Somnigroup International Inc (SGI) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tempur-Pedic International Second Quarter 2006 Earnings conference call. [Operator Instructions]

I would now like to turn the presentation over to your host of today’s call, Barry Hytinen from Tempur-Pedic Investor Relations. Please proceed, sir.

Thank you for participating in today’s call. Joining me today in Lexington are Tom Bryant, President and CEO, 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. Actual results may differ due to a variety of factors that could adversely affect the Company's business.

The factors that could cause actual results to differ materially from those identified include economics, competitive, operating and other factors discussed in the press release issued today. These factors are also discussed in the Company's SEC filings, 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. The press release is posted on the Company's website and filed with the SEC.

With that introduction, I will turn the call over to Tom.

Thank you for joining us for a review of Tempur-Pedic’s second quarter 2006 results.

Tempur-Pedic delivered a solid quarter in what has been a more challenging environment for our industry. Strong performance throughout our operations generated significantly improved mattress unit growth, working capital, and productivity.

In addition, our brand awareness and consumer and dealer interest in our products continues to grow and we are very confident in the long-term prospects for our business and our ability to continue to gain share in the mattress market.

Our sales for the second quarter totaled $219 million, up 14% from last year. Earnings per share (EPS) increased 25% to $0.30. Cash flow from operations continued to be strong, increasing to $35 million. Our domestic sales grew 15%, while internationally they grew 11%.

Let’s take a look at sales by channel.

During the quarter sales in our retail channels, overall, rose 21%, reflecting our emphasis on selectively working with high quality partners. In the U.S., total retail sales increased 21%, led by furniture retail, which was up a strong 29%. Internationally, retail sales rose 20%.

Our specialty channel continued to show weakness, as we experienced sales declines for both mattresses and pillows in this channel. We recognize that this channel has limits for growth, given its niche focus, and have reflected that reality in our guidance.

Sales from our direct channel decreased 22% from the second quarter of 2005, reflecting our continued expansion into U.S. retail outlets and our decision to focus the international direct model only in the UK. As we mentioned on our first quarter call, we recognize that as we continue to grow our retail business, 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.

Sales from our third party channel were up 23% for the full Company and were especially strong domestically, where third party sales were up 87%, reflecting our continued retail expansion and market share gains in Canada and other countries.

During the second quarter, we added approximately 160 net new furniture stores in the U.S., consistent with our target for the quarter of adding 50 to 60 net new stores per month. In total, we were in approximately 5,760 furniture and bedding stores in the U.S. as of June 30th. Because we believe that retail stores are an extension of our brand, part of our strategy for 2006 is to be more aggressive in our efforts to ensure our products are represented in doors that position the brand correctly.

Our efforts to work with established accounts, evaluate under-performing locations and selectively add distribution is paying dividends, as the performance in the second quarter showed. We have also been very pleased with the quality and size of new accounts added over the last few months. Our target account penetration strategy is helping us selectively expand distribution in specific markets and improve overall store productivity.

Internationally, the expansion of our furniture retail channel continues, as we opened approximately 90 net new doors. In total, we were in approximately 4,340 stores as of June 30th. We expect to add an average of 25 to 35 net new stores per month for the reminder of the year. Reflecting the continued shift by consumers from innerspring mattresses to viscoelastic, our U.S. mattress unit growth was especially strong, increasing 22%, our strongest rate of growth in a year.

Our new mattress models, the Rhapsody and the Grand, started shipping late in the quarter and have received excellent dealer reception. Importantly, these models are helping us to gain incremental floor space. Dealer interest in both models has exceeded our expectation and we experienced some out-of-stocks. However, we anticipate fulfilling these orders in the third quarter.

Also during the quarter, we completed our planned closeout of the remaining old Classic model inventory in anticipation of shipping the redesigned Classic. The transition to the new Classic was planned in the first quarter and we began reducing inventories appropriately ahead of the promotion.

