprint with the North American distribution center in Dallas will actually provide some better service to a significant portion of our customer base given its location versus distributing out of San Diego.

So, that should be to the good really.

As far as the supply chain is concerned, the assembly in Mexico versus the assembly in Southern California really doesn't affect the timing very much or at all for that matter.

It certainly makes it more cost effective and cost efficient.

And it does to some degree, provide us a working capital benefit in that the extent to which more of that occurs in Mexico and somewhat less in the far east, it does shorten the supply chain somewhat and should affect over the longer term the inventory levels that we have to maintain in order to provide the service levels we've been able to provide in the past.

So, all of that stuff is to the good and certainly from a cost point of view represents a continued savings for us.

Great, thanks very much, George.

No problem.

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

Please go ahead with your question, sir.

Good afternoon.

My apologies.

Great seeing you.

Thanks --

We thought we lost you.

Third time, I guess.

A couple of quick questions for your guys.

Just drilling down a little bit more on the growth that you're looking for, I think a one to 5% for 2011.

Can you expand, when you say strong product line.

How are you thinking about what you're going to do from a market share perspective in 2011?

Is that one to 5% a number that you think the industry will do?

Or is that more of you gaining share and if so, sort of what segments do you think you're going to gain share in?

Well, this is a big year for a new irons introduction for us which I think should be an area that we're going to do well in.

Certainly the introduction in the new technology in drivers and woods with forced composite we think will position us well in the marketplace.

But in order to be very conservative about the '011 year, we tried to take a very conservative stance as far as that's concerned.

We think the marketplace is going go to be nominally up.

It's not going to move a great deal.

To the extent that the recovery takes hold a bit more aggressively.

That's going to be a tail wind to us.

We're looking more at the progress that we're making in emerging markets, which has been quite positive even in a very difficult market in '010.

We're looking at continued growth in the accessories and soft goods area again which grew quite nicely in '010 in a very difficult marketplace.

And I think that together with what we believe to be very achievable and conservative estimates for the hardware part of the business will provide that one to 5% growth without having exaggerated expectations about what share might do.

Okay.

That's really helpful.

And then my second question is just surrounding the ball business and the roll that that ball business is going to have in getting you guys back to is it financial profitability where you'd like to be, obviously, historically, when you put out growth targets, margin targets, the ball business was a big part of that.

But at the same time, you've struggled to really turn a significant profit in that business.

As you reflect back on seven years or however long it's been, certainly since you've had Top-Flite.

But in the context of A- the writedowns in Top-Flite and B- the move of some of the Chicopee business to Monterey.

How should I think about the ball business?

Do you think 2011 will be the year where that turns a decent profit?

Is it still a business of scale that you need to have big time sales to turn significant profits?

Or does that break even going to fundamentally change as a result of the move?

Well, I think you hit a couple of very important buttons, James.

First and foremost, if you go back again, and again, I'm sorry to keep doing this, but we're dealing with two very distinctive time frames.

If you look at the trajectory through '07, the Callaway ball business was growing.

The Top-Flite business was relatively static.

And again, focused more on the sporting goods area and the low end part of the business.

And we had not yet really begun to address the issue of cost.

During the intervening period of time, the overall ball business has taken a hit because of the nature of what's going on the last couple of years, rounds being down, that kind of stuff.

The fact the higher priced balls have now begun to infiltrate their way into the sporting goods categories and begun to put some downward pressure on Top-Flite.

While at the same time, we've now begun to make significant moves in terms of ball sourcing both from sourcing over in the far east as well as a move of some of the ball capacity down to Monterey, Mexico has changed the economics.

When you put all of that together in a pot, the ball business will always be dependent on volume.

I mean, that's where you make your money on ball.

What the supply chain issues have done for us however, it has lowered the threshold for profitability in terms of volume for balls because our costs are in the process of coming down.

Now,'011 is still a bit of a mystery.

We don't know how strongly the category is going to come back.

We're being very conservative about that.

