Callaway Golf Company (CALY) Q4 2013 Earnings Report, Transcript and Summary

Good afternoon. My name is Therese [ph] and I will be your conference operator today. At this time I would like to welcome everyone to the Q4 2013 earnings conference call. [Operator Instructions] Thank you. I would now turn the conference over to Brad Holiday, CFO. Go ahead, Brad.

Thank you, Therese [ph], and welcome everyone to Callaway Golf Company's fourth quarter 2013 earnings conference call. Joining me today is Chip Brewer, our President and CEO. During today's conference call, Chip will provide some opening remarks, I will provide an overview of the company's financial results for the quarter, and we will the 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 full year 2014 net sales, sales growth, gross margins, operating expenses, other income, pretax income, tax provision or rates, earnings per share, future market conditions, the success of the company's future products or the company's turnaround, future improvements in operations, market share, brand momentum, financial performance and shareholder value, as well as the collectability of accounts receivable and the company's estimated 2014 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 for the year ended December 31, 2012 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 non-GAAP information which we also refer to as pro forma information. This information, as applicable, excludes the gain on the sale of the Top-Flite and Ben Hogan brands, charges related to the 2012 cost reduction initiatives, and the impact of the businesses that in 2012 were sold or transitioned to a third-party model. We provide certain of the company's results on a constant currency basis which essentially applies the prior-year period exchange rates to the current period results. For comparative purposes, the pro forma income and earnings information assumes a 38.5% tax rate. We also provide information on the company's earnings, excluding interests, taxes, depreciation and amortization expenses and 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.