We kicked off the promotion the last week of May, which was $75 off wholesale, in time for Memorial Day. By mid-June we were sold out of the most popular sizes, consistent with our goal to be able to transition to the new Classic in the third quarter.

In spite of the closeout promotion, the Classic did not contribute to our unit growth for the second quarter, as compared to 2005. Compared to 2005, unit volumes were generally flat and dollars were down. We believe this validates our decision to redesign and relaunch this important model. The new Classic began shipping in July and we have experienced strong dollar and consumer interest.

Regarding pillows, we saw increased sales in the U.S., reflecting our ability to expand distribution. We are also seeing strong demand for our new higher-priced pillows. Internationally, we saw a positive sign, as the decline in sales of our pillows appeared to be leveling off.

As we have discussed before, we have dedicated additional resources to pillow R&D. I am pleased to announce another innovation to be launched from that increased R&D focus on pillows. Next week, at the industry trade show in Las Vegas, we will be rolling out a new pillow line.

The Symphony Pillow by Tempur-Pedic is a unique, dual-sided design, with a softer formulation, but still maintains the feel and support that consumers have come to expect from Tempur-Pedic. This will be a worldwide new product launch available through all distribution channels. We expect it to be available late in the third quarter, in time for the holiday shopping period. The SRP will be $99 and consumer testing has been favorable and we are looking forward to thi launch.

During the quarter, we were awarded a patent for the Comfort Pillow by Tempur-Pedic. The Patent Office recognized the significance of the innovation that we have on this design and provided us very broad protection for our invention. We expect that our patent rights will be respected throughout the industry and as we have previously disclosed, a survey of the industry to identify potential problems in this regard is underway.

Turning to the cost side, we continue to drive initiatives to improve productivity and lower costs. Dale will provide a more detailed discussion of gross and operating margins in a moment.

While we achieved operating leverage, we continued to increase our marketing investment. Overall, our advertising spend in the second quarter was approximately 10.4% of sales, relatively consistent with the prior year on a percentage basis, and up $2.2 million to $22.7 million in total. We believe our continued advertising investment is building brand awareness for Tempur-Pedic around the world.

As consumer demand for Tempur-Pedic product increases, we will continue to take the necessary steps to scale our business.

Earlier today, I was pleased to announce the appointment of Rick Anderson to the newly created position of Executive Vice President and President of North America. It is particularly valuable to have someone of Rick's impressive experience join the Tempur-Pedic management team to lead North American sales and marketing. Rick has an outstanding track record in consumer products marketing after a long career with Gillette. We believe he will have an immediate positive influence on our North American operations.

At this point, I’ll turn the call over to Dale to go over our financial results. Dale?

Thanks, Tom, let’s first talk about our sales performance for the quarter in more detail.

For the three months ended June 30, 2006, the Company achieved net sales of $219 million compared to $193 million for the same period last year. This represents an increase of $26 million or 14%. We experienced growth in both our domestic and international businesses.

Domestic net sales grew to $142.7 million in the second quarter, an increase of $18.6 million or 15%. Domestic sales accounted for 65% of our total net loss, as compared to 64% in last year’s second quarter. International net loss grew to $76.3 million, an increase of $7.7 million or 11%.

Foreign exchange rate impact was essentially neutral. It resulted in a negative impact of about $1.0 million in the quarter. Our growth in net sales was driven primarily by an increase in the U.S. retail channel of $20.5 million and a $9.2 million growth in international retail channels.

Net income for the second quarter was $26.1 million. Fully diluted EPS grew 25% to $.0.30. Fully diluted share count was 87.5 million shares in the second quarter of 2006, compared with 103.4 million shares in 2005, reflecting the weighted average impact of our repurchase activities.

During the second quarter, the Company purchased 3.3 million shares of its common stock, for a total cost of $45.8 million. Second quarter share repurchase activity contributed less than $0.05 to fully diluted EPS. From the commencement of the repurchase program on October 20, 2005 through the end of the second quarter of 2006, the Company has purchased 18.1 million shares of its common stock for a total cost of $220 million.

