Somnigroup International Inc (SGI) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Tempur-Pedic International First Quarter 2006 Earnings Conference Call. My name is Carlo and I'll be your coordinator for today's presentation. (Operator Instructions.)

I would now like to turn this presentation over to your host for today's conference, Barry Hytinen, of Tempur-Pedic Investor Relations. Please proceed, sir.

Thank you for participating in today's call. Joining me today in Lexington are Bob Trussell, CEO; Tom Bryant, President and CEO-elect; and Dale Williams, CFO. After prepared remarks, we will open the call for Q&A. Please note statements made by Tempur-Pedic during the call that are forward-looking are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements, including the Company's expectations regarding sales and earnings involve uncertainties and risks. Actual results may differ due to a variety of factors that could adversely affect the Company's business. Factors that could cause actual results to differ materially from those identified include economic, competitive, operating and other factors discussed in the press release issued today. These factors are also discussed in the Company's SEC filings referred to in today's press release, including the Company's annual report on Form 10-K under the heading, "Special Note Regarding Forward-Looking Statements and Risk Factors." Any forward-looking statement speaks only as of the date on which it is made. The Company undertakes no obligation to update any forward-looking statements.

In addition, I'd like to note that we may reference non-GAAP financial measures. A reconciliation to comparable GAAP financial measures and associated disclosures is contained in today's release. The release is posted on the Company's website and filed with the SEC. With that introduction, I will turn the call over to Bob.

Thanks for joining us for a review of Tempur-Pedic's first quarter 2006 results. Our sales for the first quarter totaled $229 million, which is a new record for quarterly net sales and net mattress units. Pro forma EPS increased 11% and GAAP EPS increased 12%. Cash flow from operations was especially strong, increasing $51.6 million. Our first quarter performance demonstrates Tempur-Pedic's ability to deliver solid earnings even in the face of a challenging environment, including negative impact from foreign exchange, sharp increases in the cost of raw materials in our industry and increased transportation costs. Our focus on delivering cost effective, low-cost operations continued to be very successful.

Earlier in the quarter, I announced my intentions to retire from my role as CEO. I'm thrilled our Board endorsed my recommendation that Tom Brian succeed me. Since Tom joined Tempur-Pedic in 2001, he and I have worked closely together building a global business, crafting a marketing strategy and building a top-notch management team. He's an outstanding leader with a commitment to excellence. Under his guidance, I'm convinced Tempur-Pedic will achieve our goal of becoming a worldwide leader in the bedding market. This has been a very smooth leadership transition and--that has served the best interest of our shareholders, customers and employees. At this point, I'd like to ask Tom to review our operations during the quarter in more detail for you. Tom?

Thanks, Bob. For the first quarter, total sales grew 3%. U.S. sales grew 2% while, internationally, they grew 4%. As we have discussed before, the first quarter of 2005 was an especially difficult comparison in the U.S. because we believe it benefited by approximately $12 million related to our February 1, 2005 price increase. Additionally, our international business was negatively impacted by about $7 million from FX changes, compared to the first quarter of 2005. It is particularly gratifying to report results that not only represent a record for the business, but also demonstrates our ability to overcome a strong quarterly comparison to the U.S. business, increased pressures on raw material costs and a substantial foreign exchange headwind.

Let's take a look at sales by channel. During the quarter, sales in our retail channels, overall, rose by 8%, reflecting our emphasis on penetrating furniture and specialty stores. In the U.S., total retail sales increased 7%, led by furniture retail, which was up a strong 14%. Our specialty channel continued to experience weakness. Specialty had a tough comparison, with a price increase in the period last year, and continued to experience weaknesses in pillows. Internationally, retail sales rose 12%. As mentioned earlier, foreign exchange had a noteworthy negative impact on international results, which Dale will discuss in more depth in a moment. International results versus last year continue to be impacted by the legacy gray market pillow issues in Japan. Sales from our direct channel decreased 23% for the first quarter of 2005 - we believe primarily because of the price increase in the first quarter of 2005 in the U.S. and our decision to stop the DR test in France and focus the international direct model only in the U.K.

The U.S. direct channel had an especially difficult comparison, versus a very strong quarterly performance in the first quarter of 2005 when our direct channel was positively impacted by "beat-the-price-increase" promotions. We are also cognizant of the fact that as we continue to add new stores in the U.S., our direct channel becomes more impacted; however, we strongly believe that growing the retail channel - and therefore, our total sales - outweighs the margin benefits from our direct business. The assumptions about our direct channel are integrated into our full-year guidance. Sales from our third-party channel were up 3% for the full company, and were especially strong in the Americas, where third-party sales were up 59%, reflecting our continued retail expansion in Canada, Mexico and South America.

Now, we will provide a brief update on our progress with the key initiatives we announced last quarter to spur growth. During the first quarter, we added approximately 300 net new furniture stores in the U.S., far exceeding our target for the quarter of adding 50 to 60 net new stores per month. In total, we were in approximately 5,600 furniture and bedding stores in the U.S., as of March. As we mentioned last quarter, we continue to evaluate established stores, and because we believe that the retail stores are an extension of our brand, part of our plan for 2006 was to be more aggressive in our efforts to ensure our product is represented in stores that position the brand correctly. Internationally, the expansion of our furniture retail channel continues, as we opened approximately 150 net new doors. In total, we were in approximately 4,250 stores, internationally, as of March 31.

