Callaway Golf Company (ELY)

ELY 
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Callaway Golf (ELY)

Q3 2012 Earnings Call

October 25, 2012 5:00 pm ET

Executives

Bradley J. Holiday - Chief Financial Officer and Senior Executive Vice President

Oliver G. Brewer - Chief Executive Officer, President and Director

Analysts

Phil Anderson - Longbow Research LLC

Edward D. Timmons - Roth Capital Partners, LLC, Research Division

Lee J. Giordano - Imperial Capital, LLC, Research Division

Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

Presentation

Operator

Good afternoon. My name is Allie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Callaway Golf Company Third Quarter 2012 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host Brad Holiday, Chief Financial Officer. Sir, you may begin your conference.

Bradley J. Holiday

Thanks, Allie. I'd like to welcome everyone to Callaway Golf Company's third quarter 2012 earnings conference call. Joining me today is Chip Brewer, our President and CEO. During today's conference call, Chip will provide some opening remarks and I will provide an overview of the company's financial results for the quarter, and we will then open the call for questions. I would like to point out that any comments made about future performance, events, prospects or circumstances, including statements relating to estimated sales, gross margins, operating expenses and loss per share for 2012, the estimated amount or timing of benefits and charges associated with the cost-reduction initiatives, the collectibility of our accounts receivable, as well as the company's estimated capital expenditures and depreciation and amortization expenses, are forward-looking statements subject to Safe Harbor protection under federal securities laws. Such statements reflect our best judgment today based on current trends and conditions. Actual results could differ materially from those projected in the forward-looking statements as a result of delays, difficulties or increased costs in implementing the cost-reduction initiatives or 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 Form 10-K for the year ended December 31, 2011, 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 Global Operations Strategy, noncash tax adjustments, including a deferred tax valuation allowance, restructuring charges, the gain on the sale of 3 buildings, the gain on the sale of the Top-Flite and Ben Hogan brands, noncash impairment charges and charges related to the company's cost-reduction initiatives. We will also provide information on the company's sales on a constant currency basis and earnings, excluding interests, taxes, depreciation and amortization expenses and the asset impairment charges. 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 Chip.

Oliver G. Brewer

Thanks, Brad. Good afternoon, everybody. I'm glad to be with you today and have the opportunity to discuss our results, as well as the many changes happening here at Callaway Golf. The quick summary is as follows: first of all, our Q3 operating result fell generally within the expectations we provided at the end of Q2. Secondly, our outlook for the balance of the year has softened based on lower expectations in the U.S. and Europe, and thus, we are lowering guidance for the balance of 2012. And lastly, and I believe most importantly, we are making good progress on our turnaround plan, which I believe -- where I believe we are moving quickly, decisively and are on the right path.

Looking at our operating results. In Japan, we have seen improved results versus last year based both on the launch of the Legacy '12 product, as well as improved market conditions versus last year. Our Japan business continues to be a strength for Callaway. Our primary areas of weakness in Q3 and for the balance of the year were in the Americas, Canada and the U.S., and in Europe. With the exception of our Asia-specific models, our 2012 products have not sold through well enough, and thus, during the quarter, we took aggressive pricing action to drive sell-through at lower inventory levels, both our inventory levels and those in the field. These actions had predictable results on our gross margins, but were successful in delivering the desired results in the field where we have enjoyed 5 consecutive months of hard good dollar market share growth in the U.S..

Although painful on a financial basis, right now, these actions are helpful for the long-term outlook in that they clear the channel and start to improve momentum for our 2013 story when we will have new product and new marketing to drive improved results. This is also significant in that to turn this business around, it needs to first stop shrinking, which means we need to stabilize and grow our dollar market share. To this end, in August, we had the first year-over-year gain in market share since November of 2010.

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