Brad Holiday - Chief Financial Officer Chip Brewer - President and Chief Executive Officer.

Lee Giordano - CRT Capital Scott Hamann - KeyBanc Capital Markets James Hardiman - Longbow Research Dan Wewer - Raymond James Andrew Burns – D.A. Davidson Casey Alexander - Gilford Securities Rommel Dionisio - Wunderlich John O'Neill - Imperial Capital Victoria Konstantinova - THB.

Good afternoon. My name is Ian and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 Callaway Golf Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Brad Holiday, you may now begin your conference..

Thank you, Ian. I would like to welcome everyone to Callaway Golf Company’s third quarter 2014 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, and we will then open the call for questions.

I would like to point out that any comments made about future performance, events, prospects or circumstances, including statements relating to the estimated 2015 or 2014 net sales, sales growth, gross margins, operating expenses, pre-tax income, tax provisions, earnings per share and profitability, future industry or market conditions or market share gains, the success of the company’s future products or the company’s recovery and brand momentum, future operating efficiencies or investments 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, 2013 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.

This information, as applicable, excludes charges related to the company’s prior cost reduction initiatives and the impact of the businesses that were transitioned to a third-party license 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 non-GAAP income and earnings information assumes a 38.5% tax rate.

We also provide information on the company’s earnings, excluding interest, taxes, depreciation and amortization expenses and impairment charges. This non-GAAP 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 in today’s call. Q3 was another excellent quarter for our company. Despite the challenging market conditions, Callaway Golf continued its trend of improving market share towards success in operating efficiencies.

On the strength of this performance, we are raising our guidance for the year. I believe this is clear evidence that our turnaround plan is working and I would like to start by thanking the Callaway Golf team for their hard work and commitment to turning this business around.

This 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. Turning to our results, Callaway Golf’s total revenues for the quarter were down 5%, but are up about 5% year-to-date. We believe our year-to-date performance is significantly better than the industry overall.

The U.S. had a strong quarter with revenue growth of 11% and is now up 6% year-to-date. On a constant currency basis, Europe was down 14% and Japan was down 23% for the quarter, reflecting challenging market conditions and shift in new product launch timing.

All three of these large markets are showing year-to-date constant currency revenue growth and are expected to show further growth for the full year. In addition, we have had strong revenue growth this year in important midsize markets such as Korea and Australia.

During Q3, we launched the Big Bertha V Series driver, which has met our sell-through expectations thus far and has notched an impressive five wins on major tours over the last three months.

We also launched the Big Bertha Beta in Japan, which are off to a strong start and should allow us to improve our position in the super premium area of that market. Importantly, our market share continues to show growth year-to-date.

Looking at our largest markets, in the U.S., our total hard goods share through September was at 18.8%, up 360 basis points year-over-year; Japan through September was at 14.7%, up 20 basis points; and UK through August was at 18.3%, up 370 basis points.

Highlights include us regaining the number one position of hard goods brand in Europe for the last five consecutive months, sustaining our position, the number one selling American brand in Japan and earning the number one selling fairway woods brand in the U.S. for July, August and September.

We also sustained the number one Putter position worldwide. It’s been a while since Callaway has contended for so many number one positions. We are proud of this progress and believe that bodes well for our future.

On top of this, our operating efficiencies as evidenced in our gross margin as well as our overall cost management continue to show excellent progress. Looking forward, the industry outlook for Q4 is improving, thanks to new product launches from both us and others, which are expected to attract consumer attention.

Our internal expectations mirror this outlook. And as a result, we are increasing our full year earnings guidance to earnings per share of $0.15 to $0.18, up from $0.12 to $0.16 previously. We are reiterating revenue guidance of approximately $890 million, which have realized would be a constant currency growth rate of 7% for the year and 11% for Q4.

During Q4, we will be launching the Big Bertha Alpha line of drivers, which will join our Big Bertha V Series line to make up our most premium wood offering for 2015.

By utilizing our advantage in multi-materials technology, we are creating three past the distance, which provides a sophisticated fitting based approach of performance in our most premium brand. We are also launching the Big Bertha lineup Irons and Hybrids in the Western markets as well as the Big Bertha Beta Irons and Hybrids in Japan.

Both of these iron sets feature a new 360 degree cup-face construction similar to what we have used in our fairway wood and hybrids over the last few years, which greatly increases velocity in overall performance. Our internal testing shows up the two clubs longer overall distance with no negative trade-off.

We are excited about these launches and we believe this new cup-face technology in irons is technically superior to anything in the market and should open up new growth opportunity for us in this important category going forward.

Looking further forward, we were expecting 2015 revenue growth of approximately 1% to 2% on a consolidated basis driven by constant currency revenue growth of 5% to 6% in our four channels.