Gross profit for the quarter was 48.6%, compared to 51.2% in the prior year and 48.7% in the prior quarter. On a year-over-year comparison, the gross profit rate decreased due primarily to three factors. Channel and product mix changes contributed to lower gross margins.

The retail segment represented 79% of our business in the second quarter and 75% in the prior year. In addition, our product mix continues to shift more towards other products rather than pillows, as the other products tend to be sold with a mattress. Other products represented 18.3% of our business in the second quarter, up one point from the prior year.

The last factor impacting gross margin was the closeout activity on the old Classic model and shipping new floor models for the RhapsodyBed and GrandBed. This was the smallest factor of the three.

Our ongoing productivity initiatives have helped offset a great deal of these mix shifts. As a result of these initiatives, we currently anticipate gross margin improvement during the second half of the year, as compared to the first half. As I mentioned on our last call, we continue to expect gross margin for the year to be 100 to 150 BP down compared to the total year 2005.

Operating income was $47.3 million or 21.6%, up $2.7 million compared to the same period in 2005, reflecting leverage on operating costs partially offsetting the gross margin erosion.

CapEx for the quarter were approximately $9.3 million, of which approximately $6.0 million was related to the construction of our Albuquerque facility. This compares to $30 million of total CapEx in the second quarter of 2005.

As Tom mentioned, the cash flow from operations was strong at $35 million for the second quarter, based on improved working capital. Cash flow from operations for the six months ended June 30, 2006 was $86.5 million, compared to $49.1 million in the year-ago period, an increase of 76%.

As we have discussed before, we’ve been very focused on lowering inventories and improving working capital. Within the quarter, our sales and operations teams successfully drove inventories to the lowest levels in several quarters. However, we would expect a moderate increase in the coming months, as we stock up on our new models.

Reflecting continued strong performance from our international operations, for the second consecutive quarter, we have voluntarily prepaid part of our European term loan. In the second quarter we prepaid $20.5 million, in addition to a $4.9 million scheduled principal payment, for a total of a $25.4 million reduction of our European term loan.

Since the beginning of the year, we have made voluntarily prepayments totaling in excess of $42 million, which, coupled with scheduled payments, has lowered our European term loan by approximately $53 million. This partially offsets our increased U.S. borrowings to fund the share repurchase program.

Now I'd 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%. For earnings, the Company is increasing its guidance for diluted EPS to reflect shares repurchased during the quarter, corresponding interest expense on associated borrowings, and recent stock option grant activity.

Compared to Company’s previous GAAP guidance of $1.24 to $1.29, the Company currently expects diluted EPS for 2006 to range from $1.26 to $1.31, which would represent an increase of 30 to 35% from the Company’s GAAP EPS for 2005. This guidance assumes an average fully diluted shares outstanding of 88 million shares for the full year and approximately 86 million shares for the third and fourth quarter.

Regarding interest expense, we expect interest expense to increase close to 10% in the third and fourth quarter versus our second quarter run rate, due to the second quarter repurchase activity and associated borrowings. We anticipate recent executive stock option grants will result in a FAS 123(R) pre-tax charge of approximately $1.0 million over the remainder of the year.

Regarding CapEx, we currently expect to incur $38 million for the year, which represents a slight increase versus our prior guidance of $35 million. This increase is primarily related to a decision to build a new R&D test center, reflecting our commitment to product innovation and market leadership.

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.

[Operator Instructions] Bob Drbul with Lehman Brothers.

Hi, good evening, guys. The first question that I have is on the unit growth, the 17%. Can you talk a little bit about the industry in terms of how you think that compares to the industry and sort of the expectations, maybe, for the full year for your business versus the industry as well?

The first thing I would point out, Bob, is 17% is the total business unit growth. For the U.S. business, our unit growth in the quarter was 22%. We only have industry data through the first two months.

