Topgolf Callaway Brands Corp.
Q1 2008 Earnings Call Transcript

Published: 2 May 2008

[Operator:]

Welcome to Callaway Golf’s 2008 first quarter results conference call. (Operator Instructions) I would now like to turn the conference over to Chief Financial Officer, Bradley Holiday; please go ahead.

[Bradley Holiday:]

Thank you and welcome everyone to Callaway Golf Company’s first quarter 2008 earnings conference call. I’m Brad Holiday, Chief Financial Officer of Callaway Golf Company and joining me today is George Fellows, President and CEO of Callaway Golf. During today’s conference call George will provide a few opening remarks and I will provide an overview of the company’s financial results and we will then open the call for questions. I would like to point out that any comments made about future performance, events or circumstances including statements relating to estimates of future sales, gross margins and earnings, estimated charges for the company’s gross margin initiatives, as well as the company’s estimated 2008 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 and other information. Actual results could differ materially from those projected in the forward-looking statements as a result of certain risks and uncertainties applicable to the company and its business. For details concerning these and other risks and uncertainties, you should consult our earnings release issued today as well as Part 1, Item 1A of our most recent Form 10-K filed with the SEC together with the company’s other reports subsequently filed with the SEC from time to time. In addition, during the call in order to assist interested parties with period-over-period comparisons, we may provide certain pro forma information as to the company’s performance excluding charges associated with company’s gross margin initiatives as well as information related to the company’s EBIDTA. This information may include non-GAAP financial measures within the meaning of Regulation G. The earnings release and related schedules we issued today includes a reconciliation of such non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with GAAP. The earnings release is available on the Investor Relations section of the company’s website at www.callawaygolf.com. I would like to now turn the call over to George for a few opening remarks.

[George Fellows:]

Thanks Brad. Good afternoon and thank you for joining us. We are pleased with the results of the first quarter particularly in view of the somewhat clouded retail picture in the US. Sell-in of our 2008 lineup has been quite solid reflecting the trade’s confidence in and support of Callaway Golf’s resurgence. These positive sell-in results are largely consistent throughout the world with particular strength being reflected in Europe and Japan. Now at this point I would like to reflect on what I see happening in the financial market as it concerns Callaway. T here would be appear to be far too much emotion and generalizing going on regarding our sector and not enough attention given to facts as we know them. So if I can ask your indulgence let me review some basic facts relating to our results that we believe should be in focus. First, our first quarter sales were up 10% versus 2007. This is a pretty strong statement by a retail trade focused on inventory in an uncertain retail environment. Second our bookings for immediate shipment, a reasonable measure of sell-through for the first quarter in the US was up 11% versus a strong 2007 period. Bookings for immediate shipment in April are up 7% further reflecting a relatively positive consumer response to the early stage of the golf equipment buying season. And even though these levels are somewhat below the levels we had originally planned for, they are still very respectable in view of the relatively negative news regarding overall economic conditions in the US. Third the international particularly throughout Europe and Japan, is quite solid at this stage and appears to be insulated from the negative prognostications about the US and Canadian retail environment. Now the intent here is not to paint an overly rosy picture and ignore the obvious concerns about the macroeconomic issues facing the US, but rather to bring the business outlook for Callaway back to as factual a basis as possible and take some of what appears to be an indiscriminate and emotional reaction to general but not necessarily specific to Callaway, business conditions. In that regard our best thinking based on facts at this point is to reiterate our guidance as communicated at our Investor Day but also to suggest that in order to accommodate the continued uncertainties in the current economic outlook that we expect to deliver at the lower end of the range of our guidance. We think this is a prudent position at this point in time. All results to date through April are in fact within that range and we feel quite comfortable in reaffirming our guidance. As additional support I’d like to remind that all our performance to date confirms several elements of our original guidance that promised to provide some degree of insulation from US uncertainty

[Bradley Holiday:]

