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Callaway Golf (NYSE:ELY)

Q4 2009 Earnings Conference Call Transcript

January 26, 2010, 5:00 pm ET

Executives

Bradley Holiday - CFO and SEVP

George Fellows - President and CEO

Analysts

Tom Shaw - Stifel Nicolaus

Dan Wewer - Raymond James

Rick Nelson - Stevens Incorporated

Todd Slater - Lazard Capital Management

Kristine Koerber - JMP Securities

Jeff Blaeser - Morgan Joseph & Company

Derek Leckow - Barrington Research

Operator

Good afternoon my name is Marcello, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 2009 Callaway Golf earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers remark, there will be a question and answer session. (Operator Instructions) Thank you. I will now turn the call over to Mr. Brad Holiday Chief Financial Officer. Mr. Holiday you may begin.

Bradley Holiday

Thank you and good afternoon everyone welcome to Callaway Golf Company fourth quarter 2009 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 earnings per share, estimated charges and benefits related to the company's gross margin initiatives, the company's estimated 2010 tax rate foreign currency rate, capital expenditures and depreciation and amortization expenses are forward-looking statements subject to safe harbor protection under the federal securities law.

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 two, item 1A of our most recent Form 10-Q for the quarter ended June 30th, 2009, 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 consistent and comparable basis, we will provide certain pro-forma information after the company's performance for 2009 and 2008 excluding charges associated with the company's gross margin initiatives and for 2008 again associated with the company's prior and reversal of energy derivative valuation account.

We will also provide information after the company's operating results on a currency neutral basis. In order to evaluate the company's core operating performance from the cash generation perspective we will also 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 information provided on the call today in 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 George for a few opening remarks.

George Fellows

Thanks Brad and thank you all for joining us, the worldwide economy in general and the golf industry specifically have weathered the most severe downturn since the great depression and certainly in most of our collected professional careers. That fact has been certainly proclaimed quite prominently ad nauseum by most economic pundits. What is more important to note now however is that we come through this most trying period in a very solid condition and important way to our cautiously optimistic about prospects for significantly improved 2010.

While we would be naive to think that all bad influences are fully behind us, it would be far too negative not to recognize the many improvement signs pointing towards recovery in significant parts if not in total during the 2010 season. Going to more detail, to just highlight some of the indicators that give us optimism. Leading economic indicator has been pointing up for nine consecutive months supporting some of you that the recession has been ended, and we are in our recovery mode about not necessarily a rapid one.

Asia and South Pacific are clearly on the upswing and have been for more than one quarter. These ways appears to be leading the U.S. and Europe in their economic recovery and represent a important and profitable part of our business. As that head winds are reversed and are likely to restore meaningful portion of what was taken in 2009.

The trade outlook while cautious is generally quite positive with the pre-books of the new products in line with our expectations. Overall, retail inventories are in very healthy shape and may represent an opportunity as the season progresses. While we do not believe inventories will return to previous session levels some build backs of major brands could occur in 2010. We have received strong positive response to our new offerings not only from the trade but from the golf media as well receiving 15 medals, 10 of which were gold in golf size annual product preview more than any other manufacturer.

Our strength in competitive position going into the New Year reflects weakened secondary brands and our shared growth in most equipment categories in 2009 versus 2008. And this represents a stronger platform from which to grow as the season opens. This is true for both the U.S. and most international markets as well. And early sunbelt data appears positive despite weather issues encountered early on.

We believe the appropriate point of view to draw when balancing the continued uncertainties we face versus the positive market signs that are clearly surfacing is to plan a conservative recovery of budget with flexibility to ramp up or down at the market and season reveals itself. Aggressive marketing efforts will be balanced by prudent continuing operating expense controls that prove to be quite important in 2009.

Initially, we will continue to spend behind longer term growth opportunities like India and China, margin improvement initiatives and new businesses such as uPro which reflect our confidence that the golf industry will be restored to at least its traditional growth levels and perhaps beyond as the economy recovers and as further spurred on by the fertile international market opportunities and the long-term beneficial affects of the Olympics.

As we have in the past Brad will provide our outlook for 2010 in some more detail with suffice to say, our 2010 profitability and long-term outlook are in line with projections provided to you last November.

Let me now turn the call over to Brad to give you some greater detail. Brad?

Bradley Holiday

Thanks George. Consolidated net sales for 2009 were $951 million, with a pro-forma net loss of $17 million, or fully diluted pro-forma loss per share of $0.27. These results are in line with the guidance provided at our last earnings call and compared to 2008 net sales of 1.117 billion, and pro-forma earnings of $60 million, or fully diluted pro-forma earnings per share of $0.94, excluded from the 2009 pro-forma results are charges associated with our gross margin initiatives or $0.06 per share excluded from '08 pro-forma results were charge of $0.12 per share for gross margin initiative and a benefit of $0.22 per share related to the reversal of a $19.9 million energy derivative account that was establish in 2001 associated with the determination of long-term energy supply contract.