Based on significant overachievement in adding new doors in the first quarter, we believe we have a good shot at exceeding our full-year target for total doors. However, at this time in the U.S., we will maintain our monthly goal of adding an average of 50 to 60 new net stores per month for the remainder of the year. Internationally, we will maintain our monthly goal of adding an average of 25 to 35 net new stores per month for the remainder of the year.

As mentioned on our last call, in late 2005, we analyzed our accounts and store penetration levels across various demographic and buying power metrics to identify specific regions where we are under-penetrated. As part of this review, we identified a number of key accounts who would complement our product line, help us build brand awareness, and assist us in expanding our market share. We continue to be very pleased with the quality and size of new accounts added in the fourth and first quarters. We believe that target account penetration initiative will help us expand distribution in specific markets and improve store productivity.

In the first quarter, we also expanded our sales force to allow our sales team to spend more time with our retail partners. Our sales force efforts to expand our business and establish accounts has already started paying dividends. We are pleased by the trend of our established account growth overall, yet we recognize there are still opportunities for continuous improvement.

In the first quarter, we expanded our distribution and floor space within our established accounts. With the shipments of our previously announced new mattress models, we expect to continue to expand slots and establish accounts. While we continue to implement our initiatives to improve sales productivity, our efforts are beginning to show very positive signs.

U.S. mattress unit growth for the first quarter was up 2%, versus the first quarter of 2005 when retailers bought ahead of the price increase. In addition, for the first time in a few quarters, we reported positive unit growth for our U.S. pillow business. This growth reflects our ability to expand pillow distribution beyond our U.S. specialty channels and into furniture and bedding retailers.

On the cost side, we continue to be negatively impacted by a number of factors. As Dale will discuss in more detail - consistent with prior periods - margins were impacted by channel and product mix. Additionally, consistent with the broader furniture and bedding industry, raw material prices and fuel surcharges for the transportation and delivery of our products were unfavorable. Foreign exchange was also unfavorable, as compared to a year ago. While our gross margin was down year-on-year, it is slightly better than we anticipated. We continue to drive initiatives to improve productivity and lower cost, offsetting a large portion of the margin pressure.

With respect to gross margin, including pressure related to channel, product, raw material and fuel surcharges, our view of the full year remains unchanged. We currently expect gross margin to improve over the course of the year. Regarding operating expenses, we have been managing costs carefully and will continue to drive operating leverage to improve operating margins.

In late January, we unveiled two new mattress models in the U.S., the GrandBed by Tempur-Pedic and the RhapsodyBed by Tempur-Pedic were introduced in the Las Vegas World Market Trade Show. Their queen size mattress only suggested retail prices will be $5,499 and $2,399, respectively. To date, we have been extremely pleased with the dealer feedback and interest. Both mattresses will feature the totally new insert, Tempur-HD comfort layer.

Also in Las Vegas, we launched a redesigned Classic as a means to accelerate unit growth. Dealers have shown significant interest in this upgrade, and all three mattress models will start shipping during the second quarter.

Internationally, in the first quarter, we launched several new products, including Tempur Day and Tempur Night bed systems across much of Europe. Additionally, we rolled out the CelebrityBed by Tempur-Pedic in the U.K. market, reflecting our continual expansion of mattress models around the globe. Dealer interest has been exceptional.

As we discussed last quarter, we have continued to increase our marketing investment. Our advertising spend in the first quarter was $26.2 million, or 11.4% of sales, reflecting our commitment to building our brand. We would also like to announce the findings of a recent, independent, third party evaluation of brand awareness. The researchers found Tempur-Pedic's total brand awareness improved significantly in the past year. Total brand awareness now stands at 78% in the U.S., underscoring the significant benefits we derive from our marketing and branding efforts.

Turning to our medical division, I would like to provide a brief update. As we have discussed before, our U.S. medical strategy has evolved over time. We have focused our strategy for us in this channel to utilize partners who already have market-leading positions selling into the U.S. healthcare market; therefore, our medical team has aligned itself with a growing list of best of breed organizations. For example, we recently signed agreements to manufacture medical imaging table pads for General Electric, wheelchair cushions for ROHO, and operating table pads for OSI. In addition to penetrating with lead--participating with leading manufacturers, we also began to partner with leading distributors who had--who are regarded as leaders in their perspective market segments. We believe this indirect selling method allows us to focus on what we do best and leverage the assets of these partners as we continue to penetrate the U.S. medical market.

Before I close, let me recap the findings of a recent, independent, third party survey of more than 100 Tempur-Pedic retailers. The study was a blind survey of retailers selling Tempur-Pedic between less than one year and over five years. Among other findings, some key points include - consumers ask for Tempur-Pedic, by far, more than any other brand of mattress, Tempur-Pedic is by far the easiest mattress brand to sell. The original bed has generated additional sales and has increased Tempur-Pedic's addressable market. Tempur-Pedic has the highest profit margin and profit dollars for retailers.