Thanks George. For the quarter we achieved consolidated net sales of $366 million, a record first quarter for the company and an increase of 10% compared to last year’s sales of $335 million. We reported a 21% increase in net income for the quarter to $40 million compared to $33 million last year and earnings per share increased 27% to $0.61 from $0.48 per share a year ago. On a pro forma basis excluding after-tax charges of $0.01 for gross margin improvement initiatives for both 2008 and 2007 our fully diluted earnings per share for 2008 increased 27% to $0.62 compared to $0.49 in 2007. Looking at sales by product segments, our wood sales for the quarter were $117 million, an increase of 13% compared to last year. This increase was due to an increase in new fairway woods and hybrid products introduced this year compared to last year. This increase was offset slightly by expected lower second year sales of our statement Fusion drivers, the FT-5 and FT-i. Sales of irons were $96 million compared to $100 million last year. This slight decrease was due to lower second year sales on our X-20 and X-Forged irons somewhat offset by an increase in our new FT and Big Bertha line of irons as well as our X-Forged series of wedges. Golf ball sales were $58 million for the quarter, an increase of 9% compared to last year’s sales of $54 million. This increase was due to the introduction of several new balls including the HX Tour IX, HX Hot Bite and the new Top-Flite ball models. Accessories continued to perform well with sales of $60 million for the quarter, an increase of 24% compared to sales in 2007 of $49 million. This increase was driven primarily by Top-Flite packaged club sets and Callaway Junior sets. Putter sales were $35 million, an increase of 19% compared to $29 million in sales last year. This increase was driven by strong sales of our Black Series and Divine Line models that were introduced late last year as well as our new White Hot Tour and Saber Tooth models. Turning to our regional breakout US sales were $184 million for the quarter, up just slightly compared to last year. International sales increased 21% to $182 million compared to $151million in 2007. Foreign currency and translation positively impacted sales by $12 million; so on a currency neutral basis, our international sales increased 13% compared to last year driven by strong growth in Europe and Japan. First quarter gross margins were 48% of net sales, flat compared to last year but full year margins are still projected to improve by at least 200 basis points compared to 2007. For the first quarter margins improved approximately 130 basis points compared to last year due to continued implementations of our gross margin initiatives which continue to be on track with our expectations. This gain was offset by carry-over inventory costs that were the result of lower golf ball production volumes during the fourth quarter of 2007. This lower volume was expected and was due to the implementation of initiatives to reduce our inventory levels and should not have any impact on the balance of the year. Additionally gross margins were also impacted by an unfavorable shift in product mix due in part to expected lower second year sales of our premium drivers and X Series irons which generally have higher margins than the 2008 replacement products. We still expect product mix to be neutral on a full year basis. Operating expenses for the quarter were $111 million, compared to $105 million last year. This year-over-year increase reflects slightly higher marketing and promotions expenses to support our new product launches, an increase in non-US expenses due to the translation effect of foreign exchange rates compared to last year and general inflation. Turning to the balance sheet our consolidated net receivables were $300 million, an increase of $22 million compared to last year due to the year-over-year increase in sales. Consolidated day sales outstanding decreased slightly to 75 days compared to 76 days last year. Collections on AR remain strong and the overall quality of our AR is good. Net inventories totaled $264 million, a decrease of f$7 million compared to $271 million last year. As a percent of trailing 12-month sales which was the metric we discussed at our February Investor Conference, we achieved 23% through the first quarter, a 300 basis point improvement compared to 26% for the same period last year. From a cash generation perspective trailing 12-month EBITDA through the first quarter was $137 million, a 49% increase compared to the same period last year and a 145% increase compared to two years ago. Capital expenditures for the quarter were $12 million. We estimate 2008 capital expenditures to be in the $50 million to $55 million range which includes approximately $15 million for our headquarter consolidation project and consistent with our last estimate. Depreciation and amortization was $9 million for the quarter. Our estimate for 2008 is still expected to range from $35 million to $40 million also consistent with our previous guidance. Now I would like to review our estimates for the year. As you know our original pro forma guidance included a sales range of $1.145 billion to $1.165 billion with earnings per share of $1.08 to $1.18. As George already mentioned we are still projecting our results to fall within original full-year guidance albeit at the lower end of the range. There are several factors we took into consideration in developing this projection. First I think its fair to say that the economic situations in the US and Canada have become more real than what we had assumed in our original guidance. Additionally the golf season in the northern portion of the United States and Canada got a fairly late start this year which is somewhat reflected in our Q1 results with sales in the US flat compared to last year and Canada down slightly in local currency. These factors along with the fact that it is still very early in the season with little sell-through data available at this time influenced our full-year projection to the lower end of our original guidance range. The offsetting good news at this time is that as expected our international business has been somewhat insulated from the economic situation in the United States as demonstrated by the strong sales in Japan and Europe. Additionally we continue to benefit from our gross margin initiatives which we also feel remain somewhat insulated from macroeconomic conditions and are on track with our original expectations. And as George mentioned, we have developed contingency spending plans intended to offset these conditions as much as possible in an effort to protect our overall annual profitability. After considering all of these factors however we felt it was realistic at this point in the year to adjust our projections to the lower end of our original guidance range. As in the past we will update you as appropriate on our full-year projections. Those are the highlights for the quarter. We would now like to open the call for questions.