Thanks, Brad. Good afternoon everyone and thank you for joining us for today's call. As you look at 2013 in total, I'm pleased with our results. This is especially true in context of the headwinds we faced from both foreign exchange and weather, as well as our starting point which was challenged by the poor brand momentum we experienced over the preceding few years. Most importantly, I believe the results reinforce that our turnaround plan is on track and we believe we are building momentum. As with our last call, I would like to start by thanking the Callaway Golf team for their hard work and commitment to turning this business around. The team has done a remarkable job changing this business for the better and I want them to know how much we all appreciate their efforts. For the full year our revenues were up $9 million or approximately 1%. However, when you factor out the effect of discontinued business and currency movements, what we will refer to as constant currency continuing business basis, we grew 14% or approximately $106 million year over year. We grew in almost all markets but especially so in Japan where the team delivered an impressive 26% growth rate on a constant currency continuing business basis, as well as the U.S. where the team grew their business 14% on that same basis. Although we don't break these numbers out specifically, Korea also had an excellent year overall and Europe had a more than respectable 8% constant currency continuing business growth rate for the full year, driven by a very strong performance in the second half of the year. In concert with this revenue growth, we grew our market shares in almost all key categories and markets. In the U.S. of 2013 hard good dollar market share was 15.1%, up 120 basis points year over year. In Japan it finished at 13.9%, up 300 basis points year over year, and making us the number one American brand in that market. In the U.K., our 2013 share was 14.6%, up 160 basis points year over year. This worldwide growth combined with our improved operating efficiency led to improved financial performance, with our year-over-year full year income from operations improving $105 million on a GAAP basis and $74 million on a pro forma basis. On a pro forma basis, we made a small net profit. After several years of losses, this was an important milestone for us. These improvements occurred despite challenging market conditions in many of our key markets, especially the Americas and Europe where weather negatively impacted the market through the first half of the year and the fact that we entered the year with poor brand momentum. Looking forward, I'm pleased to say that we do have positive brand momentum going into 2014. I also believe we have a stronger organization, product line and now a proven operating plan. This proven operating plan I'm referring to has been outlined many times during our previous calls. It's part of what we refer to internally as our movement towards the new Callaway. It includes revamped approaches to marketing, sales, operations and tour, and a commitment to leveraging our strength in research and development. Turning to some of our 2014 initiatives, consistent with our stated strategy of increasing our tour presence, at the beginning of 2014 we announced several new exciting tour additions, including Harry English, Matteo Manassero, Henkrik Stenson, Pat Perez, Matt Every, Lydia Ko, several others which are not going to be on the list here for you today. We are optimistic that these additions will further drive energy and consumer interest in our brand. To this end, we've been fortunate to have some nice early exposure both domestically and internationally. Looking on the product front, we entered 2014 with hope and optimism based on an extensive new lineup of ball, accessories and clubs. These include, on the ball front, a new premium ball line named Speed Regime where the balls are custom designed for different swing speeds via changes to compression, construction, and to the best of our knowledge, for the first time ever in golf, aerodynamics. Also a new ultra-low compression ball called Supersoft that feels great, goes a long way, and totally fun to play. This ball is an exciting new addition to our lines for 2014. And although it's only recently launched, is off to a strong start. On the club side, we've recently launched the Apex Irons and the X2 Hot family of woods and irons. These are fantastic game-changing products which we believe will do well in the marketplace. In a few weeks, on Valentine's Day actually, we're going to bring back the Big Bertha, utilizing two new innovative technologies worthy of this iconic brand name. In the standard Big Bertha, the more forgiving option in that lineup, we're going to introduce adjustable perimeter weighting, a sliding weight track located on the perimeter of the head which offers continuous adjustability while sustaining forgiveness and overall solo [ph] performance for a wide range of golfers. We believe this will be a great driver for nearly everyone, tour players to the weekend warriors. In the Big Bertha Alpha, we are introducing a breakthrough new technology we call Gravity Core. This allows us to move the center of gravity location up and down as well as side to side, thus allowing a fitter the ability to optimize spin rate or impact location without changing any other aspect of the club. We believe this will be a big hit with skilled players and technology buffs. Both of these products are breakthrough and leverage our advantage in multi-material construction, thereby allowing waste savings and the inclusion of more fitting technology without the resulting trade-offs in weight or center of gravity location. On the Big Bertha Alpha product we used eight different materials alone in the construction of the head. We also have numerous new products in the accessories category, however, time will not permit me to run through those for you on this call. Trade reactions to our 2014 lineup has been positive. There's particular interest and optimism regarding the Big Bertha lineup. Looking at market conditions in Q4, market conditions during [indiscernible] for the holiday season were really just fair both in the U.S. and generalizing now in most of the world. Unfortunately, it's too early to get a reliable read on 2014 market conditions or sell-through of our recent launches. However, we have been pleased with the sell-through of our Apex product line which launched in December in the U.S., as well as Supersoft which launched in very early January. We also believe our inventory position for Callaway's older products, both trade and ours here internally, are in reasonably good shape. Turning now to guidance -- it's worth noting that for the first time in a long time, we're returning to GAAP. But to ease the transition we'll also be providing a reference to pro forma to assist everyone in year-over-year comparisons. I believe the transition to GAAP is another healthy move for our business. Our guidance for 2014 is for revenues in the range of $880 million to $900 million. The midpoint of this range would require actual growth of 5.6% or 7.8% on a constant currency continuing basis. Therefore the guidance reflects Callaway continuing its positive momentum in the marketplace. Along with this revenue growth, we also expect the gross margins to improve. Brad will give you more color on that area during his comments. Operating expense, we are estimating an increase of approximately $19 million year over year. This increase is a mix of increased investment in marketing and tour as well as increases in variable expenses associated with our revenue growth. We expect all of this to result in GAAP earnings per share in the range of $0.12 to $0.16. At the midpoint of that range, we would deliver a $30.3 million increase in pretax income on a $47 million increase in revenues. That's pretty solid flow-through. We believe achieving this guidance would be another positive step towards our turnaround. In closing, although there's much work to be done, there is also reason for optimism. I am confident that Callaway Golf is in a much stronger position today than it has been in quite some time. The changes we have implemented are being noticed and are proving effective in driving increased consumer interest, greater operating efficiencies, and improved financial performance. However, as I have in my previous calls, I also need to emphasize that turnarounds take time. This will be a multiyear process and we are now entering only our second full season under the new operating model. There is still much to do, markets will remain hyper-competitive, and we know that the ultimate success will be determined by the consumers measured by sell-through. And unfortunately, it is too early to get a good read on sell-through at this point. At this point I am pleased with our results and I remain confident that we are on track with our overall plan. We believe we are demonstrating in our business plan combined with the strength of our brand and the quality of our people will lead to steadily improved financial performance and long-term shareholder value. I look forward to continuing to keep you updated of our progress and appreciate your interest and support. Brad, over to you.