At this point, I would like to turn the call over to Dale Williams to go over our financial results in more detail, and share repurchase program and our 2006 guidance, among other topics. Dale?

Thanks, Tom. Let's first talk about our sales performance for the quarter in more detail. As Bob mentioned earlier, for the three months ended March 31, 2006, the Company achieved net sales of $228.6 million, compared to $222.4 million for the same period last year. This represents an increase of $6 million or 3%. We experienced growth in both our domestic and international businesses, as we continued to execute on our core worldwide strategy of penetrating existing channels and investing to build our global brand awareness.

Domestic net sales grew to $151.5 million in the first quarter, as compared to $147.9 million for the same period in 2005, an increase of $3.6 million, or 2%. Domestic sales accounted for 66% of our total net sales, as compared to 67% in last year's first quarter. International net sales grew to $77.1 million in the first quarter, as compared to $74.4 million for 2005, an increase of $2.6 million, or 3.5%.

The U.S. dollar strengthened significantly compared to the first quarter of 2005, which resulted in negative foreign exchange rate impact of $7 million on total net sales, or 3% of total net sales. For the international business, this impact represents 9% of sales. Our growth in net sales was attributable to an increase in the U.S. retail channel of $8 million and $6 million growth in the international retail channel.

Regarding profitability, as noted in the press release, gap net income for three months ended March 31, 2006 was $26.9 million, or $0.29 per diluted share, compared to $26.8 million, or $0.26 for the same period in 2005. Pro forma net income was $27.5 million , or $0.30 per fully diluted share, compared to $27.5 million, or $0.27 per fully diluted share last year. Pro forma net income excludes the previously disclosed stock-based compensation expense and FAS-123R adoption. Fully diluted share count was 93.1 million shares in the first quarter of 2006, compared with 103.4 million shares in 2005, reflecting the weighted average impact of our repurchase activities.

The share repurchase contributed $0.01 to fully diluted earnings in the first quarter. During the first quarter of 2006, the Company repurchased 8 million shares of its common stock, for a total cost of $98.2 million. From the commencement of the repurchase program on October 20, 2005, through the end of the first quarter of 2006, the Company has repurchased 14.9 million shares of its common stock, for a total cost of $174.2 million. As of the end of the first quarter of 2006, the Company had approximately $5.8 million remaining under existing share repurchase authorization. Common shares outstanding at March 31, 2006 were 84.5 million shares, compared to 92.4 million at the end of 2005, and 98.2 million at the end of 2004.

GAAP operating income was $47.2 million, or 20.7%, down $2.2 million compared to the same period in 2005. Gross profit for the quarter was 48.7%, compared to 51.4% in the prior year, and 50.4% in the prior quarter. On a year-over-year comparison, the gross profit rate decreased, due mainly to four factors.

As we previously discussed, channel mix and product mix changes contributed to lower gross margins. Retail, our fastest growing channel, has lower margins because we sell at wholesale prices. The retail segment represented 80% of our business in the first quarter and 76% in the prior year. Our product mix continues to shift more toward other products, rather than pillows, as the other products like foundations and frames tend to be sold with the mattress. Other represented 17.6% of our business in the first quarter, compared to just 15.7% in the prior year.

The third factor affecting gross margin is the increase in market prices for chemicals and fuel. As we discussed previously in the second half of 2005, we experienced increases in chemical prices, and we're no longer able to offset them with volume rebates. A fourth factor impacting gross margin in the first quarter was discounted floor models. Consistent with our standard business practices, we provide discounted floor models to major new accounts. This sort of activity can temporarily reduce average selling prices for mattresses. In the first quarter, we had an unusually large new account.

Our ongoing productivity initiatives have helped offset a great deal of these factors. As Tom noted, this level of gross margin is actually slightly better than we anticipated. Additionally, we anticipate gross margin improvement over the year. As I stated on our January call, we expect gross margin for the year to be 100 to 150 basis points down compared to the total year 2005.

Operating costs declined approximately $800,000 for the three months ended March 31, 2006, compared to the same period in the prior year. The improvement was principally within G&A costs.. On a year-over-year basis, G&A costs were lower, primarily due to lower costs associated with Sarbanes-Oxley and legal fees. While selling and marketing costs were slightly down year-over-year, our advertising spend was higher as we continued to drive growth in our brand awareness.

Capital expenditures for the quarter were approximately $9.3 million , of which approximately $7 million was related to the construction of our Albuquerque facility. This compares to $16.4 million of total capital expenditures in the first quarter of 2005. Cash flow from operations was especially strong at $51.7 million based on improved working capital. Within the quarter, we lowered inventory, and we expect to continue to have moderating levels of inventory over the year.