Factored into this estimate is continued market share growth and improved market conditions offset by foreign exchange changes, anticipated retailer conservatism during the first half of next year, a strategic shift in the launch timing for our premium wood business, which will negatively impact next year’s Q1 comparison, but benefit the company in the long run and a reduction of close-out volume year-over-year.

We are not prepared to provide earnings estimates at this point other than to say we do expect further improvements commensurate with the level of revenue growth as well as continuing our permits in operating efficiencies offset by normal cost inflation and further strategic investment back into our tour and marketing.

As has been our practice, we will provide more detail on 2015 during our January call. Returning to the present, our 2014 year-to-date performance and Q4 guidance would result in the first full year net profit since 2008. Highlights include significant market share gains in all key markets. In the U.S.

alone, our hard goods share has increased 35% since 2012. These share gains have been driven by clear ability to drive innovation, a strengthening position on tour, and improved marketing, which has also supported a marked improvement in our overall brand ratings.

We have combined these revenue drivers with improved operating efficiencies, including both gross margin improvement and operating leverage. As a result, we are confident that we are heading the right direction and optimistic for our future.

Our turnaround plan is absolutely on track and other than external factors we have been exceeding our initial expectations, especially relative to market share growth and operating efficiencies. I look forward to continuing to keep you up to date on our progress and I appreciate your interest and support.

Brad, over to you?.

Thanks, Jeff. Our results through the first nine months were as follows. Consolidated net sales were $752 million, an increase of 5% compared to $716 million last year. Sales were adversely impacted by $4 million due to changes in foreign currency rates compared to last year.

On a constant currency continuing business basis, which excludes Europe’s 2013 apparel sales, year-over-year sales growth would have been 7%. Regionally, sales increased 6% in the U.S. to $372 million. Our international sales were $381 million, an increase of 4% on an as reported basis and 6% on a constant currency basis.

Details by region are included in the attachment to today’s press release. Gross margins improved 288 basis points to 43% compared to 40% last year. The majority of the improvement was due to favorable pricing and sales mix as well as improved operating efficiencies, partially offset by the adverse impact of foreign currency rates.

Included in 2013 results were restructuring charges of $7 million. Operating expenses were $251 million, flat compared to last year despite incremental investment in tour and marketing, which were offset by tight cost management and the positive impact of FX rates.

Included in 2013 results were $3 million of cost reduction charges as well as $4 million charge for bad debt. As a result of these factors our cumulative operating income improved 100% to $70 million compared to $35 million last year. We had other expense of $9 million compared to $1 million of other income last year.

This $10 million swing from income to expense is due primarily to the impact of changes in currency rates on all outstanding hedging contracts, which for accounting purposes are readout using current rates at the end of each quarter.

Cumulative net income increased 88% over last year to $58 million and earnings per share increased 83% to $0.66 on 93 million shares compared to $0.36 in 2013 on 87 million shares.

For the third quarter consolidated net sales were $169 million, a decrease of 5% compared to $178 million last year due to continued industry softness and a shift in product launch timing a majority of which is related to Asia-specific product launch during the third quarter of 2013. Regionally, sales increased 11% in the U.S.

to $75 million, while our international sales were $94 million, a decrease of 15% on an as reported basis due primarily to Japan which declined 28% due to a shift in new product launch timing and weaker yen. Gross margins improved 540 basis points to 39% compared to 33% last year.

This improvement was due to less promotional activity compared to last year, a favorable sales mix and operating efficiencies. Included in 2013 results were restructuring charges of $1 million.

Operating expenses were $68 million, a decrease of 11% compared to 2013 due to a reduction in bad debt expense, a decrease in stock compensation expense due to a lower stock price and lower marketing expense due to a shift in new product launch timing. Included in 2013 results were $1 million of cost reduction charges.

We incurred an operating loss of $3 million for the quarter, which was a significant improvement compared to a loss of $17 million last year. We had other income of $2 million compared to other expense of $3 million last year.

This $5 million swing to income was due primarily to the impact of changes in currency rates on all outstanding hedging contracts. We had a loss per share of $0.01 for the quarter on 78 million shares, which was a significant improvement compared to a loss per share of $0.32 last year on 73 million shares.

Through the first nine months we had sales growth compared to last year on a majority of our product categories as follows. Wood sales were $234 million, an increase of 6% compared to last year due to the successful launch of our Big Bertha and X2 Hot products earlier in the year as well as our most recent introduction of the B-series model.

Iron sales were $162 million, an increase of 9% due to the success of our new premium Apex Irons and Mack Daddy 2 Wedges as well as a small of our new Big Bertha Irons which shipped during the quarter. Other sales were $72 million, a decrease of 2% due to no major product launches this year.