Basically, of this quarter, the industry showed a decline in April and flat in May and so most people are estimating that for the quarter the industry is going to be kind of flat on units. So, obviously, in the second quarter a very good performance versus the industry and we would expect to continue to have very good unit growth throughout the year, as we progress through the year.

From an industry standpoint, I believe the industry is still looking to have about 7.0 to 8.0% top line growth, with very modest unit growth throughout the year.

Okay. And then the other question that I have is when you look at your top five customers and you’ve opened up a large customer within the last few months, like, how are you performing in your very top retail partners these days?

Well, we don’t give out individual account information. I can say that looking at the growth we’ve had in mattresses, that’s occurring because we’re continuing to gain floor space and take market share. And a large piece of that share is coming from furniture and bedding and so, overall, our accounts are doing well.

Okay, great and just one final question. In the Albuquerque facility, the timing of the opening or of the plant, can you just give us and update on that?

Yes. It really hasn’t changed. We’re still looking at completing that project at the end of the year, having it online come ‘07.

Okay, great. Thank you very much.

Mark Rupe with Ryan Beck & Co.

Hey guys, congrats on the quarter. Some of the sales force initiatives that you’ve put in place over the past six months - are you starting to see the results of that in the U.S. business now?

Well, we think the investment that we’ve made in both adding more people, reducing territories, and improving frequency of our fall cycles, especially on the A&B stores, seem to be paying dividends for us.

We’ve also -- as a result of being able to get around to the stores more frequently, is helping us elevate all of our stores. And as we said, since we feel that the stores are an important partner in our business and also an extension of our brand, we want to make sure that they’re positioning and representing the product correctly. So, I think certainly its helping with all of those factors combining to drive the business.

Got it and then on the pillow business internationally, obviously you had some easier comparisons, but still it looks like its stabilizing somewhat. Are you doing anything different there in the past quarter or so or is it just working through the issues there?

No. I think it's working through the issues and also, as we pointed out previously, we relaunched a new pillow line into Japan and we think that that’s helping as well.

Okay and then lastly, any activity on pricing over in some of the international markets? I saw something in the UK going on right now.

Sorry, I didn’t make out the question that you --?

In some of the international markets, are you doing anything with pricing on the mattresses? I saw something Tempur-UK. It looks like there was some sort of a price increase.

No. I mean, we take price depending on the individual markets. We don’t have a -- so it's possible that we have taken some price in certain markets, depending on market conditions. I don’t know specifically about the UK [inaudible].

Okay. Congratulations again. Thanks.

Thanks.

Thanks, Mark.

Steve Colbert with Canaccord Adams.

Hey guys, congratulations on another solid quarter.

Thank you.

Domestically, it looks like mattress ASPs were a bit flat. What impact may the stock-outs, or the floor models for that matter, or the Rhapsody or GrandBed have had and what are your thoughts going forward?

Yes, this is Dale. The biggest impact in terms of ASP on a year-over-year basis was channel shift. More retail, less direct. Direct was down $4.0 million year-over-year, predominantly mattresses, so that channel shift has a big impact on ASP. Our floor models did have a minor impact, but the biggest impact was the channel shift.

Okay and then looking at commodity costs, specifically polyol and other key chemicals tied to oil. How do you see pricing, going forward, and do you expect and uptick in costs with the move in oil?

At this time, we don’t foresee additional price increases. As you know, a lot of the chemicals that we buy can be made from oil. They’re predominantly, though, made from natural gas. Natural gas prices have been still relatively low. We had the big run-up last fall when natural gas prices spiked.

The chemical prices have stayed relatively constant, to where they went after last fall. So we don’t, right now, anticipate a big change there. If anything, we’re still looking for opportunity to call back some of that price increase on chemicals that we got last fall. And just as another reminder, the price increase really only affected the U.S. business. our European chemical costs didn’t change.