Consolidated net sales for the fourth quarter of 2009 were $186 million, a 9% increase compared to $171 million last year. The company reported a pro-forma net loss $17 million or $0.27 per share compared to a pro-forma loss in 2008 of $15 million, or $0.24 per share. Excluded from the '09 results or charges associated with our gross margin initiatives of $0.02 per share. Excluded from the 2008 results were a charge of $0.03 per share for the gross margin initiatives and a benefit of $0.22 per share related to the energy supply contract I just mentioned.

As we have mentioned throughout the year, there were a few key factors that negatively impacted our business in 2009. These key factors include a downturn in the global economy, which began in the second half of 2008 a stronger U.S. dollar which negatively impacted the currency translation of our international businesses and a contraction of retail inventories throughout the year.

Weak economy had a significant impact on consumer demand for golf products, which resulted in increased levels of discounting at retail. A strengthening U.S. dollar beginning in the latter part of 2008 negatively impacted the translation of our international results, impacting full year 2009 consolidated sales by $36 million or 3%, on a currency neutral basis.

Lastly, retailers reacted to the tough environment this past year by reducing the amount of inventory they purchased compared to more normal years. The good news is that inventory levels at retail entering 2010 are at relatively low levels which should be at worse neutral but possibly a positive factor for the upcoming year. Also, we were able to grow share in most major product categories during the year despite the tough environment.

The actions we took in addressing the conditions in 2009 were balanced between cutting expenses to offset the downturn in the economy, while continuing to invest in some initiatives we felt were important to position the company for future growth. We feel this approach was the correct one and positioned our company as well as can be expected to generate wealth as the economy recovers.

in looking at regional breakout U.S. sales declined 14% to $475 million for the year compared to a $554 million last year. For the quarter, U.S. sales were $76 million, compared to $89 million last year.

International results were negatively impacted by both the translation effect of the strengthening U.S. dollar and a weak global economy throughout the year. International sales for the full year were $475 million, a decline of 16%, compared to last year sales of $563 million. On a currency neutral basis, international sales would have decreased by 9%, while the economy affected the majority of our regions we did see solid growth in China and Korea during the year.

Full year gross margin declined to 36% of sales compared to 44% in 2008 due to significant discounting throughout the year as well as lower volumes. We were able to partially offset this decline to our continuous profits on gross margin initiatives, which generated $14 million of savings in 2009, and $70 million over the past three years.

Operating expenses for year declined 7% to $374 million, compared to $403 million in 2008. This decline was driven by tight management of discretionary spending, suspension of several employee benefits, positive affect of currency translation on foreign operating expenses and savings associated with the reduction in head count.

Partially offsetting these reductions the investments in growth initiatives including the U.K. acquisition, investing in emerging markets like China, Thailand and Malaysia and the creation of soft goods sales force with focus on our apparel category.

Looking at the balance sheet, we ended the year with $78 million in cash and no outstanding balance on our credit facility. Consolidated net receivables were $140 million at the end of the year compared to $120 million last year due in part to an increase in fourth quarter sales.

Consolidated DSO was 69 days compared to 65 days last year. This increase was due to the carry forward of increased credit terms implemented during the year. The overall quality of our accounts receivable is good. As a matter of fact, our past due receivables as a percent of total AR actually decreased compared to 2008.

Net inventories were $219 million at the end of the year compared to $257 million in 2008. This is the lowest year end level in the past five years even including incremental inventory associated with apparel, and uPlay products as a percent of trading 12-month sales inventory was 23%, flat as compared to the same time last year.

Capital expenditures for the year were $39 million compared to $51 million in 2008, and slightly favorable to our previous estimate. Depreciation and amortization expense was $41 million for the year compared to $38 million last year, in line with our last estimate. As we look at this upcoming year, we are consciously optimistic that the economy and overall market conditions will improve. The question is how much and how quickly. It's early and while these estimates will most likely change over the course of the year we do it's important to give your our range of financial expectations for the 2010.

Net sales are estimated to range from $990 million to $1.05 billion, or growth over 2009 results of 4% to 10%. We took several factors into consideration in developing this estimate which include number one, overall currency, foreign currency rates are estimated to improve for the company in 2010 compared to 2009.

Spot rates were favorable compared to last year, are favorable to compared to last year, ranging from low single-digit to mid-teen percentages depending on the currency. An overall average for our international business of this favorability ranges from approximately 4% to 5% or about half of this rate when you look at it on a consolidated company basis.

Number two, the IMF or the International Monetary Fund reported last week that China, India, and other emerging Asian economies are leading the global recovery and returning to their pre-crisis growth level. And was going to raise their 2010 global growth forecast from their current estimate of 3.1%. Number three, key really U.S. economic indicators as George mentioned were up beginning December, for the 9th consecutive month. Number four, the overall improvement in the economy and low golf retail inventories will positively impact the marketplace in 2010, resulting in what we believe will be significantly less discounting product at retail.