[Operator:]

(Operator Instructions) Your first question comes from John Shanley - Susquehanna Financial Group

[John Shanley:]

George can you give us an indication on what drove the particularly strong sales results in Japan in the quarter and is that business sustainable going into both the second quarter and balance of the fiscal year?

[George Fellows:]

The environment in Japan has been quite positive for us. We had a very important introduction, our Legacy driver that has been extraordinarily well received and in fact after about one week in February it took over the number two position and the 7.9 share in the marketplace so it’s been very strongly received and there are other Legacy products that are part and parcel of that franchise. That together with the fact that the Japanese market appears to be relatively robust tells us that certainly the start of the season is very, very strong. It’s hard to predict at this point whether or not some of the stuff that we’re hearing in the states creeps over the ocean but right now all of the signs point to Japan having a very successful year. That translates into Europe as well.

[John Shanley:]

Turning to golf ball sales for a second, Brad mentioned they were up 9% in sales, but the product income declined pretty significantly down 22%. What’s driving the lower profit margin? Was it the change that you made in the golf ball introduction and the fact that you didn’t produce as many golf balls in the quarter as you originally anticipated or is there something else going on?

[Bradley Holiday:]

Most of that has to do with that fourth quarter absorption on lower inventory and that was a little over, about $2.5 million which would have translated into profit so I think the numbers would have gone from down 22% to almost up 20% so it was really that one event that happened.

[John Shanley:]

Then also on accessories, that’s becoming a real significant product category for you with sales up a strong 24% in the quarter, can you give us an indication what specific products are driving that accessory business and is that something that’s also sustainable going forward?

[George Fellows:]

Again I think the trend that we’ve seen on accessories has been strong for a reasonable period already. Bags in that business has been very strong for us and continues to be. In fact we’re struggling to keep up with the demand that we have for the bag business and that is in fact sustainable. The glove business is pretty strong for us. The shoe business is pretty strong for us. We’re beginning to focus a bit more aggressively on accessories. And also by the way, which Brad mentioned in his comments, we have introduced some sets for youth and packaged sets under the Top-Flite name each of which have been received quite well by the marketplace. Again as we begin to focus on some of these areas I do believe that these are in fact sustainable growth opportunities.

[John Shanley:]

Are there any competitors that are exhibiting any signs of irrational pricing or promotional activity that you can mention to us?

[George Fellows:]

There was some early signs that some guys are getting a little nervous and jerky about, I think part of the problem and it sort of prompted parts of my initial commentary, I think people are acting a little emotionally with little fact; a little too emotionally with very little fact in front of them and I think that perhaps some of the smaller guys might be prompted to do something silly. But if in fact they do that, we’re going to do everything we possibly can to try to maintain some stability in the marketplace and not fall into that trap. The market is just breaking, the weather has finally started to get reasonable and I think that we’re beginning to see the affects of that in our inside sales orders and things of that sort so I think its really premature for everybody to get crazed about what might happen later on in the marketplace. At this point in time even with the rounds figures looking a little suspect, equipment purchases are a little less subject to rounds, and people will I think still come into the marketplace and additionally the great proportion of the demo days that we have which drive equipment sales quite dramatically are now beginning to happen given the fact that the weather has cleared so, we’re still reasonably hopeful for the ultimate outcome for the marketplace in the balance of the year. So I’d just caution everybody to just kind of relax a little bit until we see more of what happens.