Thanks, Chip. Consolidated net sales for the fourth quarter were $127 million, an increase of 17% on a constant currency continuing business basis, which excludes the brand and businesses that were sold or transitioned to a third-party model in 2012. Sales on a GAAP basis, which were adversely impacted by $8 million due to changes in foreign currency rates and by $4 million for the sold or transitioned businesses, increased 6%. Pro forma gross margins for the fourth quarter improved significantly to 26% compared to 14% last year due to less promotional expense this year, the positive impact of the new full price products launched in the second half of the year, and continued strong demand for our higher-margin X Hot products this year. Pro forma operating expenses for the fourth quarter declined 1% to $73 million, a slight improvement compared to $74 million in 2012 as we began to anniversary last year's cost reduction initiatives. We had a pro forma operating loss for the fourth quarter of $40 million, an improvement of $17 million compared to a loss of $57 million last year, and a pro forma loss per share of $0.34 compared to a loss per share last year of $0.48. On a GAAP basis, the operating loss was $45 million, compared to a loss of $71 million in 2012, with a loss per share in 2013 of $0.65 compared to a loss per share last year of $1.01. For the full year, consolidated net sales were $843 million, an increase of 14% on a constant currency continuing business basis. Sales on a GAAP basis, which were adversely impacted by $40 million due to changes in foreign currency rate and a net impact of $57 million for the sold or transitioned businesses, grew 1% compared to 2012. Full year sales in the U.S. were $401 million, an increase of 14% on a continuing business basis, with sales on a GAAP basis increasing 2% compared with the same period last year. Full year international sales were $441 million, an increase of 13% on a constant currency continuing business basis compared to sales last year. Sales on a GAAP basis were flat compared to last year and total sales represented 52% of total company consolidated sales. On a product category basis, 2013 annual wood sales were $256 million, an increase of 28% compared to last year, due primarily to the success of our X Hot line of wood as well as the successful second half launch of our [indiscernible] products. We gained market share in wood categories with Fairway Wood gaining nearly 9 share points for the year. Iron sales were $182 million, an increase of 6% compared to last year, on a more streamlined and profitable product offering, and driven by the success of our X Hot irons this year, along with the second half launch of our new Mack Daddy line of wedges and Apex Irons. Other sales declined 4% to $90 million due to a decline in the overall category this year. But despite this drop in sales, Odyssey has increased its year-to-date U.S. market share by nearly 2 percentage points to 29.9%. Golf ball sales were $132 million, a decrease of 5% compared to last year due to the sale of the Top-Flite brand. But sales of Callaway-branded balls have increased 10% compared to 2012. Pro forma profitability for golf balls has increased significantly this year despite lower sales due to the actions we've taken this year to consolidate and better leverage our manufacturing footprint. Accessory sales were $183 million, a decrease of 20% compared to last year due primarily to a reduction of approximately $37 million in sales associated with the businesses that were sold or licensed in 2012. Full year pro forma gross margin increased 460 basis points to 39% compared to last year due to less promotional expense, the success of X Hot products, as well as improved manufacturing efficiencies. Full year pro forma operating expenses totaled $321 million, a reduction of 9% compared to $353 million last year due primarily to the cost reduction initiatives that took place last year. This was also significantly lower than our original guidance of $340 million due to the positive impact of changing foreign currency rate as well as the deferral of some previously planned initiatives in response to the adverse market conditions experienced last year. Full year pro forma operating income was $5 million, an improvement of $74 million compared to a loss of $69 million last year. And we had a pro forma loss per share of $0.02, in line with our guidance provided last quarter, which was an improvement of $0.75 compared to a loss per share last year of $0.77. On a GAAP basis, the operating loss was $11 million compared to a loss of $116 million last year, with the corresponding loss per share of $0.31 compared to a loss per share in 2012 of $1.96. Turning to our balance sheet, we ended this past quarter with cash of $37 million compared to $52 million last year. Our consolidated net receivables were $92 million, an increase of 1% compared to last year. DSOs improved by 2 days to 68 days compared to 70 days last year. And we remain comfortable with the overall quality of our accounts receivables. Net inventories were $263 million compared to $212 million last year. This increase was due to being able to