Number five favorable reception to our 2010 products by trade publications and annual equipment reduced as well as our customers and consumers number six included in our estimates are incremental sales due to new apparel arrangement with Perry Ellis where we will capture traditional golf channel revenues as well as incremental sales in our uPlay product category and emerging markets such as India and southeast Asia.

From a timing perspective, we historically generate between 60% and 65% of our annual revenues in the first half of the year and would expect this year to be consistent with that average.

Gross margins are estimated to improve to 42% to 44%, the key drivers here include an expectation of less discounting at retail, the favorable impact of an anticipated weaker dollar improved manufacturing leverage from higher volumes and continued savings from our gross margin initiatives.

Operating expense is estimated at between $375 million to $405 million. As I mentioned a few minutes ago, 2009 OpEx was reduced significantly during the year due to several actions we took to offset the impact of the down economy. The annual estimate for 2010 represent continued savings from last year's actions offset by incremental expense associated with new market expansion, the full year impact of the soft good sales team reinstatement of employed benefits that were suspended last year and the negative translation impact of a weaker U.S. dollar.

Excluding the impact of FX and reinstatement of benefits operating OpEx is expected to be lower year-over-year. Tax rates for 2010 are estimated at 38%. And given these estimates are earnings per share estimated to range from $0.25 to $0.35 for the year. This estimate excludes approximately $0.10 for continued gross margin initiatives. But includes the impact of the preferred equity issued last June. For 2010, CapEx is estimated to be $30 million to $35 million. And depreciation and amortization expense is estimated at $40 million to $45 million.

We would now like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

And our first question is from the line of Tom Shaw with Stifel Nicolaus. Please go ahead with your question.

Tom Shaw - Stifel Nicolaus

Hi, thanks. First question, looking at some of the recent press concerning sharp declines and sponsorships viewerships et cetera, I guess, for George, does this change really another way you approach certain elements of the business in 2010, I guess, in particular maybe endorsements or other kinds of marketing?

George Fellows

Well, we continually shift our marketing spending to reflect what the current marketplace conditions are. But the issue of tournament sponsorships is really a function of the economy and you have to recognize that a very significant portion of the tour was sponsored by financial services companies as well as the automobile companies now that clearly has been impacted very severely over the course of this last year. But what we are seeing it start to comeback a little bit and I suspect while it maybe a couple of rough spots for the balance of '010, I think, the sponsorships are ultimately going to come back.

Our real issue is less the sponsorships of the events themselves than it is consumer interest and willingness to play the game of golf and just to remind you that the overall rounds played in '09 despite the severity of the economics were relatively flat. So, the fundamental interest in playing the game, playing the game, has really not changed dramatically. And we think that together with the signs that the economy is recovering should bring more consumers back into the market place.

Now, we clearly indicated that we don't anticipate '010 to restore itself to pre-recession levels we think we are going to make up a significant amount of grounds and we budgeted accordingly and just prudently obviously put the appropriate flexibilities into our overall plan to be able to adjust it upward and downward, depending on how the market opens up and progresses through the year.

So, yeah, we are always making adjustments and I think if '09 taught us anything it's do be bit more agile and be more anticipatory to the market rather than staying with the plan as term of the written. So, we think, we are in a pretty good place actually and based on the early science, I think we planned appropriately.

Tom Shaw - Stifel Nicolaus

Okay. And I know it's very early with a lot of product coming out post PG merchandise show but are you seeing any signs from some of new product, we have seen $250 driver has being introduced, a few buy this, get a $50 gift card. Is anything surprised you that you seen so far from a competitive or from a promotional standpoint?

George Fellows

Well, not really. Again, it's rather early, I think, we clearly anticipated that the hangover if you will from the economy would probably heighten the proportion of the business that would go towards the lower price products, but fundamentally with, you know, perhaps one exception this is a rational marketplace, I anticipate that the overall promotional dealing will be less than it was in '09 but probably somewhat more than a traditional year, we certainly accommodated that in our financial planning. So, at this point in time, I haven't really seen anything that's dramatically off that playing assumption.

Tom Shaw - Stifel Nicolaus

That's fair. And last one, so the housekeeping, what share count are you are assuming for 2010?

Bradley Holiday

64 million, Tom.

Tom Shaw - Stifel Nicolaus

Alright. Thanks, guys. Best of luck this year.

George Fellows

Thank you.

Operator

Our next question is from the line of Dan Wewer with Raymond James. Please go ahead with your question.

Dan Wewer - Raymond James

Thanks, George first on the weakness in the U.S. market, can you -- do you have a sense of how much of that reflects just a large number of the smaller independent retailers have closed their doors and how much reflects softness that your larger accounts that have been aggressively pairing back on inventory?