Now I would like to address our guidance for 2006. As noted in the press release, the Company continues to expect net sales for 2006 to range from $940 million to $970 million, an increase of 12 to 16%. This guidance reflects our assumptions for channel and product mix, as previously discussed. For earnings, the Company is increasing its guidance for gap diluted earnings per share, only to reflect shares repurchased during the first quarter and corresponding interest expense on associated borrowings.

Compared to the Company's gap previous guidance of $1.18, to $1.23, the Company currently expects diluted earnings per share for 2006 to range from $1.24 to $1.29, an increase of 28 to 33%. This guidance includes $0.02 of FAS-123R and other non-cash stock-based compensation. Our guidance assumes an average fully diluted shares outstanding of 88.8 million shares. As noted in our press release, we will no longer pro forma stock-based compensation, and therefore, we have discontinued these pro forma adjustments. Consistent with prior guidance, this guidance does not consider the impact of potential future share repurchases. As noted in our press release, these expectations are based on information available at the time of the release, and are subject to changing conditions, many of which are outside the company's control.

This concludes our prepared remarks, and at this point, operator, we would like to open the call to questions.

Thank you, sir. (Operator Instructions.) Sir, our first question is from line of [Steve Colbert] with Canaccord Adams.

Hey guys, congratulations on a good quarter.

Thank you, Steve.

Thanks, Steve.

Mattress units were quite strong, particularly domestically. What are your thoughts behind the improvement there?

Well, basically, Steve, we're continuing to improve the brand awareness, we're continuing to get good store penetration of our products. We have new customers that are supporting the brand well and it's just a general growth. Obviously, the first quarter was a big hill to climb last year. And so, we're very pleased that we were able to overcome that big pull ahead in the first quarter around the price increase last year.

Okay. And then, conversely, it looks like mattress ASP fell off. What are your thoughts going forward, particularly with the mix of existing products, and then, obviously, the higher price point products you have coming on?

Well, as I mentioned in my comments, mattress ASP was impacted by number of floor models in--at extreme discounts for a major new customer. We think that's a temporary situation and we will see mattress ASPs, particularly in the U.S., continue to increase on a general trend. We do have two more expensive products starting to ship here in the second quarter that will influence that.

Okay. And then the international pillow business, obviously, still appears to be challenging. Can you give us your thoughts on the business, going forward, and what initiatives you have to improve the legacy condition over in Japan?

In terms of our direct response business, we had tested last year expanding our model that's been successful in the U.K. into France and we made the decision after evaluating--.

--The pillows overall?

Well, the pillows in Japan has continued - as we said in our prepared remarks, the gray market that we've been fighting there for quite a while has continued--the residue from that has continued. We introduced a new line of pillows into our direct customers there and we're continuing to focus our resources around building that business back up. At the same time, we're looking at developing some new products on the mattress side for that market at some point this year.

Okay. And then just finally, I may have missed this, but did you break out U.S. ad spending from the total?

Sure. U.S. advertising spending--the total was 26.1 million. U.S. advertising was 17.9 million.

Okay. That's great. That's it for me, thanks guys.

And sir, our next question is from the line of [Louis Cowell] with Lehman Brothers.

Hi, this is Lou asking a question of behalf of [Bob Drbul]. First question is, just curious, the share count amount that you mentioned, the 84.5, is that just a basic number or is that a diluted number where you currently stand?

No, that's a basic number.

That's basic? And I don't know if you'll provide this now, but I was just curious if you could give a dollar figure on U.S. sales to the furniture and bedding channel? Excluding specialty, just the--.

--Sure. For the first quarter, the sales to the furniture and bedding shops was 106 [inaudible] million.

106, thanks. And do you have any sense, Dale, of how your products are selling at Sleepy's or is it too early to tell?

It's early to tell.

Okay. Thanks very much. I appreciate it.

Again, sir, we have question from the line of Joe Altobello with CIBC World Markets.

Hey guys, good afternoon.

Hey, Joe.

On the Sleepy's question, how many doors did they contribute to the net adds you saw in the quarter?

Sorry, repeat the question?

I'm sorry. The net ads in the quarter, in terms of new doors, how many came from Sleepy's alone?

We don't comment on individual accounts or individual doors. But, Sleepy's door count number is pretty available. It's incorporated--when we talk about being net, it means that the new accounts like Sleepy's are in there, but we've also closed some accounts during that period. So that 300 would have them in there.

Okay. And then if I could ask also, in terms of the top line growth guidance you gave out, it looks like to get to the bottom end, you'd have to grow the rest of the year by 16% year over year. That seems a little bit difficult, given the FX drag, for example, that you're talking about in the first quarter. How comfortable are you guys with that top line guidance?

We're pretty comfortable with it. We reiterated it. Certainly FX was a real drag in the first quarter. If you look at last year, U.S. dollar was at its weakest in the first quarter. It continued to strengthen throughout the rest of the year. FX became something that we were battling throughout the year last year. Obviously it continued in to the first quarter of this year. But the year-over-year comparison of FX starts getting a little bit easier as the year goes on. Most forecasts that we see out there call for the dollar to weaken, but we're not counting on that.

And I would add that our overall comp gets a lot easier from now on. We've survived our toughest comp of the year in the first quarter. And we did quite well. So I think it gets easier from here on in, generally.