stage inventories of our new products earlier than last year in preparation for launch in early 2014. This earlier staging was the result of continued improvement in our supply chain and product development processes. We are comfortable with the quality of our inventory in-house as well as inventories at retail as we begin 2014. Capital expenditures for the year were $30 million, which was slightly lower than our previous estimate, and depreciation and amortization expense for the year was $26 million, consistent with our previous estimate. Now I would like to review highlight of 2014 estimates. First, we will be reporting guidance and results this year on a GAAP basis rather than on a pro forma basis since we have now completed a major restructuring initiative during the past year. As Chip mentioned, we think this is a positive next step for the company. Additionally, since we will be reporting on a GAAP basis, our tax expense will be based on actual taxes paid rather than a pro forma rate of 38.5% that we have used in the past. Additionally, to assist in comparing 2013 and 2014 results, we will provide supplemental details on a quarterly basis of charges that were excluded from pro forma results in 2013. So let's start with top-line sales. Based on the best available information we have at this time, we estimate 2014 annual net sales to range from $880 million to $900 million or a growth of 4.4% to 6.8% compared to last year. This estimate is based on currency rates as of the first week of January which are in total slightly weaker than 2013 rates. Additionally, our 2014 sales will be adversely impacted by approximately $9 million as a result of our decision last year to license our apparel business in Europe. Adjusting for these two items would result in 2014 sales growth on a constant currency continuing business basis of 6.6% to the low end of the range to 9% to the high end. We estimate that as a percent of total annual sales, that first quarter sales will skew slightly higher than what we experienced last year. This shift in sales to the first quarter is the result of the higher inventories we were able to stage during the fourth quarter that I just mentioned which are due to improvements made to our product development and supply chain functions during the past year. Gross margins are estimated to improve to approximately 41.7% plus or minus 30 basis points due to the full year positive impact of the supply chain initiatives put in place last year, increased pricing, as well as an improved mix of full price products, partially offset by higher costs associated with new technologies and our 2014 products. For 2014 we estimate operating expenses to increase to approximately $345 million for the full year compared to $326 million in 2013. This increase includes reinstating some of the initiatives we deferred this past year which I mentioned earlier, as well as additional investment in tour and marketing, increases in variable expenses related to higher sales, as well as modest increases in cost of living and inflation. Other income and expense includes an estimate of interest expense associated with our convertible debt and our ABL credit facility of $8.6 million. [indiscernible] gains and losses will also be captured in this line item of Other Income and Expense as they occur during the year, but for guidance purposes, we are assuming zero at this point. Pretax income for the year is estimated to improve to $15 million compared to a loss of $13 million in 2013. With regards to taxes, this year we will be using the actual tax expense incurred for 2014 and will no longer be using pro forma tax rate of 38.5%. While we do not incur any federal tax liability at this time because of our deferred tax valuation allowance, we do still incur and pay annual state and international taxes. Our current estimate of this tax liability for the midpoint of our guidance range is $6.5 million. For modeling purposes, I would suggest that the $6.5 million [indiscernible] roughly in line with the quarterly international sales as a percent of total annual international sales. For example, if first quarter international sales were 30% of the total annual international sales, then the tax liability for the quarter would be 30% of the $6.5 million or approximately $2 million. This estimated liability can and will change throughout the year for several reasons, so we will update our estimate on a quarterly basis. Fully diluted earnings per share is estimated to range from $0.12 to $0.16 based on 78 million shares outstanding. FX is estimated to be approximately $50 million [ph] in 2014, with depreciation and amortization estimated at $25 million for the year. One final item I wanted to mentioned is, now that we no longer have any outstanding preferred stock with specific dividend payment dates, future dividend declarations will be announced after our regularly scheduled board meeting which will vary slightly from past scheduled dividend announcements. I just wanted to clarify this so there's no confusion if our dividend announcement dates aren't aligned with past dates. We will now open the call for questions. Therese [ph], over to you.