George Fellows

I think, all of it is really reflection of consumer more than anything else. There were really a measurable number of independent retailers that closed their doors in '09. I seen estimates approximating 250 perhaps, but there is no shortage of retail outlets for the golf industry and that business will ultimately go to the remaining players. So, I don't think from a consumer point of view there is going to be any lack of availability to product, so the weakness both from the number of doors that closed to the overall declining consumer purchases are really a reflection of whether or not the consumer is willing to put their hands in their pockets and buy products and that was clearly impacted in '09, but based on all of the things that sort of I mentioned in my prolong here we think is going to be less of a factor in '010. I think less of, not a factor but less of a factor in '010. We see it recovering.

Dan Wewer - Raymond James

So, you are expecting your domestic revenues to increase in 2010, as part of the overall forecast or 4% to 9% increase?

George Fellows

That's correct.

Dan Wewer - Raymond James

The second question I had is on the profitability of the golf ball business but in the fourth quarter and the year, recognize that your product lineup was more mature than your competitors but is there anything else that's impacting the profitability of that segment?

George Fellows

Actually, a lot of the steps that we are taking from the margin improvement initiative will enhance the profitability under normal circumstances. I think clearly, a lot of product '09 for that matter most of '09 was impacted by a lot of commercial dealing involved and that certainly impacted the profitability in the short-term. But on the ongoing basis with less promotional pressure, we clearly expect that more profitability to be restored to more typical levels for us and again, on a gross margin, gross margin basis, based on efficiencies that we are bringing to the party in terms of our process in terms of having a high portion of its produced offshore, our overall gross margin should go up actually.

Dan Wewer - Raymond James

And then the last question I have right now George is both the company and industry did a terrific job of educating customers last year to wait for a deal, I understand why you're thinking that the margin rates will be better than they were in '09 but perhaps not as strong as they were in the past. But I think in real life, consumers are still looking for a deal right now, and I am just confused as to how the industry thinks they can sell more units without offering the same promotions as they did in '09?

George Fellows

Well, there is an awful lot of talk about the new reality but I have to tell you we have gone through these periods before, there have been periods of stronger promotional activity and when the trade and the manufacturers fundamentally want to get back to normal, we work our way back, just simply by not promoting nearly as I believe as we did in '09 and the consumer responds to it.

The other part which you really can't ignore is the fact that there is a buildup of purchasing desire and power if you will that was deferred in '09 because of the uncertainty relating to jobs and income et cetera. The golfer like most consumers can be held back only to certain period of time, and once the economy stabilizes which it appears to be doing, normal purchasing patterns typically are restored. I see nothing other than severity of what happened in '09. I see nothing different in this recessionary period from other periods that occurred in the past, and in fact people came back from heavy promotional dealing to more normalize trading and I don't know why people seem to think that this is going to be a permanent reduction because I see no signs that would indicate that its going to be --

Dan Wewer - Raymond James

Well, I guess, it's because unemployment stays north 10%.

George Fellows

Not just only 10% but the people who employ the buying and their income is not impacted. Certainly 10% are not buying. Or certainly they are buying but again as I say, as the economy recovers, which clearly means that unemployment has to go back down again, those people are slowly going to come back into purchasing pool. I don't mean to make light of 10% unemployment because it's obviously horrible. But 90% of the people are continuing to be employed and they are continuing to receive their income as before and as they become more secure that the overall layoffs et cetera are not going to continue, they are going to go on with their lives and do what they done in the past.

Witness case in point rounds played last year did not suffer anywhere nearly the level that new purchases did. And that reflects the fact that people are still out there living their lives.

Dan Wewer - Raymond James

Great. Thanks and good luck.

George Fellows

Alright, thank you.

Operator

Our next question is from the line of Rick Nelson with Stevens Incorporated. Please go ahead with your question.

Rick Nelson - Stevens Incorporated

Thanks and good afternoon. Interested to know what product categories you think will be the big sales drivers in 2010?

George Fellows

I wish, I had that kind of crystal ball, but, we have an extraordinarily strong line across the board, I mean, this would going to sound like a message from your sponsor and I guess if it is. But we have very strong entries in the new driver and in the entire woods area, we have some very strong irons introduction this year, we have strong putter line, and we are introducing two brand new golf balls at the upper end of [DNIS] line. So, pretty much across the board we bought out a very solid new product offering.

We have not cut back in any way our R&D activities because we always certainly felt that throughout '09 and obviously continuing to do so now that this is a temporary hick-up if you will in the business and that the golf industry is clearly going to recover. So, we are approaching the marketplace in exactly that fashion. So, I actually expect a pretty strong performance across the board.

Rick Nelson - Stevens Incorporated

Some pretty big growth, year-over-year in putters and accessories in the fourth quarter, you just reported, what is behind that and do you think the consumer is going to continue to trade down as we look at the new year?