Okay. Great. Thanks.

And, sir, our next question is from the line of Reza Vahabzadeh with Lehman Brothers.

Good afternoon.

Hey Reza.

As far as CapEx, I may have missed your guidance for the year.

Yes. What we said on our last call in January was that we expected CapEx to be in the neighborhood of $35 million this year.

Okay.

Roughly 15 of that is for Albuquerque. And the balance is for general growth and maintenance capital.

Got it. Working capital for this year, should it be about a wash or could it be a source of cash?

It could be a source of cash. We certainly expect inventory improvement throughout the year. We saw inventory improvement in the fourth quarter last year. We saw inventory improvements this year.

Right.

We saw some [tables] improvement. Certainly, with the sales growth, we'll continue to have increase in receivables, but working capital in general should be kind of balanced, if not a source.

Okay. And what is the restrictive payment basket under your bond indenture and bank debt as well? How much more are you allowed to buy--.

--From a purchase standpoint?

Yes.

We - a very good question, Reza. Obviously, you're somewhat familiar with the high yield. On the senior side, as we talked about, when we instituted the repurchase program last October, we had limitations on the repurchase, the total amount we could repurchase on the senior credit agreement. That was fixed with the amendment that we did in January of this year. We now have a limitation based on the high-yield agreement. And, basically, the bucket on that calls for up to 50% of net income.

Fifty percent of net income from what time period?

From the time the bonds were put in place.

Okay. Do you happen to recall what the basket was just to kind of - zip-code-wise at the end of the quarter?

Basically, the 180 authorization was pretty much what the basket allowed as of the end of the year.

I see. Okay.

So for that to build, that basket builds as--.

--As net income grows. Right. And then how do you feel about, input costs this year, raw materials and otherwise?

We've talked a lot about the chemical costs. There was a significant increase in chemical costs, late third, into the fourth quarter last year. Our expectation this year is that the chemical costs will be stable and we're working to continue to offset those chemical costs as well as some of the other general margin pressures through our productivity initiatives.

Thank you much.

And, sir, our next question is from the line of [Ryan Fenninger] with [Joe Fishcott Partners].

Hi guys. Great quarter. I just have two questions. First is, if you could give just a short update on what's going on with the Albuquerque facility. And second, if you just had a little commentary on the competitive environment. Just--you mentioned the strengthening brand awareness and that's sort of what we've been seeing as well. I just wondered if you had any comments there?

Okay. In terms of Albuquerque, it's continuing to progress. As we had said last quarter, we expect that facility to be completed and come online around the end of the year. So it's moving along as expected.

In terms of the competition, we have continued to see additional competitors in all markets on a global basis getting into the visco category. At the same time, all the statistics that we're able to view from industry and other publications indicate that the category overall is certainly expanding. So that's a very positive thing for us because we think the category as a whole is taking market share from traditional innerspring mattresses and that we'll continue to benefit from that.

Thanks guys.

(Operator Instructions.) And, sir, our next question is from the line of Todd Schwartzman with Sidoti.

Good afternoon, gentlemen. You spoke to raw material costs. Could you talk a little bit about - maybe quantify what you saw in the quarter in terms of freight, transportation and related expenses and what you might expect for the year?

I won't quantify it, but I'll give you some qualitative comments. What we saw from a freight and transportation standpoint, versus what we were seeing in the late fall and early winter, essentially late third quarter into the fourth quarter, we saw some improvement in transportation costs as fuel prices were down. Obviously, here recently we've seen fuel prices go up quite a bit again. In addition, we have had some productivity initiatives in our transportation department that have been able to generate some improvements for us. But it's something that with record oil prices, I'm sure, transportation costs will continue to be an expensive proposition, something that we have to continue to battle.

So the--does that mean that the increased guidance takes into account some type of increased assumption as to energy costs?

Basically what we, from a guidance standpoint, what we said today was we are still comfortable with the guidance that we gave in January for the year. We increased the earnings guidance based on the lower share count and the higher interest costs associated with the borrowings to achieve the repurchase.

Got it. And--.

--From a balance of the revenue and income, we feel that we've got the programs in place to continue managing those costs.

Okay. And when do you expect to ship the medical pads that you alluded to, to GE?

We're actually shipping those now. We're working with them on the fabrication, but they are in the process of shipping.

Any speculation on what that might represent, how big that could be on an annual basis down the road?

No, not at this point. We're sort of taking a wait and see attitude to see how it develops.

And could you describe the Tempur-Day and Tempur-Night products that you mentioned in the prepared remarks?

Yes, it's a new concept for the European operation. It's a new design of a bed base and there are two different colors; one, obviously, black, one white and that's the reason for the positioning. And what they're doing in Europe is as they introduce these new bed bases, which are completely different than a bed base in the U.S., they are also selling the mattress to go along with the bed base. So it's sort of a new venture outside of our mattress business for us in Europe.

All right. And last question, I missed the numbers, the suggested price on the GrandBed and the Rhapsody for queen?