Golf ball sales were $170 million, an increase of 5% due to this year’s launch of our premium Speed Regime line of golf balls and the success of our low compression Supersoft line of golf balls. Overall profitability for this category has increased significantly as a result of this revenue growth along with improved operating efficiencies.

Accessories and other sales were $168 million, an increase of 3% compared to last year due to an increase in sales of package sets, headwear and golf bags partially offset by a decline in apparel sales due to the transition of the company’s European apparel business to a licensing model at the beginning of the current year.

Turning to our balance sheet, we ended this past quarter with cash of $33 million, a slight decrease compared to $37 million last year. We had no outstanding borrowings on our ABL credit facility. Average available liquidity for the first nine months was $78 million.

Also our trailing 12 months EBITDA improved to $44 million, an increase of $36 million compared to $8 million for the same period last year. Our consolidated net receivables were $143 million, a decrease of 9% compared to last year due to lower third quarter sales with DSOs improving by 3 days to 78 days compared to 81 days last year.

We remain comfortable with the overall quality of our accounts receivable.

We continue to see benefits in inventory management as a result of internal process improvements with inventory levels trending positively from increases of 22% and 12% respectively in the first and second quarters compared to the last year to a decrease of 3% to $186 million at the end of the third quarter.

The first half increases were due to the slow start of the season and improvements in our internal forecasting process have allowed us to react quickly and bring inventory back in line. We remain comfortable with the quality of our inventory at this time.

Capital expenditures for the nine months were $9 million and we estimate full year to be approximately $14 million, slightly lower than our previous guidance of $15 million.

Depreciation and amortization expense was $16 million year-to-date and is estimated to be approximately $22 million for the year, an improvement compared to our previous guidance of $25 million. During the quarter we purchased $1 million or 132,000 shares of stock as part of our $50 million share repurchase plan approved in August.

While we don’t have policy providing a future forecast on share repurchases, any decision we make to repurchase stock in the future will be based on market conditions, other potential uses of cash, as well as any regulatory and legal requirements.

Now with regards to our business outlook, given third quarter results we are adjusting our annual guidance as follows. Net sales are estimated to be approximately $890 million. On a constant currency continuing business basis, this represents an increase of 8% compared to last year in addition to the 14% growth we achieved in 2013.

Gross margins are estimated to be approximately 41% slightly lower than our last estimate of 41.7% due to unfavorable FX rates. Our current forecast is still a significant improvement compared to 37.3% last year due to improved operating efficiencies, better pricing and sales mix and a decrease in charges related cost reduction initiatives.

Operating expenses are estimated to be approximately $336 million for the full year, an improvement of $9 million compared to our previous estimate of $345 million due to favorable impact of FX rates and lower stock compensation expense associated with our current stock price.

Pretax income for the year is now estimated to range from $18 million to $20 million with a corresponding tax provision of approximately $5.6 million. This compares to a pretax loss in 2013 of $13.3 million with a corresponding tax provision of $5.6 million.

Fully diluted earnings per share is now estimated to range from $0.15 to $0.18 based on 78 million shares outstanding compared to a loss of $0.31 on 72.8 million shares in 2013. We would now like to open the call for questions..

(Operator Instructions) And your first question comes from Lee Giordano at CRT Capital. Your line is open..

Thanks. Good afternoon, everybody..

Hi, Lee..

I was hoping you can give us an update Chip on what you are seeing out there on the promotional environment overall and I guess overall what you are seeing in terms of rounds played and any new trends in the industry. And then also, maybe update us on the inventory levels in the channel as well? Thanks..

Yes, good questions. The market was promotional during Q3 Lee, but at a level that we had anticipated. And the outlook going forward is starting to improve a little bit. I am optimistic that Q4 is going to a stronger quarter for the industry.

There will still be some promotional activity, there always is, but these levels seem to be mitigating to a degree and commensurate with that inventory levels out in the field are improving. They were big issues for the industry going into the year and I think the trade has made good progress working through that.

Not all the way through it yet, but good progress and lessening issue. Rounds played were down significantly earlier in the year particularly in the Americas, that was poor early weather. And they have improved slightly more recently. And so again, what we are seeing is I believe a return to more normalized market conditions..

Great, that’s helpful. And then just secondly, you talked in the press release about the strategic change in product launch timing for next year, can you just describe exactly what that refers to, is that their earlier launch of the Big Bertha Alpha 815 or is there something else? Thanks..

That’s exactly what it is. Lee, we made a decision internally to segment our launches and shift the timing of the Big Bertha, super premium product launch away from the timing in Q1 where it would overlap with our other big launch, which has been our X lineup.