George Fellows

Again the fourth quarter and is something that we really started paying a lot more attention to in the last several years, the fourth quarter is a fairly big gift giving period. There has been, if you take a look at the consumption patterns the November December period really reverses the slow decline that occurs say starting in August. So, getting a bounce in that latter part of the year is not surprising but we also have new products that went in at that point in time. We introduced Jaws Wedges, which are based on the new groove ruling that is currently being proposed by the U.S. G&A are usable until '024 by the vast majority of golfers we have an entirely new line of putters, white ICE putters which are really quite extraordinary that were introduced at the latter part of the year and then a uPro, product uPro go that is also introduced for gift giving, all three of those products by the way were introduced largely to take advantage of the end of the year gift giving period. So, I'm sorry, and we also had a line of women's products called [Solaire] that was quite well received by trade as well.

All of those, we felt were very strong gift opportunities and in deed it would appear that is what happened in the marketplace. Now, as far as whether or not people are going to continue to trade down as I kind of mentioned, I think clearly the 299 price point for drivers will be disproportionately successful in the market place going into '010 even more so than in perhaps in past years again because there is some uncertainty as far as unemployment and income et cetera are concerned. But we budgeted accordingly. We would expect the 399 price point would be somewhat reduced again certainly based on the results of we achieved in '07.

So, yeah, we are expecting continuation of some emphasis against some of the lower priced product, but that's pretty much in line with, I guess, what our philosophy is, we expect '010 to be better but we don't expect '010 to be restored to the levels that we saw in '07.

Bradley Holiday

Rick, this is Brad, one thing, I would just point out is that just kind of year-over-year, we introduced about the same amount of new products, George also mentioned some of the specifics. The increase really for the quarter a big chunk of that was made up just by FX rates compared to the prior year. So, it was up just slightly compared to last year on a currency neutral bases and having about the same amount of new products year-over-year.

Rick Nelson - Stevens Incorporated

Thank you very much. One thing I got to ask you, the Tiger Woods question, suppose that puts you at a competitive advantage versus Nike and how does that change the way you approach the business from advertising standpoint perhaps sponsorships et cetera?

George Fellows

You know, I think the sensationalism so I mean that has very little to do with the business from our perspective. The industry is very thankful to the Tiger affect if you will that occurred for so long. He is going through a rather important personal crisis but the reality is and your focus should be on the fact that the game is much, much bigger than one individual. The game is going to continue to prosper, there is some extraordinary young players coming up as well as some extraordinary seasoned players such as Phil and so many others.

I think far too much is being placed against that. I expect the golf industry to continue to do well, and we all hope that Tiger is able to resolve the issues that are plaguing him right now. But as far as our business approach is concerned, there is no affect of that.

Rick Nelson - Stevens Incorporated

Have you seen any market --

George Fellows

I'm sorry?

Rick Nelson - Stevens Incorporated

Have you seen any market share shifts away from Nike and toward Callaway?

George Fellows

No. Again, please I'm not talking to your question, I think, far too much is being made of this, no, the business continues on its current trends, pretty and post by that unfortunate event and I don't see it changing.

Rick Nelson - Stevens Incorporated

Great. Thank you.

George Fellows

You are welcome.

Operator

Our next question is from the line of Todd Slater with Lazard Capital Management. Please go ahead with your questions.

Todd Slater - Lazard Capital Management

Thanks very much and good evening.

George Fellows

Hi, Todd.

Todd Slater - Lazard Capital Management

My question is just follow-up on the sales outlook with a range of 4% to 10% on the revenue guidance, I'm just wondering, if you could just give us a little color on what that range assumes in terms of what you think in terms of economic environment, maybe talk a little about how the order book has changed since your third quarter commentary that was above expectations and also talk little about the whether we should assume any inventory build and also what you are assuming on ForEx?

George Fellows

Let me, let Brad give you the breakout if you will, because I think you will find when he gives you that breakout it's really quite reasonable. No, we are not anticipating any inventory build, I think, that fact I mean, extent it happens, that's obviously to the good. But we built this budget from the ground up really with very specific assumptions in mind that I think Brad can give you some color on.

Bradley Holiday

Todd, I will just, if you take a look at just kind of zero in and on maybe the midpoint of the range we gave you, which is about 7% growth, about 2% to 2.5% of that we think will be foreign exchange translation. If you also include the incremental product that we are going to get in terms of apparel, emerging markets as well as some of the uPlay products, that what is really left for our core business, I think, we tried to prudently forecast and build our plan around what I would call a fairly prudent, what I call core growth.

So, it's certainly something significantly less than 7%, but to George's points, we are trying to build a plan that allows us to flex up and down. So, if it comes in stronger than that then we are going to be able to may be do little more things, few more things on the marketing front. But by the same, if the core business comes in less than that, and I will tell you it's going to be in the low single-digits in terms of our core growth. So, I don't think we gotten way out in front of it, when you take foreign exchange and incremental new products year-over-year as well as the emerging markets, I don't think we guarantee for a line we try to be fairly conservative in our estimates.