Thank you. [Operator Instructions]. And our first question comes from Dan Wewer with Raymond James. Dan Wewer – Raymond James: Hi, good evening, Chip and Brad. Regarding the 2014 revenue forecast of 6.6% to 9% increase, I would have thought that you would have guided higher than that given the momentum that all of your products are achieving and growing market share. So, Chip, just curious, how do you see the golf industry growing or not growing in this upcoming year?

Dan, you know, market conditions at this point in the year are kind of hard to predict. There's not any great indicators out there at this point. We do expect that overall market conditions will support low to single digit industry growth and we do think macroeconomic trends and consumer confidence are in general moving in the right direction. We think weather overall should be slightly improved relative to the first half of last year. However, we know we're not very good at forecasting weather so we're reluctant to do so. And the, you know, the industry is still recovering from 2009 downturn, but at the same time, it'd be naïve to think that the golf business would be any less competitive this year. So we think, you know, it'll be a little better than last year where the industry overall contracted a little bit. But reluctant to get ahead of ourselves until we get more clear reads on the early selling season which will be still a few months away. Dan Wewer – Raymond James: [indiscernible] a year ago, your premium driver and premium golf ball business, particularly at the beginning of the year, didn't perform well for you. Would you not expect the market share to actually increase at a faster rate based on the potential of Big Bertha and Speed Regime?

Well, we think -- we're optimistic on our lineup for this year. We do expect to grow market share. And we think that's reflected in our guidance. You know, our guidance is, on a constant currency continuing business basis, it's 7.8% or roundabout 8% growth on the midpoint. Now, you know, I don't view in this industry that as very conservative. And -- but I am pleased with our momentum. As stated, the reactions of the Big Bertha product is positive. There's a lot of room for [indiscernible] at this point as well which, sure, you can sense. But there's so much uncertainty at this point right now where again that 8% we think is -- 8% on a midpoint seems not too conservative and, you know, about right. Dan Wewer – Raymond James: Just one follow-up. If Callaway is to eventually return to 8% or so operating margin rate, it'll probably need to achieve a gross margin rate 44%, maybe 45%. This year you're forecasting slightly below 42%. Given that your inventories are clean, you're able to potentially increase average unit retail prices this year, why could the gross margin rate maybe not be in a 43%, 44% rate in 2014? What holds -- what prevents you from reaching those levels of gross margin?

You know, at this point when we provide guidance, we don't provide guidance [indiscernible] perfection. And so what we're looking at is a turnaround that is really [indiscernible] coming from where we've been, you know, we grew this business in a down market $100 million on a constant currency continuing business basis, we moved the margin up significantly, we expect to be able to do that again next year. We're in -- the operations team has done a wonderful job in changing and transforming our supply chain, but that is still also work in progress. We will not see all of the final fruits of that labor this year. And it's going to be a process of continuous improvement. You know, we think that a well-run golf equipment company would deliver margins of 42% to 44% range, and historically has seen those types of numbers. So, you know, what you're seeing in the guidance we think is a movement along the path, but I do want to stress that, you know, we don't think it's reasonable than in the second year of our operating model under this new approach, you know, it would instantly get to that point. That's ahead of the process and plan that we think is practical. Dan Wewer – Raymond James: Right. Great. Thanks and good luck.

Thank you.

Thanks, Dan.

Thank you. Your next question comes from Scott Hamann with KeyBanc Capital Markets. Scott Hamann – KeyBanc Capital Markets: Yeah. Hey, good afternoon guys.

Hey Scott. Scott Hamann – KeyBanc Capital Markets: Just following up on the top line question, you know, it seemed like across all parts of the product line there's their premium products versus last year. So if we're kind of thinking about volume versus price within your revenue guidance, I mean, how are you thinking about that? And then maybe regionally, in the different geographies, I know Japan's been a tough comp, but how are you thinking about the international versus for domestic?