And we think that there are some benefits to that over the long-term, it will allow us to focus on them more individually. If you look at history, when you launch a premium and super premium at the same time, it’s sometimes challenging to provide appropriate focus to both and usually only one cuts through.

So, we looked at that, said that, that we think there is a better way and we have made that move this year and the entire Big Bertha driver lineup was effectively shifted into Q4 of this year. And so that’s exactly what that is referring to and we think that’s going to be a positive for the long-run..

That’s helpful. And then my last question is, on FX rates for 2015, can you just talk about the hedging program you have in place for next year and it looks like sales maybe hit, but would the bottom line also be hit by the change in FX for next year? Thanks..

Hi Lee, this is Brad.

Right now, the guidance we provided just assuming spot rates where we are roughly middle of this month, our hedging program really occurs in a very early part of the year, when we will take a look at the currency rate, relative to where we are guiding and where we think our year has been in turnout in terms of our budget and our forecast.

And what we try to do then is block in a majority up to probably 70% in all major currencies, just try to reduce the volatility.

So, the problems get into as when you do hedging, if we started to hedge today, giving the accounting rules of marketing to market, if we saw a big swing which we did a year or so ago, you would take all the gains or losses and still this year, you wouldn’t get any benefit next year.

So our plan is really, first week or so Japan, we will lock the rates in all the major currencies..

First week of….

January.

Great, thank you. That’s helpful. Thank you..

Your next question comes from the line of Scott Hamann at KeyBanc Capital Markets. Your line is open..

Hey, thanks. Good afternoon everyone.

Just a couple of questions on the 2015 preliminary guidance you put out, just kind of thinking about the leverage that you would anticipate getting on those sales, I know there is a lot of kind of puts and takes and then gross margin potentially little bit lower than you had anticipated this year due to some clearance activity.

And then OpEx talking about pulling forward some tour spend this year and hopefully seeing leverage next year.

Can you kind of talk about what’s your expectations should be for leverage profile on an operating margin basis next year and just maybe high level with some of the puts and takes to think about would be?.

Sure, Scott. But only in a big picture basis at this point, we are not at a point now where we are going to be able to provide much guidance or insight on the earnings side of next year other than as we said we do expect further improvement in earnings.

It will be – we anticipate there will be some improvements more than our revenue growth, but revenue growth should be factored into that as well as FX and further investments etcetera. You have seen us improve our operating efficiencies.

We expect to continue to be able to do that next year, but we are also expecting to continue to make investments into tour and marketing in 2015. So, unfortunately, I don’t think I can provide you much more than the puts and takes at this point which I believe you are aware of..

But Chip, would you think it’s unrealistic to get the kind of operating leverage next year that you saw this year based on where your guidance is right now?.

The – in terms of our – I am not going to be able to quantify that. So, we expect to continue to improve our earnings next year. We expect that we have got ability to drive both gross margin improvements, but in terms of quantifying those at this point, that’s ahead of where we are right now..

Okay. And then in just looking at third quarter or fourth quarter this year, it seems like sales might have shifted a little bit more into third quarter versus fourth quarter. You talked about them being kind of even I believe last quarter.

And then similarly it looked like some of the operating expenses were a little bit light this quarter, is there a shift kind of going on maybe around the product launches that maybe shifting some of those expenses into fourth quarter?.

Yes, hey, Scott, this is Brad. Yes, sales shifted a little bit between quarters. I mean, that just happened as we get kind of towards the end of quarter some stuff we might have available to shift and so we kind of look at kind of longer term. So, we are still comfortable really with the kind of second half sales.

The OpEx kind of quarter-to-quarter once again we look at OpEx really on an annual basis, if you will and our overall OpEx as you noted dropped about $9 million. You will see an increase in OpEx in fourth quarter, which is really aligning if you will our marketing spend against our new product launches. That’s really the biggest movement.

But I think on an annual basis, we saw some continued improvement, if you will, in OpEx compared to our last forecast, but I think second half came in reasonably close to what we have thought, others little bit of shift in between the quarters..

Okay.

And then just on your EPS guidance for the year does that contemplates any additional currency hedge gains in the fourth quarter?.

That assumes – it assumes whatever spot rates are now. So, if the currency stays right where they are everything is built in and we would have technically mark-to-market all of our contract hedges at the end of the quarter. They might have been a little bit from the end of the quarter to the middle of roughly this month, but not a much..

Okay, thanks..

Yes. You bet..

And your next question comes from James Hardiman at Longbow Research. Your line is now open..