[Operator:]

Your next question comes from Rommel Dionisio - Wedbush Morgan Securities

[Rommel Dionisio:]

In your prepared comments I just didn’t hear anything about the I Mix line, I know that was a couple weeks delayed but it should be in stores now. Could you give us an initial read on that is it still a little too early?

[George Fellows:]

It’s a little early. Most of its getting out literally in the last couple or three weeks. Aside from just anecdotal buzz in interest in it because its really a very unique product, I’d be premature if I were to project on, initial buzz on all new products is always very positive so for me to try to extrapolate from that I think would send us both into troubled waters. So all I can say at this point in time is that reception has been quite good. The traders responded favorably to it. Other than anecdotes that are also positive, I’d rather hold that until the next call and be able to tell you that with more confidence and more numbers.

[Operator:]

Your next question comes from Jeff Blaeser - Morgan Joseph & Co. Inc.

[Jeff Blaeser:]

Could you please give us a little bit more color on the strong wood’s growth, how much of that is coming from the new fairway woods and how is your focus on the women’s lines doing and percentage of sales now and what you think it could potentially be?

[George Fellows:]

Well I won’t comment on the latter part of it because you’re asking for projections but the woods are driven by the very strong offerings in fairway woods and hybrids that we have this year. I think if you were at the Investor Day you’ll recall that this was a year that we were going to sort of remake the fairway wood and the hybrid market by coming out with some really new and interesting technology that has certainly been the driver for the first quarter wood sales. The driver sales were planned to be somewhat lower because we were going into the second year for both FT-i and FT-5 and its very early to try to determine how the driver sales are going to go based largely on the comments I just made about when the season opens and when demo days happen. Demo days drive our business and in fact very strongly drive the FT-i and FT-5 sales so at this point in time we’re not concerned about the fact that that started off slowly because so did the marketplace. But the results to date are largely or much more reflective of the fairway wood business. The women’s line has been very well received and we’re looking forward to that being the first of many steps that we are going to be taking to drive the overall women’s market. I think as I’ve said in the past to all of you, the women’s market we believe is significantly underdeveloped in the United States certainly as compared to Europe and that is partly a factor, the most significant factor we believe in that is that we as manufacturers really haven’t created the product appropriate for the women’s market. We took a big step in that direction by introducing the current Gems line for women and would expect to continue to drive that marketplace going forward. Those are essentially the things that have affected the woods market at this early stage of the year.

[Jeff Blaeser:]

Going back to Japan, I noticed last year growth was significantly higher in the first quarter, is there anything in particular to that or is it just kind of a timing issue on both quarters?

[George Fellows:]

No, I think that the introduction of the Legacy driver I think has had a very significant part to play in that. The fact is that we are now focusing on the Asian market with products very specifically designed and created for the Asian market. That together with the entire international organization really kind of gelling and I think becoming a lot more effective has created a very, very strong Japanese marketplace for us and as I said, I believe based on all the things that we’re hearing and the products that we have currently out there, that they should pretty much hold up for the year.

[Operator:]

Your next question comes from Kathryn Thompson - Avondale Partners

[Kathryn Thompson:]

Kind of tagging on to the drivers sales and Japan sales, how much of the driver increase in the quarter was driven by this Legacy driver and Japan versus the fairway woods and the domestic markets?

[George Fellows:]

Well the overall woods business was driven more by the fairways. The driver sales in the US if I remember correctly, was not up very substantially.

[Bradley Holiday:]

Driver sales were actually down for the quarter but they were offset by the hybrid and fairway.

[George Fellows:]

The fairway woods and hybrids were the ones that drove the overall wood growth. But to your point the Legacy business in Japan was a very significant bright spot for us as far as drivers are concerned and does represent the continuation of what appears to be a very successful franchise that we’re developing in Japan.

[Kathryn Thompson:]

Just to give a general sense, which percentage of total Japanese sales are of drivers in a given year or of woods specifically.

[George Fellows:]

I’d rather get back to you on that rather than guess, pick a number out of the air but we can get back to you on that.