For a queen price, mattress only on the GrandBed, 5,499. And for the Rhapsody is 2,399.

I'm sorry. Repeat that, please?

2,399.

All right. Thanks.

And sir, our next question is from the line of Mark Rupe with Ryan Beck and Company.

Hey guys, good quarter.

Hey, Mark.

Just a couple of questions here. Could you go through the direct response plan here in the U.S.? I know you've made an updated comment on it. Could you go through that please again?

Certainly. In terms of our plans, we will continue to invest in our advertising both to build the brand awareness and also to drive business to our direct call centers. As we have said in the past, however, as we have opened additional stores and continued to grow our retail base and made it more convenient for consumers to find our product in the market, that we had expected that this would have a adverse impact on the direct business. We built that into our models as well as into our guidance that we've given for the year. So it's a business that is still very important to us, but obviously one that because of our retail strategy, is not going to continue to grow.

Oh, okay. And then on the original launch last year, I think a couple of the targets for the original were to accelerate unit growth and also open up the market opportunity. Any kind of high-level comments on whether or not the first six months the original has done that?

Well, we've been very pleased with the distribution that we've gained, as well as the sell-through. And I'll mention again the research study that was done at the end of last year in which the retailers who were contacted, who had put the original on the floor, indicated that it had generated incremental sales and it added to their overall performance of the product line. So from that standpoint, we've been very pleased and, of course, we're also excited now about the redesign of the Classic, which was something that we hadn't done for a long time. So we'll be shipping that product this quarter as well.

Okay, then lastly, on the adjustments in the--increasing your sales force, any idea how many salespeople you've added to the U.S., the retailers?

Yes, we're at--we were at approximately 52 at the end of the year. We're at 60 now and we'll continue to add where needed, depending on the analysis by market.

And then, lastly, on the Rhapsody, any thoughts on its impact on the Deluxe? Is it kind of the same, as far as from the customer's point of view or do you think it won't have an impact at all?

Well, it does have some differences - different features, different benefits and a different look and a different feel. So I think time will tell as to how it fits into the overall product line for customer satisfaction.

And the 2,399 was the original price that you guys thought originally on that one.

Yes.

Perfect. Thank you.

And, sir, our next question is from the line of Keith Hughes with Robertson Humphrey.

Thank you. A couple of questions. As you ended the quarter, we picked up some commentary of weakness in the furniture bedding panel in the March, kind of in April timeframe. Have you seen your unit shipments drop off at all as the quarter ended and into April?

Keith, we've heard some of the same reports. We have not seen an impact there.

Okay and on the accounts receivable, it was up well ahead of sales. What was going on in that account?

Basically, when you look at it on a year-over-year basis, Keith, because of the price increase effect last year--.

--Right.

We kind of had an inverse--inverted quarter last year. January, [big] month, February, very big month because the orders were so big, we had a lot of them shipped in February…

Right.

And so the quarter got--went down as the quarter went on. This year, we had a normal quarter where we came into the year. We started well and we built through the quarter.

So it's somewhat price increase, somewhat timing. Is that--?

--Yes. Well, because of the price increase last year the timing of revenue in the quarter was very different.

Okay. And final question, on the guidance - the new guidance, did I hear you say earlier that's based on 88.8 million shares?

Yes.

That's diluted shares?

Fully diluted average for the year.

Average for the year. And what did--what was the actual ending share count for the first quarter?

On a basic basis, it was 84.5 million.

And what was that on diluted?

It would have been right about the--hang on one second…

93 is an average.

Yes, 93 is the average for the quarter. Fully diluted would have been about--right about 88.

88. Okay. All right, that's all, thank you.

And, sir, we have a question from the line of Joel Havard with BB&T.

Thank you, good work everybody.

Thank you.

The question is two parts, but they're probably related. I believe in the opening comments, you made some remarks about reducing inventory. Did you mean sequentially or year-over-year? And does - and this is the second part - does it tie to New Mexico still getting online and does that help, kind of squeeze down the [buffer] stock you need to carry throughout the system otherwise.

We reduced inventory sequentially. On a year-over-year basis, inventory was still up a little bit.

Right.

We started, if you recall in 2005 - and I'm not sure how closely you followed the company at that point last year, Joel - but we cautiously on purpose built inventory last year. We started building it in the first quarter. We built it through the third quarter. When the per-market end results weakened--

--Right.

We ended up kind of overshooting, from a days standpoint, anyway, where we wanted to be on inventory. So we started turning that back the other direction in the fourth quarter. And we will continue to do that on a gradual basis throughout the year. And--.

--All right. And again, is this benefiting as New Mexico gets on stream and is that still--.

--Well, it will, but New Mexico is not going to be on stream until basically the end of the year.

Okay. And that's in production, not just a finished building and facility.

Correct.

All right, great. Thanks guys, good luck.

And, sir, we have a question from the line of Michael Cox from Piper Jaffray.

Good afternoon. Thanks a lot for taking my questions. My first question is on the sales and marketing and G&A, both declined year-over-year on an absolute dollar basis. I was wondering if you could give a little color around what drove that decline and if you expect that trend to continue as the year progresses.