Hi, good evening. Thanks for taking my call. Just maybe Brad on that last question about the hedges, I guess when I do this math to get to your net income number, your pre-tax number, I need to sort of build in a pretty decent sized other income benefit.

Am I doing that math right? And then I guess the other piece, it also I think I am – I think your guidance for the full year suggest that gross margins are going to be down pretty meaningfully in the fourth quarter.

It seems like the answer to most of these things is just currency but how should we think about that?.

Well, I think if you take a look at kind of year-over-year margins, we are certainly up relative to last year, I mean significantly. I think if you take a look at other income, it will be better than it was last year.

I think last year there was a movement than currencies, where our other income was really other loss if you will other expense and it was larger than we are anticipating at this point in time. So, you will see some shift there kind of year-over-year..

But I just want to make sure I understand, I mean, year-to-date other income is an expense of close to $9 million. So, you are going need to reverse the entirety of that to get closer to even in the fourth quarter. Is that right? I mean, it seems like there is a big hedge gain there..

We are not assuming any hedge gains or losses to speak of in our Q4 numbers. Yes, the way to look at that James is if you just take our contracts, right now the remaining contracts, they are right now mark-to-market at whatever the spot rates for practical purpose were at the end of the quarter, okay.

If the currency does not shift between now and the end of the quarter and we are assuming just spot rates, there shouldn’t be any gains or losses on that, but it will be better than last year, because we had some hedged losses last year in the fourth quarter.

Does that make sense?.

It does. I guess maybe my math is just a little bit off here. So, I guess sort of next question here I mean as we look to 2015 and we appreciate the color as early as it is.

Can you maybe speak to the commentary about retailer conservatism in the first half of next year? What are you seeing there? How are those conversations going? What do you think it would take for them to reverse course on that front or is that just sort of the new normal that we need to deal with here?.

I think, this is, first of all, just a short-term issue. The industry as a total fortunately Callaway has been successful on bucking this trend has struggled over the last few years. And the retailers are struggling they have been working to decrease inventories over the last two years, this year aggressively.

And so they are going to be conservative a little bit gunshot going into net year and some of them are also still working on reducing their overall inventories although as I mentioned in one of the answers to previous question, they are making good progress against that.

And so I think there is a realistic probability that they will be a little bit more conservative than normal going into the year, but what history shows is if sun shines like it usually does that time of the year and we get average weather and things materialize that will revert to a more normal situation pretty quickly, but it will impact I think the beginning part of the season..

Great.

And then last question, just on discounting this year and I know we always get ourselves into trouble as we sort of continually seek the normalized year, but any sort of guidepost with respect to how much discounting hurt your numbers this year? And I guess is there any hope that we won’t have a similar set of circumstances as we get into the late spring and early summer of next year?.

There is no doubt that our results were injured by market conditions and FX over the last few years. And I can’t quantify those all for you at this point, but I am sure they were significant impacts. I am proud of this team and its ability to deliver good results and drive the change process that we have been able to do in face of that.

And I think that speaks volumes about the strength of our game plan and our abilities here. And yes, I have a lot of hope going forward regarding both this business and the industry. The – as I have stated previously, I think the majority of what we have seen are fairly normal issues and factors here.

In other words, there was excess inventory, a lot of excess inventory in the field going into a year, where the season started out very slow because of weather and that had a very predictable result. We are not hearing anything leading us to anywhere near the same cycle of a conclusion going forward.

We are hearing more and more talks from retailers and through those retailers of others in the industry, be much more rationale in their approach to how much inventory to create and to carry. Obviously, weather tends to normalize. So there are good reasons for us in it.

And I also think that we have demonstrated, we can be successful with or without that although we – although I will go on record and say I would like to try it with the wind at my back, just for once and see what it feels for us..

That’s very helpful. Thanks guys..

Yes..

And your next question comes from Dan Wewer at Raymond James. Your line is open..

Thanks. Good evening Chip..

Hi Dan..

First question, do you still think that an 8% operating margin rate for Callaway is achievable and no timeline on that, but is that still achievable.

And if so, is the current 18% to 19% market share is sufficient to give you the leverage you need to reach that 8% operating margin rate?.

Dan we still think that a well run Golf Company can achieve 7% to 8% operating margins. And so therefore we are still holding ourselves against those goals. The timing of that has been intuited by FX and some other market conditions. We are sure if what that market share number is that it will drive those numbers, we will – we could use more revenue.

And therefore that market share question is so tied together with market growth or what a normalized market would be that there in effect inseparable. But there is no question that we have been impeded by some of these factors.

We think these factors are short-term and we haven’t changed our goals but clearly they are taking a little longer than what they would have otherwise taken..