Todd Slater - Lazard Capital Management

Okay. And then, I'm sorry, did you touch on the order book?

George Fellows

The order book our pre-books have come in pretty much in line with our expectations. We had planned for pre-books to come in slightly behind last year, and did that because of, you know, the natural conservatives and everything going to trade, even at this point, and the -- compensation for that is that the orders that are coming in now for immediate delivery which are reflection of sales coming in more heavily than they did last year.

So that on balance I think it's actually a very healthy mix relative to past years and that's another reason that I think we are feeling as I said cautiously optimistic.

Todd Slater - Lazard Capital Management

Okay. That's helpful, thank you. Then, I just want to move to gross margins and maybe ask it in -- to look at it in a similar way, 42% or 44% if you could look at through the bucket, how much of that improvement from the gross margin initiatives the 15 million to 20 million savings, is that still there, a less promotional cadence which you talked a lot about and then ForEx, if there is a way to order magnitude on those three major -- those three items?

Bradley Holiday

Well, without getting real specific because we don't give that level of detail but certainly our best is going to have a fairly significant impact on gross margins, year-over-year. Certainly, we have some additional GMI savings built in there, as I mentioned we delivered 14 million, we have another I believe, 25 to up to 35 million over the three year period.

So, we delivered 70 to-date and we are certainly on target to deliver net of next round of 40 to 60 of which we delivered 14 million this year. So, it's really going be a combination of that but the most significant impact is really the discounting. The fact that when you discount the directed to your margins and so we are anticipating as George mentioned a more, not all the way back to normal but a more rational marketplace out there with less discounting and that going far was the biggest impact in 2009 on our gross margin.

So, we expected having a more rational marketplace will drive a big portion of that gross margin improvement.

Todd Slater - Lazard Capital Management

Okay, great. And then, just on the ForEx assumptions are they based on current rates?

Bradley Holiday

Yes.

Todd Slater - Lazard Capital Management

Perfect, alright. Well, thank you guys, all the best.

Operator

Our next question is from the line of Kristine Koerber with JMP Securities. Please go ahead with your question.

Kristine Koerber - JMP Securities

Hi. Couple of questions. I'm not sure you gave this on the call but do you talk about market share gains by category?

Bradley Holiday

We don't have all them for December at least I don't, George, you might have them, most of them were through November.

George Fellows

I got the December woods share and we picked up 1.8 share points year-to-year, in woods. Bear with me a second while I look up the specifics. There we go. I got it now. Our iron share year-to-year was up 0.9, almost a point. The putter share was up 1.1 share points. As I indicated the woods share was up 1.8 to 2 share points. The only area as we have indicated in the past that we had some difficulty in were was involved and again we had a product line in that was in the second year with the new introductions that we have in '010, we are expecting that reverse itself. So, all things considered all of the fundamental equipment parts of the business we come into '010 in a stronger position than we did coming into '09.

Kristine Koerber - JMP Securities

But, and then, how much was the ball category? How much was that down?

George Fellows

The ball category.

Bradley Holiday

I think it was on average about 1.5 points.

George Fellows

Yes, 1.4 share points in ball.

Kristine Koerber - JMP Securities

Okay. That's helpful.

Bradley Holiday

And soft goods was up 2.

Kristine Koerber - JMP Securities

Okay. And then, can you talk about India and your -- the long-term opportunity there, and when we expect to see products at the market?

George Fellows

Sure. The Indian introduction, as you know, just occurred a couple of weeks ago. We are going to be shipping product in India starting February 15th, with product appearing on shelf approximately the middle of March. But just to give you some perspective and this is a superficial look from 30,000 feet but it should give you some idea, the penetration of the golf business in the United States is approximately 10%, and it is approximately 9% in Japan. If we were to achieve and again this is not an immediate thing, certainly this would be over time, if we were to achieve a penetration of the Indian market at one quarter of that level, or approximately 2% for argument's sake, and each golfer were to spend $50 a year, and the spending in the United States is approximately $123 a year, so spending at less than half the rate, the potential for India would be approximately $1.2 billion in retail sales. So, it's just enormous market.

The thing that is very hard to grasp is the enormity of the population base that exists in China and India, and the extent to which you only need relatively small penetrations in order to really arrive at a fairly large market that's what makes it so important. We think that the -- golf is relatively native to India. The second oldest golf course in the world is located in Calcutta, and it was created in 1829. So, the British influence on India, I think, has a very big part to play in the fact that it is a natural and comfortable sport in the country.

There are approximately 500,000 golfers currently in India, which relative to the size of the country may seem rather small, but in the absolute it's quite a number. And there approximately 250 golf courses in India, with at least 50 currently being built or in the planning stages, so we see that rapidly expanding as well, and that together with the influence that we believe the Olympics will have on the emerging markets like India and China, we see these markets really expanding at a really substantial rate between now and 2016.

And in fact, if you were to take a look, albeit off a small base, the growth that we are seeing in China, it would tell you that both of these markets represent a very, very important potential down the road.