We know that our sourcing is going to continue to provide returns for us in terms of ball profitability.

Lowering the absolute volume necessary for us to get up to levels that we'd be happy with.

But I think we'll see a positive move in ball profitability in '011.

I think we'll see a bigger one in '012.

The cadence in product introduction in balls would indicate that '012 is going to be a year where we're going to have measurable new product activity.

But there's no question in my mind at least that balls are going to be profitable for us.

Our cost structure has changed dramatically over the last three or four years, all to the good.

And the money to be made is made in the higher priced ball which is the Callaway home, if you will, and that part of the business continues to show itself to have strength.

So, I would be hopeful for ball being a contributor to the overall profitability.

I don't think it's going to be an issue going forward, not nearly to the degree it used to be in the past.

That's really helpful.

But let me just ask in a slightly different way, I mean, you're sitting here at about $176 million in terms of your golf ball business.

Are the cost savings significant enough that you could turn a profit with those levels of sales or if not, where do you think that number needs to be at the top line for you to turn a profit in the ball business?

Well, listen, I think with some of the new cost structure once we get it up and operational to the level we want, we can make money at this level.

But I don't have any intention of staying at this level.

I think we clearly have to have a stronger ball franchise than we currently have.

We are developing plans that will, in fact, do that.

But the ball pricing structure is all to the good because as we get that pricing structure down closer to the levels that we feel comfortable with, it does two things.

It not only contributes to profitability but it also provides the resource necessary to drive the top line as well.

All of that is beginning to come together as far as the ball business is concerned.

What we need now is a better environment.

And I don't -- I'm tired of hearing me say that also by the way.

In case it's bothering you, it's bothering me even more.

As the environment turns and we believe it is beginning to turn, a lot of these things will become more self-evident than now.

Excellent.

Thanks, guys.

No problem.

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

Please go ahead with your question.

Thank you.

And George, just a clarification on a prior question.

You said the market nominally up.

You were referring to the US market, correct, or were you talking global?

Actually, I'm talking globally.

I think the US is going to be up.

I think the international environment is going to be a mixed bag.

We're finding that Asia, Korea, southeast Asia, India, China, are doing quite well.

We think that Japan is a question mark.

We think that there are some issues there.

And Japan may, in fact, have a difficult year.

In the case of Europe, we think that our business in the UK will do better, partly because we think it was more depressed in '010 -- and more because of things we did than the marketplace in general.

We think that will be a recovery.

Western--Central Europe- Central Europe I think is going to do okay.

I think it's going to be up.

They have weathered the euro issues much better than the rest of Europe is concerned.

And the countries that have had difficulty in Europe, whether it be Ireland or Spain or Portugal or Italy are really not very strong golf markets.

So, the extent to which there's a continuation of economic issues there, I don't think it's going to affect the golf industry terribly much.

The golf industry is driven most by the UK obviously.

But central Europe is beginning to have more of an effect.

And the Scandinavian countries which, while small, are nevertheless very well developed golf markets are doing okay.

So, I think if you mix all of that stuff together, the golf industry even outside the US will be up nominally.

And then following on James' question there and one I've asked before.

You mentioned obviously you're getting the cost structure in better shape with the balls and that should be beneficial going forward plus new products coming.

But you also mentioned you're getting pressure from some of the mid-level balls being pushed down into mass and that's creating some issues.

If you look at balls, if you look at clubs as a whole and TaylorMade and shortening the product life cycle to their whole portfolio now.

Is the change in the cost structure which is needed and good, and they have no qualms with that.

Is that -- are we running on a treadmill here where on the one side you're gaining and not able to make headway because of what's going on structurally in the industry.

And I guess, how do we get over that type of hump over the next two to three years before maybe demographic tail winds in the US and the market potentially pickup.

Maybe not '11 but '12 or so?

Makes a very fair questions.

But look, any year is a year of some tradeoffs.

The important thing I think you got to recognize is that I think we more than really almost anybody else in the industry are doing things that are off setting some of the negative trends.