So, back in 2008, I recall that Callaway’s market share was in the high-teen rate and that was sufficient to reach that 8% in operating margin plus back then you had some lower margin businesses, that you disposed, do you think that you would actually be running it around that 8% rate, if you did not have the so I am saying promotional activity from some of your competitors and the weather challenges that we had in 2014?.

In 2008 do you – Brad do you remember what our revenues were?.

$1.1 billion, 125 like that..

Put me on $1.1 billion..

But back then you had footwear and apparel and GPS devices and…?.

A little bit, they had a roughly less than $100 million of that business that was in those categories. And, so the world has changed since 2008 and this industry as in most others, we are still very optimistic about our future. I think our track record speaks for itself, directionally.

And, but what – obviously 2008 I wasn’t here, so it’s a little bit hard for me to speak from an accurate perspective on those. But there are some pretty fundamental changes relative to that time period..

Just a couple of questions regarding competitors, first does that – with the management changes at Nike Golf, do you think that they are finally becoming serious about trying to significantly grow their share?.

I think Nike has been serious about it and they are obviously incredibly powerful company and I am not going to speculate on any impact of the management changes there other than we have got a lot of respect for them and pay attention to them as we do all others..

I guess, you may not answer this one, but the changes at TaylorMade, do you sense that they are going to increase their focus on margin this year, which would benefit everyone else in this sector or do you think that they are still really laser focused on market share and (indiscernible) to achieve that?.

I don’t think it’s comfortable for me to speculate on any individual company or management team. It is interesting that there has been so much change on the management side throughout the industry over the last few years, but I think I can guess what it correlates with. The – again I am proud that this team has been with all bucket trends.

I am confident that our team is continually strengthening. And I like our chances going forward, but I am very respectful of what I think is increasingly strong competition out there.

And the other point I will just reiterate is, I do think that there are some positive signs with the industry in total and the approaches that I am hearing being relayed through customers and in general out there.

So reason for optimism on that front, but most of our issues relative to our own abilities and our competition is certainly strengthening independent of any management changes that is not intended to reflect on any management personnel and competitor, past or future or in any way, shape or form. They are just getting better and we are too..

Okay. And just a final question.

I am trying to reconcile this comment about 2015 full year sales 5% to 6% in the core channel business, but then kind of walked me down to the 1% to 2% consolidated, is that all due to foreign exchange or are you saying 5% to 6% the underlying growth with any emphasis you tracked out the fact that you may have pull forward some Big Bertha business into 2014?.

Yes, 5% to 6% in our core channel. So the – and core channel is a bit of a nebulous term, but it certainly includes green grass, specialty retail and premium sporting goods, those are core for us and we expect to continue to gain share next year and continue to grow at a reasonable cliff in those markets.

We are going to be impeded by FX if current spot rates prevail. And we also have a reduction of closeouts that we refer to. Some of that reduction of closeout is ongoing improvements in our operating efficiencies as we work down excess inventories in older products.

And with also a significant difference relative to this year and that we had a lot of products that have been under the RAZOR trademark.

And we have used that RAZOR trademark for multiple years here at Callaway that was not a trademark we owned, we licensed that trademark, the license expired and we had until September of this year to sell that product or we could no longer sell it. And so that caused a increase in closeout business this year that we will not anniversary next year.

Though it wasn’t a quarter issue, it wasn’t per se an issue for the quarter, that is in a project that we have been working on here for a year, certainly spread a lot throughout the year.

And you are always seeing in a turnaround as we improve our working capital efficiencies, you are going to see us diminish the amount of closeouts, but there was a more marked change it’s going to be in tactful for this year over next.

Unfortunately, we are not going to quantify that for you at this point, but other than this let you know that’s part of the story..

Well, I appreciate all the time spent. Thank you..

Thank you..

And your next question comes from Andrew Burns at D.A. Davidson. Your line is now open..

Good afternoon. Hey Chip and Brad, congratulations on year-to-date performance..

Thank you, Andrew..

Thanks Andrew..

I was hoping that we could spend a little bit more time on the retail conservatism you highlighted.

I am trying to get a sense of how significant this phenomenon is and on the last call you talked about the potential for some long-term inventory discipline emerging in retail, when you highlighted the retail conservatism, it sound more like a short-term phenomenon on this call.

I am just trying to figure out sort of the magnitude and timeline here?.

Andrew, I think it was worth mentioning, but I wouldn’t think it’s hugely significant. So what you are seeing in general is just that there was excess inventory in the world, and as people pull that inventory down it has a near-term effect. And we believe some of that has continued through the first fine period of next year.

So, all we are trying to do is articulate that same fact. They have made good progress. I am pleased with what I am hearing from our largest customers in terms of how much progress they have already made on addressing inventory issues. And so it’s worth noting, but I would not dwell on that point.