Kristine Koerber - JMP Securities

Great. That's very helpful. And then, just lastly, talk about just marketing behind some of the new products. Do you have a bigger push this year than what we have seen in the past or is it about the same?

George Fellows

Well, it's going to be a different push. We are in the consumer products industry. We may be selling golf clubs, but fundamentally we're in consumer products. Clearly news, it's very important and marketing and advertising is very important in order to make the marketplace aware of what you are bringing to the party. The fact that we have a very, very strong new product offering with all of the medals that have been bestowed upon the line by the media that reviewed these products, all of these things would tell us that we have a very, very strong opportunity going into 2010.

So, we will be very aggressive with our marketing behind these products and the mix will be different than it was in '09. It will be different because the marketplace is different; it is a recovering marketplace rather than a contracting one. And also there are some fairly marked shifts in where moneys are being spent between traditional media and digital media, so our efforts will reflect all of those shifts as well. We think we have a plan, if anything that will be quite a bit stronger than what we did in '09.

Kristine Koerber - JMP Securities

Okay, thank you.

George Fellows

You are welcome.

Operator

Our next question is from the line of Jeff Blaeser with Morgan Joseph & Company. Please go ahead with your question.

Jeff Blaeser - Morgan Joseph & Company

Good evening, thanks for taking my question. A couple of questions on the promotional activities that you saw this year and expect going into 2010. Any differences domestic versus international? You also mentioned the emerging market opportunities, obviously its a few years away, but where would you see the margins of those products? Can you guesstimate, like would it be similar to the U.S., similar to an Asian market, or somewhere in between?

Bradley Holiday

The margins internationally are tend to be higher than the U.S., and the promotional activity internationally tends to be lower than the U.S., which is in part feeding, obviously, the gross margin differences. The fact that more than half of our revenues come from outside the United States is all to the good in situations like that, the FX uncertainties are something you have to deal with, but in general the international marketplace is a very profitable one for our company and the fact that it's expanding as well as it is, and the fact that it appears to be, or at least portions of the international markets appear to be leading the economic recovery -- are all to the good, as we see it for '010.

Jeff Blaeser - Morgan Joseph & Company

Okay. And then, quickly on mix, you mentioned that you expect the promotional activities to subside, I think by the end of 2011. Do you think the mix will shift back to the 2007/2008 levels eventually as well, or are probably going to be in a lower price point consumer level for the foreseeable future?

George Fellows

No, I really don't think we are going to stay at this level. It's think it's going to drift back up again. But again, you've got to recognize, people pay for value. And if you can provide products that from a technological point of view, or otherwise, provide value, they will pay up for it. It's been proven time and time again. So, I have no reason to believe that it will be any different this time around. So, once we get by, you know, the memory fades about the severity of what happened in '09, I think, people will go back to paying for value, and I do see the price points drifting back up again.

Jeff Blaeser - Morgan Joseph & Company

Okay. Finally, you mentioned some retail door closings with some of that market share shifting to other retailers. Has that shift been to the mass markets, or are they other primarily golf and golf-focused retailers?

George Fellows

It's a little of both. The mass market picks up something, but again the product lines tend to be somewhat different depending on the portions and the trades you are looking at. Golf specialty, obviously, is the destination shop for serious golfers. It may not be quite so pronounced as far as sporting goods is concerned. But clearly, there is no shortage of availability from a retail point of view and so while we don't like to see retail shrink, we don't think we are anywhere near the point where availability will be impacted in any serious way.

Jeff Blaeser - Morgan Joseph & Company

Thank you very much.

George Fellows

Thank you.

Operator

Our next question is from the line of Derek Leckow with Barrington Research. Please go ahead with your question.

Derek Leckow - Barrington Research

Thank you, good evening. Just a follow-up question on the guidance commentary you gave of the elements there, and I think number four was that you felt that low inventory levels across the U.S. market gave you some comfort that we won't see further degradation of inventories, but you are not anticipating any recovery in inventories in 2010; is that correct?

George Fellows

Yes.

Derek Leckow - Barrington Research

And then, as we just heard on the question regarding the channel shrink and the closure of about -- I'm reading reports that show 12% retail door closure. So, what happens to the inventory that contracted there? Are you saying that it's being made up by other retailers?

George Fellows

Yes, but remember a door closure is not a door closure, most of the doors that closed tended to be on the smaller side.

Derek Leckow - Barrington Research

Okay.

George Fellows

So, I think when you deal with 250 doors and by the way, as far as the -- all commodity volume, if you are familiar with that term, 250 doors represented is insignificant.

Derek Leckow - Barrington Research

Okay.

George Fellows

So, it's not something that -- like I said, it's not something we are happy about, but it's certainly not going to be sufficient to impact the business in any way.

Derek Leckow - Barrington Research

So, really the inventories of your products in the U.S. retail environment looked to be fairly, I guess, flattish with what you are looking for this year, to get to your guidance?