Scott -- and Brad, you jump in here if you have anything more specific. I might lack a little bit on that front. But it is a mix of price and volume that we're expecting for this year. We see opportunities for mix improvement as Big Bertha should do better than Razor Fit Extreme in the marketplace in our premium products driver. There are other areas where we increased prices reflecting added technology we put in to our products. So, you know, and we do think we're going to gain market share. So there's contributions coming from multiple areas. Regionally the U.S. has been doing a great job. They got momentum. And we expect to have a strong year in the U.S. Europe started slowly last year, mostly due to the market conditions. They finished the year very strong. We're bullish for that market. You know, Europe is a lot of individual markets, as you know, some of them are still in tough positions, others are doing better. But our business in general over there is bullish and we think will help drive our overall growth rate this year as will the U.S. The Japan business just did a wonderful job last year, and as I stated before, I think the [indiscernible] of that team and what they had been able to do, I do think they have a harder comp this year. That was one of the few markets that grew last year overall. And so that one may not lead to the growth rate like this year. And, you know, I don't think there's going to be any difference in previous years in terms of the competitiveness of the marketplace out there. You know, this golf business is a highly competitive business. That obviously doesn't catch us by surprise, we're planning for that. But I think we want to just state that it'd be naïve to think of it any other way going forward. Scott Hamann – KeyBanc Capital Markets: Okay. And then just a follow-up on OpEx, I appreciate that you brought down last year, and so the move this year may be a little bit higher than you would normally expect in terms of the incremental expense. But when we think about incremental OpEx for 2014 in the guidance, is it really a, you know, kind of a one-time investment in some of these tour and sales initiatives, something that we would expect to provide leverage in 2015 or should we continue to expect this level of incremental investment annually going forward?

Well, the -- you know, first, and you're correct and I'm confident we communicated this in the previous call, that although we took a lot of costs out of this business, we also believe we have to reinvent in certain areas to get where we need to go. And you're seeing that in some of the tour investments and strategic reinvestments that we did. There was, you know, we had a very successful offseason in attracting what we think is the significantly stronger tour staff [ph] to complement what was a reasonably good one going in, and now it's planning towards a great one. Our operating expenses, when you look at right now, are a little high relative -- as a percentage of revenues on projection. So we're aware of that and we will have to leverage that at some point going forward. Sometimes the investments in this business will be lumpy, sometimes they'll come -- and almost always they'll come in advance of the revenues. So the leverage point you mentioned is certainly there. We're not going to provide future guidance here, so we're not going to be able to give you what we think will happen in next year or beyond. But you're absolutely correct, we have to leverage those investments, and we recognize that we're investing this year at a little higher rate relative to the overall revenues that we -- than we can afford to do long term. Scott Hamann – KeyBanc Capital Markets: Okay. Thanks, Chip.

Thanks, Scott.

Thank you. Your next question comes from James Hardiman, Longbow Research. James Hardiman – Longbow Research: Good evening. Thanks for taking my call. I just want to make sure I get all the -- what we're doing here with GAAP versus non-GAAP. Just so I understand here, are there in fact no restructuring charges that are going to be incurred during 2014 or are we just basically ignoring those charges? And I guess pretty related question there, are there any other incremental cost savings that we're going to see from here going forward other than sort of the typical year-to-year maximization [ph] type efforts?

James, this is Brad. I think you're right, we aren't planning for any major one-time expenses or restructuring. And if anything comes up, we'll absorb it in our operating results. But the intent is GAAP and we won't have any call-outs in terms of pro forma. And with regards to just additional major restructuring, I mean I think Chip had said this in the past, I think we made pretty significant ones. We don't see any big major ones right now. But part of the culture here now, as part of this new Callaway, is to be very cost conscious and continue to look at ways that we can try to [indiscernible] we continue to grow business, and as you mentioned, you know, for us to get -- enter to that well-run 7% to 8% operating margin, it's going to require that we manage expenses while we're growing top line and margins. But to answer your first question, no, we don't anticipate any major charges next year to the P&L. James Hardiman – Longbow Research: Got it. And then unrelated question here, obviously there's a big focus in terms of reinvesting on tour. Can you give us a little bit more color maybe big picture about the strategy there? It certainly looks like maybe you're going after some of the long-ball [ph] guys, maybe trying to get a little bit younger. Could you just put that strategy in the context of your broader product strategy?