[Kathryn Thompson:]

In general it’s more driven by the fairway than it was your Japan Legacy?

[George Fellows:]

The overall woods sales were more driven by fairways, correct.

[Kathryn Thompson:]

Also could you give a look into the status of your retail inventory in the market and your competitors?

[George Fellows:]

Our retail inventory at this point in time is in very, very good shape. There are even some instances where we believe our inventory is a little lower than we’d like it to be and we’re going out after that to see if we can get it back up again. The retail inventory being low is a real serious problem if allowed to go on for too long simply because the buying season is in fact limited and you certainly don’t want to be running out of hot selling products during that period of time. As far as any significant overstocks, we really are not in difficulty on virtually any part of our line as far as that’s concerned.

[Bradley Holiday:]

I would add also that I think retailers have been a little more conservative this year in their inventory and for that reason it’s pretty clean.

[Kathryn Thompson:]

Are you seeing retailers saying listen we have to get higher quality or a certain type of brands that we know we’re going to sell?

[George Fellows:]

Yes, I think we talked at the Investor Day as well in tough time the retailers will tend to go to quality and in doing that they’ll tend to cut back on the number of fringe brands that they would carry. So it was our expectation back then that some of the tertiary brands would have a difficult time this year and in fact we believe that’s what’s happening.

[Kathryn Thompson:]

Also just looking at your, along with the retail and inventory, any particular, I know you’ve made some comments earlier on discounting in the market but are you seeing any regional differences in discounting?

[George Fellows:]

No it’s very difficult to regionally discount the way the trade is structured. The big off-course guys are fundamentally covering very substantial portions of the country, each of them. So it would be very hard to do something in one region without having it spill over to the others. And as far as the green grass market is concerned with obviously is regional by definition that market is just opening up right now so to the extent that there is anything that ultimately will happen there won’t happen for awhile. So no, we have not really seen anything particularly important on a regional basis.

[Kathryn Thompson:]

Cash used in operations is down 121 versus 77 last year, 77.6, could you have comments on that and how we should see that trending for the year?

[Bradley Holiday:]

The reason for that is increase in AR because of the higher sales as well as this year we paid a cash bonus, operating bonus to our employees and last year we didn’t. Those are the big reasons.

[Kathryn Thompson:]

Where would you like to see that trend for the year just for modeling purposes?

[Bradley Holiday:]

Up. If right now you’re comparing it to a year where it’s not really apples to oranges, if our sales continue to increase and our ARs outstanding and then it’s good. That’s fine; I don’t mind investing in AR. I think that the bonus paid is an anomaly kind of with last year and should balance itself out compared to next year. But taken aside from that, obviously cash from operations should continue to grow.

[Kathryn Thompson:]

How much of the increase was AR?

[Bradley Holiday:]

You know what, it was just, I’m not going to go into that level of detail but suffice it to say those two were the primary drivers of that amount.

[Operator:]

Your next question comes from Bill Chappell - SunTrust Robinson Humphrey

[Bill Chappell:]

I just want to make sure I understood what went on with the I mix, as far as the ship in, did you get full credit for that in the first quarter or is that something that got shifted out to the second quarter?

[George Fellows:]

No we had most of it in the first quarter but we still have some of it going out now. We should be pretty much done with the initial shipments of that in the next couple three weeks I would think. Again, remember this was a program that was limited to specific doors as opposed to a broad scale program and it was limited to those doors that we feel were most appropriate for customizing and a fitting program that would tend to be the larger doors. That would also tend to be the ones that have the strongest personnel capable of doing it appropriate justice so that was one of the principal guidelines in terms of where it went.

[Bradley Holiday:]

And it also wasn’t, if you just take a look at our total product introduction was not a big part of our overall product introduction. It was new technology, high end and we never really planned for it to be a huge amount of our business.

[Bill Chappell:]

On your share count guidance of 66 million I guess with your current dilution account its 64.8, I guess you’re expecting some dilution as the year goes on? You’re not going to be buying back shares?