Well, one of the things that we have said consistently and we said that we would build our plans around this approach to advertising was that as a percentage of sales, we would maintain our spend to the revenue line. So if you look at specifically in the U.S., the U.S. did increase the spending slightly. But from a percent of net sales, it was right at the same percentage, 11.8% this year compared to 11.7% last year. So we're going to continue to invest in advertising as a percent of our revenue.

The other thing, Michael, in my prepared remarks, I did specifically mention a couple of areas in G&A where we spent significantly less this year, number one - first quarter last year, we were wrapping up the SOX certification. We had significant productivity in terms of the whole Sarbanes Oxley process. And in addition, as Tom mentioned, on--we did spend a little bit more on advertising. But as you start the year with higher targets, your sales force commissions get reset. So, a different level of sales expectation this year; and so the commissions are not set at the same rate that they were in the quarter last year.

Okay. But did--so it sounds like on a year-over-year basis, we should not expect that trend to continue though, it sounds like, in terms of absolute dollar decline.

No.

Okay and on the international business, in terms of the unit volume, the growth rate in the international side of the business slowed a bit. I was wondering how much of that was a function of the DR change in France versus any other factors you're seeing in the international arena?

Well, the international business was a little bit slower. If you CapEx adjust it, it was 12%, which is not a bad growth rate. And, we did change the DR structure there. We did have continuing negative impact in Japan. Besides that, we're very pleased with how the business is progressing internationally and we'll have a very strong year.

Okay, my last question is on the gross margin. I was wondering if you could break down the year-over-year decline in the gross margin by the different factors that you broke down and just rough estimates between petrochemical costs, the channel mix and the product mix?

I would--I can, but that's not something that we typically do at that level. It's an element of each. The biggest drivers being general mix and product mix.

Okay, great, thanks a lot.

And, sir, our next question is from the line of Steven Kim with Citigroup.

Hi, good evening, this is Nishu [Suid] for Steve. First question is, you mentioned that the discounted floor models on some of the new doors that you opened. But there's something different about that this quarter compared to other quarters. The reason I ask is opening 300 new doors for you with the tremendous growth you have. I mean, some quarters you opened far more from that. So was there something different about that this quarter?

Just the size of a particular account. And because that's a net number, keep that in mind. So depending on how many new doors, actual new doors, that's what impacts the amount of floor space, plus how many models a particular store may take. Because in the past, for example, we would open an account and we might get two or three models, whereas now we can actually see some of our accounts coming with five and six models. So in a lot of cases, we are having to double the number of floor models per store.

Right, so--.

--We haven't changed our discount that we provide for the floor models.

Right, so higher slots per store right off the bat there.

Right.

Okay and, Dale, I know you were asked this earlier - about the share repurchases. As I understood--so does that mean that under your lending agreements, you would not currently have the capacity to extend the share repurchase reauthorization any more at this point?

No. We just created a little bit more capacity in the first quarter and every quarter that goes by, we will create more capacity based on the way those agreements are set up. At this time, we're--we still have an authorization that's not complete and we'll evaluate the situation, and the circumstance and the limitations and determine--the board will make a determination if they want to do more or not.

Oh, and just a final housekeeping question. With the higher level of debt you have now, what would you anticipate the interest expense would be for the year?

Well, I would expect that the interest will be up this year compared to last year. You know, last year, interest expense was about $20 million. We've taken on a significant amount of additional debt associated with the repurchase and it'll be up at least $3 million.

Okay, that's it for me, thanks.

(Operator Instructions.) And, sir, we have another question on the line of Jonathan Shapiro with Goldman Sachs.

Hi, good evening, thank you. Tom, I just wanted to follow-up on what you just answered for Nishu when you were clarifying about new doors versus net new doors. Was there a significant--did you lose a number of doors or was it--or give up a number of doors voluntarily or were you just clarifying, but it's not that--not a big difference.

Well, one of the things that you may recall that we said on our last call was that we were--had reevaluated our approach to opening new doors as well as evaluating individual markets. We mentioned that we were using the consumer buying power index. We were also looking at some other data that we now have available. And we went back and, as we will continue to do throughout the year, we reevaluated all of our accounts and the doors that we had and we want to make--we wanted to make sure that as we move forward, that we have the right partners who are supporting us. The partners who understand the importance of branding and the brand's image and how they need to support that brand. As a result of that, we had some accounts that we reevaluated and we moved away from during the quarter. And we expect that that evaluation process will continue as we move forward this year.

Were any of these particularly large accounts or were they--are you sort of doing this like--you know, onesie, twosies, as you go through?

Yes. Keeping in mind that this is a pretty fragmented industry, especially on the retail side with the average account only having two doors. So if you're looking at closing a typical account, you may be looking at closing an average of two doors, unless you're looking at a larger, regional player.

Okay. And then a quick question on the selling and marketing expense, which was down year-over-year. So the advertising was up a little bit as a result of the sales growth, so keeping the percentage flat. And you have a bigger sales force than you did a year ago. Where [inaudible] can you cut out of the selling and marketing.