Sure. You know, it really fits with everything we're doing. And if you look at our brand, James, we are iconic, we are authentic, we have a heritage, we have such strength in key areas that are very valuable for us, and those areas had been around, you know, average players, game improvement, etcetera. Where we may have lacked in the past is a competitive edge to us, youth and energy. And all of the changes that we have made from a brand perspective over the last few years have been about sustaining the position that we've enjoyed with our core, but also complementing that by engaging youth, energy, you know, high performance and a more competitive spirit and attitude. You see that pervade in our marketing, you see that pervaded in our products, and you see that in our tour staff [ph]. We've had, you know, when I showed up, I was blessed with great assets including some wonderful relationships, you know, Phil Mickelson and others, and be able to complement those with youth, energy, some of these long hairs, you know, but appealing characters that show energy and excitement, more frequent exposure on TV, you know, that we believe is very important for our business. And it feels good to, entering the new year, when you turn on the TV and see the Callaway hats in the young moderns [ph] out there, in addition to Phil. That adds energy, excitement to the trade and we think will add consumer interest. Correlation is not causality, but if you look at successful companies in the past, that correlation is pretty darn good. James Hardiman – Longbow Research: Very helpful. Good luck this year guys.

Thank you.

Thank you.

Thank you. [Operator Instructions] Your next question comes from Casey Alexander with Gilford Securities. Casey Alexander – Gilford Securities: Hi, good afternoon.

Hi, Casey. Casey Alexander – Gilford Securities: Just got a couple of things. One, curious, when you talk about the OpEx for next year, in the fourth quarter of this year, actually R&D crept a little bit. I understand you're investing hard in R&D to get new products. Are we going to see more of the micro launches that we saw in the middle of the year last year? I mean it seemed as though it was a pretty successful strategy for creating some seasonal offsets to the sales ramp.

Yeah, Casey, in general, without zeroing any specifics, we thought it was successful and, you know, we like to bring some energy throughout the year. Our major launches are [indiscernible] and with Big Bertha coming in February, but some energy burst throughout the year seems to work well, be received well in the marketplace. And that's one of the ways we can leverage the strong resources of Callaway Golf, you know, absolutely. Casey Alexander – Gilford Securities: Secondly, there's been a rule-driven transition to the putter business. How have you guys managed inventory through this? And how do you see that particular vertical developing in 2014 when we did, you know, kind of closer to some of the drop-dead dates [ph]? I mean I know that for instance, the long putter won't necessarily be outlawed for the vast majority of amateurs, but they're not going to buy new ones because they're not going to be offered. How do you see the ramp going there?

Well, it was, Casey, unfortunately, once that ruling was announced, the sales of the anchored putters, mid and long, all but stopped. And so that did leave us with inventory at that time and we have since had to either write off or clean up all of that inventory. So we are taking that dip. You know, on the positive side, it led to some pretty cool new introductions that just we've counterbalanced putters and tank. You might have noticed a little emblem we had at that at the PGA Show booth. Casey Alexander – Gilford Securities: Yeah.

And those are going fantastic, so, definitely one of the high-growth markets for us is the counterbalance putters and tank. And those revenues in the category, as percentage of the category, are facing what anchored putters did, which is interesting. And then there are some [indiscernible] and I'm not sure I'm all the way there yet, but I know some of the media thinks that that will be substantial percentage of the market, like over 50%. Now it's not there now but it is a very healthy percentage. And the tank product line or counterbalanced putters are an exciting aspect in the business. But the anchored is, you know, that's -- you know, there's some out at retail, but that's just the retailers working through [indiscernible]. Casey Alexander – Gilford Securities: Yeah. Finally, at the show this year, there seems to be for the first time a real willingness to consider any and all things to try to improve participation in the game. Obviously I know Callaway is for improved participation in the game. What do you see your role in that? And because this is -- one part of it is obviously being driven by an initiative from TaylorMade. I mean as the CEO, what do you think Callaway's role is and how do you interact with some of these other efforts to improve participation in the game?