[Bradley Holiday:]

When we try to forecast our share count we base it on an estimate of where we think the share price will be by quarter and obviously to George’s comments I think the market has certainly our stock price has been down this year for all of the reasons I think George pointed out, so the dilution from the share price certainly wasn’t what we had expected in our original guidance. Keep in mind we knew we would start the year at a lower level and we would continue to go up throughout the year as we have options exercised and as the price would go up. We didn’t see it in the first quarter; we lowered our full year by a million shares down to 66 million.

[Bill Chappell:]

But free cash will still be used to buy back shares is that correct?

[Bradley Holiday:]

We always review those and if the opportunity is right then certainly we would go out and balance that with other opportunities that we have with cash.

[Bill Chappell:]

Any comments, I know you guys were somewhat looking at acquisitions as a possible opportunity, are you seeing anything out there or is there any update there?

[George Fellows:]

We’re continuing to look at those opportunities that are still very much on the top of our plate and we will obviously come out with news on it as we have it. We’re not at a point where we can talk about anything.

[Operator:]

Your next question comes from Paul Swinland - Stephens Inc.

[Paul Swinland:]

On the bookings, I think you said bookings were up 11% and 7% in April, could you break that down between the US and international?

[George Fellows:]

No that was just US; we don’t get as, our data systems aren’t as robust to try to get some of those day by day numbers from some of the international locations.

[Bradley Holiday:]

I think George was trying to comment relative to the macroeconomic issues in the US is what he was saying.

[Paul Swinland:]

Following up on John’s question on how far you can take accessories, is the channel mix where you’re selling the accessories the same as it’s been in the past and as it is for the club’s business or are you actually adding doors in new channels?

[George Fellows:]

Well depends on how far back you go. Obviously and also the fact that certain channels are becoming somewhat more important overall so the sporting goods channel is growing so even if we were not to add any doors or any accounts if you will that by definition is just getting more important. The discount channel, the Wal-Marts, Targets of this world are also growing their businesses and they’re becoming somewhat more important, Costco etc. so I think growth is happening just simply because of the sheer growth in those particular categories. To the extent that we’ve added doors, yes we always do as new factors come up in certain regions and we think they’re appropriate to carry our line or some portion of our line, we add it. But right now it’s less a function of growth in overall accounts as much as it is just growth in the subcategories.

[Paul Swinland:]

On your demo days, can you give us any color as to the traction you’re seeing and what’s working, what’s not from your demo days and part of the reason for my question is one of the comments we’ve heard from the retailers is that some of your products maybe aren’t as visibly different this year then last so they maybe need to be demoed. Could you give us some more color on that and what’s working?

[George Fellows:]

Well interesting comment, the fact is that our products are fundamentally technologically superior products and they have always done very much better when they’re demoed. When people match our products up against competitors’ products and see the consequences of what we bring to the party we always do better under those circumstances. That hasn’t changed. If anything the fact that the weather has really held back the number of demo days that we normally would have probably has started us off more slowly than we might normally have expected. As we get into the demo season and we’re now starting to do that, I think some of those comments may change.

[Paul Swinland:]

Are you seeing the same reaction to the products that you’re offering this year, the same kind of sell levels at the day?

[George Fellows:]

Absolutely, there’s no question if you, we have tour vans that go around to demo days and the results of a tour van appearance continue to actually grow in importance and the quality of what they’re able to accomplish and they are out there now in full force so we expect some pretty good results from that. But the response by the marketplace to our demo days has not materially changed. It was strong and it continues to be strong.

[Operator:]

Your next question comes from the line of Alexander Paris - Barrington Research

[Alexander Paris:]

Going to your forecast of coming down to the bottom of the range and you were talking about economic uncertainty, now just to make it clear is that you looking at some of the emotions or are you actually seeing things coming from your clients and their retailers and so forth that leads you to conclude that that’s going to affect the sales later in the year?