To the extent that there are cost pressures whether they be competitive in nature or raw material in nature.

We have over the last five years, embarked on a very significant effort that's paying off quite nicely to offset all of those negative influences.

As far as competition is concerned, I can't comment on what they're going to do.

They'll do what they do.

But we continue to innovate as far as product is concerned, we continue to have that innovation recognized by any outside source that you care to look at.

That ultimately will stand as a very good -- as far as the marketplace in general is concerned.

We're not going to compete on price.

We're not going there.

We've been exercising substantial efforts in the course of '010 and will continue to do so in '011 to get prices back up to the levels that we believe are appropriate to the extent that some competition wants to chase low price, God bless them, let them go do it.

And if their P&L is able to take it, more power to them.

Our P&L is able to take it because we're doing a great deal to ensure that our cost structure reflects the conditions of the marketplace.

What all of us need, whether it be the low price guy or us, what we need is a restoration of the marketplace to a more normal level.

We're beginning to see that happen.

And if the market gets back to growing at two to 3% that it traditionally has grown, we are going to be a very profitable company.

We've proven that ability going back to '07.

It's been interrupted rather badly by the last couple of years.

But there's nothing so fundamental as change in the market that will prevent us from getting back to those levels.

If you talk about tail winds, yes, there are going to be demographic tail winds for sure.

An important tail wind with the Olympics as we get closer and closer to that.

There is going to be more and more activity.

And if you take a look at the areas that we believe are going to be drivers, the emerging markets and the international environment you're beginning to see the beginnings of a acceleration of the interest in golf which can only continue as we get closer and closer to '016.

Look.

We're all very frustrated by this period of time and we're all not particularly happy about the pace of the recovery.

But the fact that we're looking like we're turning a corner is palpable.

And I think that a little bit of patience and a continuation of doing the things that we're doing are going to be what we need to be to get back to the levels of profitability that I talked about earlier.

I mean I agree, and again a lot of the structural things from the company cost standpoint you guys have done and put in place, but I just again trying to figure out how we get off the treadmill and really truly get margins going north with all the other structural issues and then--

We have the markets, we have the margins going north.

We're talking about getting the margins off another couple hundred basis points in '011.

And we feel pretty confident that we're certainly going to be able to do that.

The margins in '07, if I remember correctly were in the 46%, 45% to 46% range.

And as I indicated, I think over the course of the next not too distant future, we're going to get back to those levels.

All we need is a stable marketplace in order to have all of the initiatives we have been working on for the last several years to finally begin to show themselves.

It's only in the declining market.

Remember, between '09 and '010, the market declined 14% to 15%.

It's very hard to show growing margins or growing anything in that kind of an environment.

But that is not a typical environment.

That environment hopefully, the well behind us at which point I think we're going to see, a lot of the industry reacted to the economy and maybe over-reacted to the economy.

And I include ourselves in that by the way.

I'm not pointing fingers at anybody else.

Over-reacted to the economic outlook rather severely.

As we see it come back, I think a good deal will come back to a normal level as well.

Okay, okay, okay, okay, thank you.

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

Mr.

Fellows, do you have any final remarks?

Sure.

I think we basically spelled out what our outlook is.

I think we're going into '11 hopeful.

We think that there are enough signs out there to reflect the fact that we're certainly past the worst.

We've budgeted conservatively and taken additional steps at the end of '010 to create additional reassurance that we're going to continue the trend back to measurable and significant profitability.

I think you're looking at the same economic data that I am.

And you'll ultimately draw the same conclusions that we have over here.

The golf industry is a sound industry.

It has gone through a very difficult period of time.

But you know what?

We've gone through it and I think it's time for us to begin looking more positively towards the future.

And as we talk to each other in the upcoming quarters, we will certainly update you as to our outlook and hopefully, we'll be able to evidence the confidence that we're showing right now with specific numbers.

So stay tuned and we look forward to seeing you next quarter.

Thank you and ladies and gentlemen, this does conclude today's conference call.

You may now disconnect.