That's a great question and I'm still feeling my way through that one right now, Casey. Clearly there's some positive energy in the industry -- for multiple constituencies around looking at new ways of making the game more attractive to we'll call people outside the core, people outside the guys like you and I, that have either not stayed with the game or haven't been attracted to the game for multiple reasons. And I applaud what Mark King and the TaylorMade team are doing in terms of their financial commitment and efforts to get [indiscernible] alternatives there. And to the degree that we can collaborate on that in some way, shape or form, I'm very open to that. But where Callaway sits in that right now, my style has always been a little bit more behind the scenes. Everybody has their own personality. Mine isn't one -- not to stand in front on that. I am in some conversations behind the scenes which I hope are constructive in terms of supporting. We're very supportive of efforts that get golf ready [ph] [indiscernible] you know how active we are in Top Golf and what a positive impact that can be in terms of exposing golf to new constituencies, and absolutely one of the first ones here to applaud what Mark and TaylorMade are doing from that front -- Casey Alexander – Gilford Securities: And they actually positively mentioned Top Golf in their presentation as well.

Yup. And, you know, so the real positive nature is the whole industry talking about the subject. There is no one silver bullet answer in my opinion, but there are a lot of little things that can be done that will be helpful to this industry and game. Certainly the industry is front and center on the issue now and we're relying on [ph] [indiscernible]. We're going to have to agree on exactly where we head forward, so I'll be participating on those conversations, but maybe more behind the scenes than out front until I see the right role for me in that area. Casey Alexander – Gilford Securities: All right, great. Well, thank you for taking my questions.

Thanks, Casey.

Thank you. Your next question comes from Rommel Dionisio with Wedbush Securities. Rommel Dionisio – Wedbush Securities: Yes. Thanks, good afternoon. I wonder if you guys could just give us a little more granularity on where retail inventories might be entering the season here, particularly some of your competitors' products. I know last year one of your primary competitors was pretty ultra-aggressive on promotions, especially earlier in the year, probably due in no small part to the market share you guys were gaining. But I wonder if you guys could just characterize, were you able to clear inventories, are they relative clean going into the 2014 year?

Rommel, I'm not going to talk about any competitor specifically for reasons which I'm sure you understand. Rommel Dionisio – Wedbush Securities: Sure.

The industry in general, if you look at filled [ph] inventories, they're up slightly, but not - I wouldn't call it alarming or meaningful at this point. The Q4 was a little bit lower than what we expected as an industry I believe, and the overall inventories are really reflective of that small amount and that alone. Callaway's inventories are, you know, we're comfortable with, we're in relatively good position, etcetera. So I believe Callaway inventories are better than the industry in general. And I don't think the industry is not at an alarming position at all, but is slightly higher than they probably want, which I think is reflection that the golf industry, you know, December was a cold month and holiday sales in general were just okay, they were not gangbusters. Rommel Dionisio – Wedbush Securities: Okay. Thanks very much.

Sure.

Thank you. Your next question comes from Lee Giordano with Imperial Capital. Lee Giordano – Imperial Capital: [Indiscernible] --

Lee, we're having a really hard time hearing you. Lee Giordano – Imperial Capital: If you could hear me [indiscernible].

Lee, I'm sorry, we can't make out what you're asking. We can't make it out. All right. We'll have to, sorry, Lee, we'll have to move on. Lee, we'll get you in one-on-one. I'm sorry, we couldn't hear you. Therese [ph], why don't we go to the next one?

Okay. Thank you. Those were all of our questions. I will now turn the call back over to Mr. Brewer for closing remarks.

Well, I want to thank everybody for tuning in today. I know that in different parts of the country the weather is challenging. And 2013 was a very positive year for Callaway Golf. Very proud of the team and the improvements we made in this business. Look forward to continuing to keep you updated on our progress as we enter 2014. Thanks very much for calling in. Have a great rest of your day.

Ladies and gentlemen, thank you for joining today's conference. Thank you for your participation. You may now disconnect.