Callaway Golf Company (ELY)

ELY 
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Callaway Golf Company (ELY)

Q3 2008 Earnings Call

October 30, 2008; 05:00pm ET

Executives

George Fellows - President & Chief Executive Officer

Bradley Holiday - Chief Financial Officer & Senior Executive Vice President

Analysts

Joe Lackey - Wachovia Capital Markets

Alexander Paris - Barrington Research

David - Avondale Partners

Hayley Wolff - Rochdale Securities

Dan Wewer - Raymond James

Rommel Dionisio - Wedbush Morgan Securities

Tom Haggerty - Susquehanna Financial Group

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the third quarter conference call. (Operator Instructions) I would now like to turn the conference over to our host, Mr. Brad Holiday, Chief Financial Officer; please go ahead.

Bradley Holiday

Welcome everyone to Callaway Golf Company’s third quarter 2008 earnings conference call. Joining me today is George Fellows, President and CEO of Callaway Golf. During today’s conference call, George will provide some opening remarks and I will provide an overview of the company’s financial results and we will then open the call for questions.

I would like to point out that any comments made about future performance, events or circumstances, including statements relating to future growth, estimated sales, gross margins, operating expenses and earnings per share, estimated charges and benefits related to the company’s gross margins initiatives and 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.

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 on a consistent and comparable basis, we will provide certain pro forma information as to the company’s performance, excluding charges associated with the company’s gross margin initiatives. In order to evaluate the company’s core operating performance from a cash generation perspective, we will provide information concerning the company’s earnings before interest, taxes, depreciation and amortization.

This pro forma information may include non-GAAP financial measures within the meaning of Regulation-G. The earnings release we issued today includes a reconciliation of such non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with GAAP. The earnings release is available on the Investor Relations section of the company’s website at www.callawaygolf.com.

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

George Fellows

Thank you Brad, and thank you for joining us. We are clearly disappointed with the degree that macroeconomic conditions in the U.S. and increasingly throughout many international markets, have affected our business in the third quarter. Having registered a record first half in both sales and earnings and a solid start to the third quarter, it was particularly disconcerting to have the business turn so dramatically negative in September due to unprecedented events on the worldwide macroeconomic stage.

However, while recognizing the head winds we are facing, it should be noted that a number of positives continue to be prominent in our business profile that should be mentioned, and that all will be well for a strong recovery when macroeconomic conditions stabilize.

First, several business segments and international markets continue to perform quite well. Japan’s positive momentum continued with quarter three sales up 19% in constant currency and 21% year-to-date. China sales more than doubled in quarter three, up 128% as our local investment begins to deliver significant results, albeit still on a relatively small base.

Accessories continue to grow, up 13% in quarter three and 20% year-to-date and our ball business is still up 3% year-to-date in a very challenging year. Despite the disappointment versus our expectations, the third quarter results still register the third highest sales level in the past 11 years and just 3% behind the second occurring in 2005.

In addition to some elements of the business holding up quite well, key fundamental financial metrics continue to be quite strong, reflecting that the margin improvement initiatives, tight expense and working capital controls continue to be working effectively. Despite the volume contraction, inventories ended the quarter at 19.7% of trailing 12 months, ahead of our year-end target of 20%.

Trailing 12 month EBITDA to sales are 11% and EPS is projected to be up 3% to 15% at year’s end. Our gross margin initiatives continue to deliver targeted results and are partially offsetting the margin declines resulting from economic pressures on consumers to move to lower priced products. All of the above is to demonstrate that the company continues to operate solidly and is well positioned for a strong recovery to growth mode when macro conditions stabilize. To that end, some additional positives are instructed to look at.

Our balance sheet is virtually un-levered, thus leaving us somewhat insulated from the credit market turmoil some others are subject to. Pre-bookings of our 2009 line of new products are progressing quite well with early results both in the US and internationally, up versus comparable 2007 and 2008 levels. This is a testament to the fact that the new product line is quite strong and even stronger than both 2007 and 2008.

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