Callaway Golf Company (ELY)

ELY 
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Callaway Golf Company (ELY)

Q4 2008 Earnings Call

January 27, 2009 5:00 pm ET

Executives

Brad Holiday - Senior EVP and CFO

George Fellows - President and CEO

Analysts

Scott Hamann - KeyBanc Capital Markets

David Wells - Avondale Partners

Tom Shaw - Stifel Nicolaus

Tom Haggerty - Susquehanna International Group

Hayley Wolff - Rochdale Securities

Derek Leckow - Barrington

Kristine Koerber - JMP Securities

Jeff Blaeser - Morgan Joseph

Tim Conder - Wachovia

Presentation

Operator

At this time, I would like to welcome everyone to the Callaway Golf Fourth Quarter Earnings Call. (Operator Instructions).

I would now like to turn the call over to Brad Holiday, Chief Financial Officer. Mr. Holiday, you may begin.

Brad Holiday

Thank you and welcome everyone to Callaway Golf Company's fourth quarter 2008 Earnings 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, market share gains, estimated sales, gross margins, operating expenses, earnings per share and cash flow, estimated charges and benefits and the timing thereof related to the company's gross margin initiatives or future initiatives, and the estimated effect of foreign currency on the company's business, 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 needs 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 the benefit associated with the reversal of an energy derivative valuation account and 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 also provide information concerning the company's earnings before interest, taxes, depreciation and amortization, and the reversal of a non-cash energy derivative valuation account.

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 compared 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. The macroeconomic turmoil being faced on a global basis remains relatively unabated. Clearly, we've not seen the bottom as yet and we'll continue to face headwinds into 2009 as we have in the last quarter of 2008.

Economic uncertainties have impacted discretionary spending globally and will likely continue to do so through at least some portion of 2009. Together with significant moves in foreign exchange, projecting and assessing business results becomes quite difficult.

Now, having said all of that, none of which is news to any of you, I will try to present a realistic picture of Callaway Golf's performance in 2008 and our perspective on 2009 and beyond. These perspectives on '09 will not include specific financial guidance at this time, but we hope that color commentary will be of help to you in assessing our performance and modeling projected results.

While we are disappointed that global economic conditions late in 2008 undermined our results in the first half, the underlying performance characteristics and conditions for the company are quite strong, and we believe they bode well for the longer term. And while for some it may be hard to look past the short term, we are both confident and optimistic that we will outperform our relevant peer group when macroeconomic headwinds subside.

Now, our reasons for this are manifold. Our brands are strong and have a number one or two share in most categories throughout the world. Our trade relations, I believe, are the strongest in the industry, and we are looked to by most of the large retailers for guidance on structuring their golfing operations.

Executionally, we are at the top of our game, having consistently improved our efficiency, reliability and customer service. Our drive for margin and spending efficiency has now institutionalized. We have delivered $56 million in margin initiatives over 2007 and 2008. We are tracking to deliver the next $20 million to $30 million committed to earlier this year for '09 and '10, and have now initiated additional projects that we believe will deliver another $20 million to $30 million over the '11 and '12 timeframe.

These efforts have enabled us to largely offset the downward economic pressure in 2008 and will help us as well in 2009. These initiatives have allowed us to generate some of the highest profitability margins in the industry.

The new product line for 2009 is one of the strongest in the company's history and was very well received in recent Golf Digest equipment issues. Our pre-books have progressed in accordance with our expectations and are a testament to trade confidence and reliance on Callaway, and support the view that priority is given to major proven brands versus secondary ones in times of economic uncertainty.

Our long-term ability to generate cash is strong with a very conservative balance sheet that is free of any long-term debt. We maintain strong working capital and operating expense controls, allowing us to maintain support for our brands and the ability to spend on longer-term growth initiatives.

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