As I mentioned a little bit earlier, each year you set new commission targets based on new revenues. The other thing is, FX affects revenue. It also affects cost. So you have European--or European cost being translated into a stronger dollar. So that means less European cost on a year-over-year basis.

Okay, and then just last question. Tax rate is 37%--will you be thinking for the rest of the year?

Yes.

Okay, thank you.

And, sir, we have a question from the line of Pete Adilan with Titan Capital Management.

Good afternoon. You talked previously about the therapeutic benefits of your mattresses and I noticed that the healthcare channel is a lot bigger internationally. So taking those two points together, what's the near term potential for the healthcare channel in the United States?

Well, just to give a little background on our international business, we started in Europe as a healthcare company and that heritage, as we went into a lot of hospitals there, has played a big role in our size of our healthcare business, as well as reimbursement. There are certain countries in Europe that reimburse for our mattresses because of the therapeutic benefits. In the U.S., while we think there's tremendous opportunity for our product to satisfy a critical need in the marketplace, especially in nursing homes where a large percentage of the residents have pressure sores and bedsores. Unfortunately, in the near term, we don't anticipate a big change there because the government continues to reimburse facilities for treatment of pressure sores/bedsores, compared to reimbursing for prevention.

Yes.

So during that period, as long as that continues, that's the reason why we have not factored any accelerated growth in the U.S. medical business into our forward projections.

Okay, and then, sort of an off-the-wall question. Is there any conceptual or technical or marketing or competitive reason why you couldn't offer a combination of a visco/air product?

No, there's no reason why we couldn't do it. I mean, we have obviously been focused on our core business. We have built our brand around our proprietary material, the Tempur material. We think that material is superior and has those therapeutic benefits. So that's the reason why we're continuing to focus on our core business and our core products.

And you don't think that would offer any additional performance benefits, so to speak?

Well, we don't think so from the standpoint that--I'll give you an example. You were talking about therapeutic benefits. And you would not find a static air system like you'd find on the retail side, and you wouldn't find that in the clinical setting, such as a nursing home, because you wouldn't get that therapeutic benefit.

All right. Well, I guess what I was thinking was an adjustable type of air mattress with--.

Yes, that's what I was--that's what I was referring to as well. It's considered static air because of the fact that you can adjust it, but once it's adjusted, there's not continuous flow.

Okay, got it.

--The way you have with air loss systems, very expensive air mattress systems that are available for rent in nursing home facilities. Because generally speaking they're so expensive, facilities rent them compared to purchasing them. So there's a difference there between an air mattress that you would find in a retail consumer setting.

Okay, great. Thanks.

And, sir, we have a question from the line of [John Emrick] with [Avonworth Capital].

Hi, thanks for staying on so long for me and anybody else. Most of my questions have been answered. One is, if I just roll out the next three quarters in no particular order because last year's seasonality - as you have pointed out - was affected by a price increase. But just in general, you are looking at, or we'd be looking at, pretty healthy, teens-type, revenue growth rates year-over-year each quarter to get to the full-year guidance. And I was just wondering if you could kind of build up for me - not to the basis part, but order of magnitude, what gets to that healthy double-digit growth rate. Is it 10% more doors in the next three quarters versus the same three quarters last year plus more slots per store plus higher ASPs and so on? Just wondering if you could do kind of a back of the envelope attribution analysis to those high teens revenue growth rates that we're going to be seeing for the rest of the year.

All those are a factor.

Okay. Can you at least rank them? The doors should be easy, right? I mean, how many more doors will you be in the next three quarters versus the same three quarters last year?

Well, our guidance is that we'll add 50 to 60 doors a month…

Right.

In the U.S. Internationally, we'll add about 25 a month.

Okay.

And so--.

Those are over what denominators, basically, starting door count - if you will - today?

We've got 5,600 right now.

Okay.

We ended the year last year at 5,300. I don't want to take the time on this call to go through every quarter last year.

No, I wouldn't want you to.

You can look back at prior calls [inaudible].

No, I think you've given the chunk of it right there. And the last question - I apologize - you've talked a lot about stock repurchase authorization and baskets and stuff, but the number I missed was, what's the dollar value remaining on your current authorization?

It's about 5.8 million.

Okay. All right. Thank you very much. Great quarter.

Thank you.

And, ladies and gentlemen, that concludes the question-and-answer portion of today's presentation. I'd like to turn it back over to Bob for any closing remarks.

This will be my last conference call with you as CEO. A few closing comments. Over the past decades, we have created one of the largest and best positioned bedding manufacturers in the world. With a fundamentally better sleep technology, we have a wonderful future ahead of us. We remain extremely confident of the long-term prospects for Tempur-Pedic, and I believe we will remain the clear leader in the viscoelastic category and maintain our position as the worldwide leader in premium bedding.

I leave the company in the best possible hands with Tom Bryant. I look forward to continuing an active role on the board. Thanks again for joining us this evening.

Ladies and gentlemen, on behalf of Tempur-Pedic, we thank you for your participation in today's conference. This concludes your presentation and you may now disconnect.