George Fellows

We are planning on it; we just think it's a prudent way to go. Listen, credit availability hasn't markedly improved, so working capital will still have to be top of mind for most of our retailers. I think they've learned, as we have, lessons on how to better inventory our positions against demand. And I think they've learned that they can probably get by with somewhat lesser inventory than before. Remember that a lot of the -- some of the inventory contraction that took place really was, in part, their cutting back on some of the secondary and tertiary suppliers.

Derek Leckow - Barrington Research

Okay.

George Fellows

But again, I think, just to reiterate the earlier point, we are in the consumer products business, and our focus has to be on sell-through, not sell-in, and we want inventories to be kept at a reasonable level, because when they are not they get in the way of sell-through. So, we are very much partnering with our major retailers or our retail partners to ensure that inventories remain balanced properly and don't get out of line, because that really hurts both them as well as us.

Derek Leckow - Barrington Research

Yes, because the season is compressed, you have that risk of seeing the sell-through too late, and not being able to react to it.

George Fellows

Exactly.

Derek Leckow - Barrington Research

What categories do you think have the most risk of that, or where do you feel very good about your ability to flexibly get into that reordering, and meet any changes in demand? What categories do you think, are you better positioned at, and which ones are you weaker in?

George Fellows

Well, we have made extraordinary, I mean, it's just going to be tooting the horn of our operations and supply chain people, but those gross margin initiatives that had delivered so royally to us in terms of savings had another buy product which I think was very, very important, and that was responsiveness and flexibility. We are infinitely more responsive to the marketplace and to changes today than we were just a few short years ago. I think as we said in some prior calls, where we had lead times that were in the neighborhood of 145 to 175 days, in order to order additional quantities in many instances those lead times have shrunk down to 45 days. So that gives you that many more forecasting cycles to go through before you have to pull the trigger, and it also gives you a much more responsive delivery system once you do pull the trigger.

So, virtually across the board we have been able to become a much more agile manufacturer and supplier and I think that will allow us, and has allowed us, to manage inventories a lot more carefully than we have in the past. The numbers that Brad quoted, where we completed the year at $219 million, which is the lowest inventory level that we've had in five years, is partially a reflection of the fact that we have that much better a supply chain than we did in the past.

Derek Leckow - Barrington Research

That's great news. Just one follow-up on the margin question. You talked a lot about gross margin, but looking at your operating margin back in, you know, at a run rate of $1.1 billion, you were doing around an 8.5% or 8.8% operating margin. Do some of the changes you put in place allow you to get back to that sort of level at a lower run rate, and also what sort of growth rate would you have to have in order to turn and 8%, 8.5% plus operating margin?

George Fellows

Well, if you take a look at the three-year goals that we have, you will see that, we still feel that we are capable of getting up to the levels that we had indicated before, albeit delayed obviously because of the impact of the last 18 months. But nothing fundamental has changed in our ability to do that and if the marketplace goes back to being a more rational market, which we certainly anticipate, all of the initiatives, the cost saving initiatives and supply chain initiatives that we brought the party will, and continue even now, to deliver savings that they promised in the past. So, yes, aside from the time delay that we are talking about, we feel pretty good that our three-year goals are as we stated them last November.

Derek Leckow - Barrington Research

So I should refer back to those and kind of use those as my guide then, not thinking that we will get back to that sort of rate on a quicker basis? If you have a little bit stronger growth, it sounds like, from markets like China and India, which seem to be very exciting, and certainly in 2011, you will have a decent sized business there?

George Fellows

Well, these things can change the tenor of the overall, but again it's a matter of how prudent you want to be, and how much you want to expect lightning to strike. Clearly, if those markets explode at a rate that is not foreseeable at this moment, yes they will have an affect obviously, but to plan on that from our point of view I think would be a little careless. So, we are maintaining our point of view that the three-year plan that we put forward makes sense and is achievable and we are working against that.

Derek Leckow - Barrington Research

Okay, very good. Thanks a lot, George.

Operator

And ladies and gentlemen, we have reached the end of the allotted time for questions and answers. I will now turn the call back over to Mr. George Fellows for any closing remarks.

George Fellows

Thank you. Listen, we are still facing uncertainties, obviously, and I think it would be foolish not to at least recognize them. We believe, we have planned appropriately, both from the magnitude of what we think we can achieve but also from the flexibility that we built into our overall operation and our budgeting. And as I have said in the past, at this early stage of the season, I can't say anything other than that we are cautiously optimistic by our next call, which will be in three months' time, we will clearly have a lot more information about how the economy has recovered.

But the one thing I can absolutely assure you of is that we are operating in as tight and as controlled a fashion as we were under more difficult circumstances, and we will maximize the return that we can for shareholders regardless of what the marketplace brings.

Thank you all again for your time and attention, and we look forward to talking to you again in three months.

Operator

Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.

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