It will lead to a little bit of year-over-year comparison issue potentially for the industry in Q1, but not a dramatic thing..

Great. Thanks for the color there. And then sort of a higher level question in terms of the cadence of new product launches this fall we have got the Bertha launches, you also have the Nike Vapor, the TaylorMade RSi, it seems like with each sort of off season inch fall, this becomes a more important period for product launches.

Is that just how it will be going forward, could you comment on that?.

I think that the fall is a reasonable time to launch. There have been successful launches in the fall for many years. Ping and Titelist are launching in the fall. They do that every two years. This is one of those years. And so – and we made a strategic change in launch timing.

So, there is more chatter about it in the blogs and among the enthusiast community. I am not sure how dramatic the change really is, because from time-to-time in the past, Callaway has launched in this time period. From time-to-time in the past, TaylorMade has launched in this time period. Ping is alternated between this time period and Q1 in the past.

There is not – from my viewpoint I am not sure it’s a dramatic change as others are viewing, but there is definitely a heightened sensitivity in the channel and among the enthusiasts regarding inventory and launch cadence and hence it’s getting a lot of conversation. .

Great, thank you. Good luck..

Thank you..

And your next question comes from Casey Alexander at Gilford securities. Your line is now open..

Hi, good afternoon. Most of my questions have been answered, but as it relates to the statement that the change in product launch timing will adversely impact the first quarter 2015 sales. I mean, do you have a range of values for that in terms of some sort of a range of how you expect first quarter to sort of compare to last year.

One thing I do know is the analytical community left with their own devices will screw it up without something that gives them at least some definition?.

Yes, Casey that’s great question. And you will have to defer that when we will come back to you and give you some color on that when we give the rest of the annual guidance in the end of January. So, you are ahead of our both desire and abilities to nail that down.

We do just want to call out that there could be some comparative thinking relative to Q1 that will have to happen at some stage..

Okay.

Secondly, how does the change in the tour schedule affect one, product launch; two, tour signing contracts; and the – and does it negatively affect the ability to get guys to change mid-season whose contracts are on an annual basis?.

It is among a bit, Casey. So, it’s offered. You identified some interesting points. So, the off season is short, it’s like Christmas week now. And the players, sometimes they want to change in their contracts and the contracts are still mostly, almost entirely on annual basis, so it creates some tension points as that you identified there.

We are working through it, because we are continually building momentum on tour.

And as I have been upfront, we are continually investing there and I expect to continue to do that into 2015 has not impeded our ability to achieve our goals, but it requires a flexibility and deftness of touch, because you get somebody coming off the web and they get off to a good run, they are not going to want to change clubs in the middle of a season, that is just because the calendar switch from December to January, but that’s when the contract periods come up..

Yes.

Well, I mean, in fact the 2014 PG – or 2015 PGA Tour season has already begun?.

Yes, that’s exactly right. And we have contracts with players that are currently wearing other headwear and playing other clubs that are going to be changing to ours in January and that is interesting..

Okay. And as it relates to the fourth quarter guidance given the impact on the operating expenses in the third quarter and looking at the amount of sales necessary to get to your sales figure, I am coming up way, way short on the expenses necessary to get to $336 million. Now you alluded it to aligning some marketing spend in the fourth quarter.

I mean, is it marketing, is it tour contracts to get guys to switch, I mean, because there is a lot of dull that isn’t necessarily accounted for right now in the current year’s run rate of operating expense, it doesn’t get you to $336 million?.

Yes, it’s marketing. There are also some comparative issues too in the current year-to-date numbers. So, as you – at least as you compare year-over-year, which may not be relevant for the math you are running, but…..

Casey, this is Brad, I think if you take a look at second half, try to look at it, because there are lots of puts and takes between quarters.

I mean, our expenses will be up more than they were last year offset a little bit by currency, but in a pure dollar amount, they will be higher, but you have to balance both Q3 and Q4, because there are some puts and takes within the quarters.

So, if you just take a look at the second half, I think it looks a little more reasonable, but they are at certainly some timing that goes on between quarters.

I mean, just case in point, if you take a look at just stock compensation expense with our stock price dropping a lot at the end of the third quarter, we got a big positive there, but if you assume stock prices go back up to say at the beginning of the quarter, there will be expense there. So, it’s a little bit of shift between quarters.

So, if you take a look at the second half, I think you will see that they are up slightly relative to last year and are getting a little bit of benefit from currency. So, they would be up a little bit more consistent with some incremental marketing expense..

Alright. Well, we will nail this down a little bit more on the one-on-one later on..

Yes..