Okay, all right and then just to revisit the market conditions out there, obviously you’ve had some good results despite what others are seeing as weakness. Is it fair to say that you based your guidance range upon the current market conditions continuing and you’re comfortable with the results if these current conditions out there continue throughout the rest of the year?

Yes. We evaluate our guidance each quarter in terms of looking at updating the year. We see kind of a mixed economy out there. It's not a booming economy, it's not a horrible economy. Our expectation, at this point, in terms of supporting the guidance that we just reaffirmed, is that as long as the economy kind of stays in the range of where its at we should be fine. If the economy improves maybe we’ll do better. If the economy were to significantly weaken, it might negatively impact us.

Okay, great. That’s it for me, thanks and congrats again, guys.

Thanks.

Thank you.

Joel Havard with BB&T Capital Markets.

Thank you, ma’am. Good afternoon, everybody.

Afternoon.

Hi Joel.

Let’s see, a couple of quick ones. I think you touched on it, but maybe you could elaborate and repeat for my benefit, please, the change in the deal counts - domestic stores, international and specialty. I assume specialty remains flat.

Sure. Domestically, during the quarter we opened, on a net basis, net of any closings, 160 new stores. So we finished the quarter in the U.S. with approximately 5,760. Internationally, we opened approximately 90 and those 90 net, again, stores gave us a quarter ending number of 4,340.

Okay and the U.S. includes furniture dealers and the specialty?

No, furniture and bedding.

Yes, just furniture and bedding.

Just furniture and bedding.

Specialty really, the count hasn’t changed.

Okay, well that’s where I was confused then. You guys had said previously that you expected a little bit slower pace and that’s for the year. Does that then mean that the second half is a slower pace or is there something going on that’s keeping you ahead of the curve there?

If you look at the number that we had previously given and what we are expecting, the quarter came in right at that number. We’ve said 50 to 60 per month - in the U.S. - new furniture or bedding stores.

And at the slower pace of last year, we were adding a little over 100 a month.

We intentionally are going a little bit slower this year and churning some of the stores a little bit more.

Okay, well that’s faster than I expected. My definition of slower was --.

Okay.

Switching gears, I don’t know who would want to take this one, but on the Grand and Rhapsody, was this production constraints or more rapid ordering? I mean, why was it slower getting out? Is it fully displayed or merchandised now and are you having anything that’s going to keep you from getting those sales delivered in Q3 and beyond?

Well, we’re working to catch up to the demand. The problem that we ran into when we were looking at the type of distribution that we expected on those particular new models and then we based our production forecast off of that, we had higher demand.

Our sales force and the trade simply did a better job of flooring those new models and as a result, the production forecast we had originally put in, that forecast was too low. So we’ve reflected those market conditions in our revised forecast and the plant is working very diligently to catch up with the demand.

Tom, is it typical that you all would expect to, like -- do you service the A dealers first and then the B's or do you do it by region? Or how would you normally have approached that? Was there anything different this time?

No and we didn’t approach it any differently. We go out to all accounts in all regions at the same time. But I’ll give you an example to try and add a little color to it. If you look at the Grand, which will retail for approximately $5,600 for the mattress, we were projecting a number of accounts in stores that would stock a product at that higher price point and we just underestimated that.

Interesting. Okay and you just said Grand. What’s the expected ASP on the Rhapsody?

Approximately $2,400.

And that’s retail?

That’s retail.

Correct.

Okay.

Queen size.

For a queen, everything we [inaudible - multiple speakers].

Okay. That’s kind of a standard unit. Got it. Last question, Dale. What capacity is remaining on your repurchase authorization?

We have spent the entire authorization, at this point.

Okay. All right and I don’t suppose this is a subject you’d bring up at a board meeting anytime soon?

Well, I wouldn’t discuss future board meeting conversations.

Okay. Guys, thank you. Good luck.

Thanks, Joel.

Robert Straus with Merriman Curhan Ford & Co.

Nice quarter, guys.