[George Fellows:]

I’m affected mostly by the emotions that seem to be exhibited in the market. One man’s opinion, the markets’ irrational right now and the kinds of variations that we see going on don’t appear to be in most instances based on actual data but rather on fears and expectations. Now that may be an overstatement based on some other people’s feelings but it certainly seems to be a reflection of what’s happening to us. You can’t help but be effected by some of the commentary coming out of the general retail market right now. Most people are very nervous about how the year is going to shape up. But we also said I think back at our Investor Day the golf market is not any consumer market. It’s a very specific market with I think in some instances very different characteristics from general consumer products. The avid golfer buys product because this is not a casual purchase for them. It’s a very important purchase and I think, or at least it would be my opinion, that they are less effected by some of the economic conditions whether or not they become as severe as people fear or not. So yes, I’m reacting I think to emotions over which we have no control and to some degree the fact that the retail trade is nervous. Now whether or not that nervousness ultimately gets played out I can’t tell. If retail declines in the US as it would appear it’s doing right now at these early stages, without question, that’s going to affect us like its going to affect everyone else. The important thing from our point of view is that 50% of our business comes from markets that are not here and are not affected by the same fears and emotions. That’s one thing that’s very important to us. And the second thing is that this is the golf industry. It is not some of the other consumer products that have shown themselves to be much more variable depending on economic conditions so it would be idiotic it think to ignore all of that and say that we’re going to be totally unaffected and that’s why we’re preparing ourselves for the worst but we’re hopeful that its not going to be there.

[Alexander Paris:]

And yet your initial sell-in measures tell you they were pretty good or is that more overseas rather than the US?

[George Fellows:]

No. It’s not just overseas. The US was flat which by the way is pretty darn good because ’07 was a very strong year for us. It is lower than we had hoped for because we weren’t sure that the US economic conditions were going to continue to be questionable. It turns on to have unfortunately more legs than we originally had hoped. But by the same token the international is responding very much the way we had anticipated and the combination of the two still puts us comfortably in our range. If the US continues to be relatively weak but not disastrous and international continues to perform the way it is, we’re very happy being or having projected what we are projecting.

[Alexander Paris:]

Speaking of international you were mentioning you were getting more aggressive overseas, has your promotion or extension into China and India accelerated relative to the rest of Asia lately?

[George Fellows:]

We’re becoming more aggressive in China. India is very, very early stages and don’t represent any particular activity on our part at this stage. We are seeing China grow and it’s growing at a pretty reasonable pace but again remember it’s off a very, very small base. I would not anticipate that China is going to become a very meaningful part of our business in any short timeframe. But we’re very pleased with the way its going. We are expanding our distribution base there. We would anticipate given the sort of coming-out party that China is going to be looking at with the Olympics this summer, that that might accelerate even further but rather than get euphoric about it let’s remember its still a very small part of our business.

[Alexander Paris:]

Your broad product line, did you get it all pretty much shipped out to retailers about when you expected it to this season?

[George Fellows:]

Yes, again each year we have gotten better. We had severe difficulties if you go back to ’05 when I first got here and each year we have gotten significantly better and I would say without really any question to ’08 was by far our best year yet. You will always have, and we did this year this as well, have some problems on some fringe SKUs, high trajectory left hand ladies clubs or things of that sort, I wish we could get rid of those issues but we never will. But in terms of shipping out the important product that we needed to have in stores at the break of the market, I think we were very successful at that this year.

[Alexander Paris:]

In acquisitions you have stated in the past that you’re willing to be looking outside the golf industry but staying within the leisure products area, does that summarize it?

[George Fellows:]

Yes, that’s correct.

[Operator:]

Your next question comes from James Hardiman - FTN Midwest Securities

[James Hardiman:]

I wonder if you could just give a little bit more color on the guidance particularly on the sales line. I’m assuming that the sales guidance I should think about that the same way as the earnings guidance, if it’s the same but maybe towards the lower end, but if I do sort of the quick math I think you could pretty much have flat sales for the rest of the year and sales would be up about 3%. I think the guidance was for about 2% to 4%. Am I thinking about that the right way? I’m assuming that the majority of the uncertainty is on the top line rather than the margins but is that a fair way to look at how you expect the rest of the year to pan out?