Alright, that’s all my questions. Thanks very much..

Thanks, Casey..

And your next question comes from the line of Rommel Dionisio at Wunderlich. Your line is now open..

Yes, thanks very much. Good afternoon. Chip, I wonder if you could just talk a little bit about pricing in the industry. I know you said that over the last couple of quarters being a real driver for gross margins.

And I was just seeing that I realize its October, it’s late in season, but I was seeing some of the $499 drivers early in the season markdown.

Do you think the industry can really break beyond that $399 premium price point drivers, $999 in Arizona, if you could just talk about that with some premium new products that are coming out?.

Yes. Sure, Rommel. Great question. Yes, I do. That’s one of the things that I am really proud of this brand and team’s ability to change. The Apex Irons were $1,100 set of irons, but they were beautiful. They have performed as advertised. And they have sold through wonderfully.

We have helped our gross margins by building wonderful products and also raising prices for those products commensurate with the value we are providing. And we think that we will be able to continue to do that within reason. So, you see gradual shift in average selling prices.

One of the things that I am very proud of in this team is our average selling price in the field has gone up significantly over the last several years. Our turn rates are beating the industry average. Our inventory is in good shape. And we are obviously gaining market shares that consumer seems to like it.

So, we believe we can build value into the product and raise prices and still provide value to the consumer..

Okay, thanks very much..

Thank you..

And your next question comes from the line of John O'Neill at Imperial Capital. Your line is now open..

Thank you. Good evening everyone..

Hi John..

Hi John..

Last quarter you indicated that you expected a similar contribution from new products in the back half of this year compared to the last year, is that changed now, what’s the Big Bertha 815 or had you previously anticipated that?.

We had previously anticipated the 815, but the interest in our new products has been positive, so we are going to – we would probably revise that and say it’s going to be a little higher this year than next – than last year now.

It’s not because we added in launches, we didn’t change anything in our strategy, it’s because launches are being received well. And despite the FX movement, which would have changed our guidance adversely, we were able to hold the revenue guidance and raise the earnings guidance..

Alright.

And then with respect to this year you mentioned you had a good benefit from pricing and mix maybe just dive into that a little more if wood sales are up 6% year-to-date and Iron is 9%, how much of that might be volume as opposed to pricing or mix?.

It’s not because and it’s not – we can’t just raise prices that would be a very short-term strategy with a very certain ending. What we are doing is leveraging our R&D team and the marketing changes to build products that can justify higher prices. When we do that, we are not afraid to charge for them and the consumer seems to enjoy the change..

And your share gains prove that work, so good job. Thank you..

Yes, it really does. And then you balance that with the inventory management, it’s a strategy that’s different than others have used in this industry most recently and we light them up..

Thank you very much..

And your next question comes from the line of Victoria Konstantinova at THB. Your line is open..

Hi. Thank you for taking my questions. I was really impressed by 11% growth in U.S.

given the whole industry issues, I mean, can you give us more color on where – is there any shift from the Q4 coming to this quarter and how would you look at Japan and UK going forward?.

Sure, Victoria. Thank you. Yes, I was very impressed with what the team was able do in the U.S. as well no, not a real shift between quarters in the U.S. So it was all good operating performance and significantly beat the market, because the market we believe was down, so just a great job to that team.

If you look at UK and Europe wonderful job by that team over the last year or so, they have returned that business to the number one hard goods selling position, which is an amazing job, that market had challenging market conditions during Q3. You will see that in those numbers, but we are optimistic going forward.

We expect to have a very good year there. And Japan has just been extremely well run business for us. Again, challenging in Q3, very strong for the year and its building on a 26% revenue growth last year. So – and then we have new product that we have put out in that market reasonably with Big Bertha Beta, which is off to a good start there.

So, the Japan market is probably not a growth market overall, but our team is doing a great job and Europe, same story. We are pleased with what we have been able to accomplish and had a decent outlook through the balance..

And how much of the Japan and European decline was due to just markets in the – the shift in product launches that you mentioned?.

In Japan, it was very – in Q3, it was a lot of launch timing. And in Europe, it was a little bit launch timing and the balance market..

But should we look at like Q4 and going forward that those markets were kind of recovered back to like a positive territory?.

Certainly, on a constant currency, yes, you should, where we expect growth in those markets for the full year and Q4..

Great, thank you so much..

Thank you..

There are no further questions. I will now turn the call over to Chip Brewer, CEO for closing remarks..

I just want to thank everybody for calling in. We are very pleased with our – what we believe was a strong quarter. We will look forward to updating you on the full year and guidance for 2015 and January. Thanks very much for calling in..

This concludes today’s conference call. You may now disconnect..