[George Fellows:]

Yes, the things that are reasonably under our control are the gross margin initiatives, the spending levels, all of those things. Each of which really have a part to play in our contingency planning. Volume is always the open issue and that really drives the business. We did better in the first quarter but as we stated it really is, it’s very dangerous to look at this business on a quarter-to-quarter basis because of a very tiny shift in a shipping date on some new products could distort the quarter-to-quarter numbers. So we did a little better than we probably anticipated in the first quarter. Most of that, short of whatever the sell-through figures ultimately come out to be must come out of the second quarter by definition. The net is pretty much where we expected to be and to your point, yes is we’re up 2% to 3% for the year and given our start for the year, yes if we’re relatively flat for the balance of the year you’ll probably come out to that number.

[James Hardiman:]

You got a big boost from currency; do you build in currency benefits throughout the rest of the guidance for the year?

[Bradley Holiday:]

Keep in mind though one of the things I think gets lost a little bit and what we’ve seen a little bit in international when the dollar weakens too much it forces pressure on our pricing overseas because some of our international consumers can go online and buy it for a pretty good rate and there’s always a delta between US pricing and international for a lot of reasons. And aside from Japan where we have a unique product in the Legacy brand we have actually had to take some price reductions in some of our regions which flow all the way to the bottom line and can have an impact on us. So we monitor that very closely and we don’t want to get too far out of line with US pricing because this is really become more of a global pricing type of a business because of the internet.

[George Fellows:]

We’re sort of unique in that regard because of the very big piece of our business that’s outside the US and so currency helps you in certain visible ways but it takes its toll in a lot of other areas. The net net to us might be slightly positive but it’s not overwhelming.

[James Hardiman:]

On the golf ball business, I think you said and correct me if I’m wrong, that excluding the inventory charge that the operating income out of the golf ball segment would have been up about 20%.

[Bradley Holiday:]

That’s correct.

[James Hardiman:]

I think that suggested that the margins on the golf balls are up significantly over last year probably the best margin number you’ve ever had, what’s driving that? Is the Top-Flite strength finally paying off here, what’s driving that and should we expect that to continue through the rest of the year?

[George Fellows:]

Well I think several things. One, obviously the overall improvement in Top-Flite has a very important part to play in that because that was a profit drain on us for a long period of time but also the gross margin initiatives that we talked about, some proportion of them did fall into the ball category and we’re getting better and smarter at doing that as well. And thirdly after many year of not really addressing pricing in the ball market and sort of eating all of the increases we had in some raw materials, we did take some pricing action selectively on certain products and so its really a combination of all three that leads to the conclusion that you drew and that is that the margins on balls have in fact improved.

[Bradley Holiday:]

And I would just add to what George said, the launch of the Callaway IX, the premium balls certainly is a positive as well as the Legacy ball we have overseas in Japan and as you know with the Top-Flite brand we have balls now that are a little bit higher price point which is part of the strategy which also yields some higher margins. So a combination in addition to what George was saying.

[George Fellows:]

We got out of a great number of the very low price, low margin balls on Top-Flite. We took a hit in terms of the sheer number of balls we produced as a consequence but we significantly improved the overall margin for the brand. So all of those things contributed and that’s what we said, the point is that we’re here to improve the overall profitability of the company and we’ve taken steps in almost every element of our business to do that and balls are coming along very nicely.

[Operator:]

I would like to turn the conference back to George Fellows for some closing comments.

[George Fellows:]

Thank you very much. Again, I didn’t want to sound too preachy about the emotions but I think its very important that we look at, not just our company, but at our segment perhaps a little differently then some other consumer markets and take a look at the fundamentals and the basics. I think that some of the activity that’s going on tends to paint with a broad brush and we’re either a victim or beneficiary of that. In this case I think we’re not necessarily getting the appropriate attention to the quality or the performance the company is delivering and that’s why I thought it important to kind of point out of the things that I know all of you are aware of but sometimes perhaps lose sight of. Again we’re looking forward in a hopeful way to the balance of this year. We’re not unmindful of the fact that there are a lot of unknowns that are yet to be cleared up and the state of the economy, not just here but throughout the world is going to affect us in some form or fashion. But we believe we are certainly well prepared for as much of that as one can prepare for in advance. And we think our performance to date reflects some of that and we would hope to have a call with you in another three months time perhaps and reconfirm it. But in the meantime, we’d ask you to take a look at the fundamentals before you make certain conclusions about the marketplace in general. Thank you all for your time and attention and we look forward to talking to you again.