Thanks, Robert.

Just a few questions. First, to go back to the sales initiatives that you’ve been speaking about for the last couple of quarters. Could you just give us some more color on how far along that initial process you think you are?

Well, we think, from a standpoint of expanding the sales force, given the number of accounts and the number of stores that we have in the U.S., we think that we now have the right number of reps out there. We feel we have the right sized territories and we have the right balance between sales reps and number of stores.

We think, in terms of the evaluation of the individual markets and the individual stores in those markets that that process is continuing. I’m not sure if we can put a percentage on it at this point, but its something that we actually will not stop doing. We’ll continue to do this on an ongoing basis, because it's very important to us for long-term brand equity.

So that process will continue, whereas the expansion of the sales force and reduction of the territories we think we’re about where we are. Now if we continue down the road opening more doors and more accounts then we’ll continue to evaluate that.

Okay. Related to the new Classic Bed, that mattress is, as I understand, in virtually all of your accounts. Would there be any reason for us to expect anything different for this new Classic mattress coming in?

No. I mean, looking at it from the standpoint of replacing the old models, we would basically, as they’ve sold out of the old, they would just replace it with the new Classic.

And for the Rhapsody and GrandBed, which started distribution this quarter, do you care to make a comment on where your current penetration of those products are in existing accounts and what your eventual expectation is for penetration somewhere in the future?

Well, unfortunately, for competitive reasons, we don’t give that type of detailed information in terms of the rollouts by model and store penetration. So we wouldn’t be able to do that.

Last question. The New Mexico facility, I believe, you were expecting to get it up and running first quarter ‘07. Is that still the thought?

Yes.

Okay. Thank you. Nice quarter.

Thank you.

Thanks.

Joe Altobello with CIBC World Markets.

Hey guys, good afternoon.

Hi Joe.

The first question is on the market share. I think, Dale, you had mentioned that you guys took market share and I assume that that applies to the overall bedding industry. In terms of the visco market, are you guys also taking share there?

No way to know. There’s no industry compilation of what the visco industry is.

Okay. But I’ve seen --.

We’re the only one that reports.

Right, right, okay. Okay and second, in terms of the trends in the quarter, I mean, obviously it was pretty strong. Did it accelerate or decelerate toward the end of the quarter or was it pretty much flat throughout the three months?

We don’t generally comment on month-by-month activities, but by and large we had a pretty good trend throughout the quarter. It was pretty strong the whole quarter.

Okay and in terms of the stock-outs, you guys didn’t quantify the impact of that. I imagine its probably a rounding error, but.

No we didn’t.

Okay. Could you? Is it [inaudible - multiple speakers]--?

No. We won’t quantify how much stock-outs we had, but basically we’re limited in terms of what we thought we would do in the quarter. There was opportunity to do a lot more on the Rhapsody and the Grand, but we’ll get all the customers' orders filled and taken care of this month.

Okay, great. Thanks.

Michael Cox with Piper Jaffray.

Good afternoon, congratulations on the quarter.

Thank you.

Thanks, Mike.

First just a theoretical question. You look back at last fall when we saw signs of consumers slowing down after gas prices spiked higher and if you look across a lot of different sectors of retail we hear similar stories. I’m just wondering what’s different this time that you guys have been able to work through this type of environment.

Well, it's hard to say exactly, Mike. I think there are a number of factors. One is last fall, I think, most all companies in the consumer space were impacted. And from a consumer psyche standpoint, when you have a dramatic run like you had last fall in gas prices and you hit all-time new highs, the first time the news is telling people that they’re not going to be able to heat their homes this winter, people get real concerned.

Prices moderated, now they’ve run back to about the same level as they were last fall, but the second time around consumers don’t react as negatively. It's just a consumer psyche thing. And why we’ve performed better through kind of a mixed economy at this time, I think a lot has to do with overall initiatives, as Tom talked about before. Initiatives in the sales force, initiatives of working closer with the customers and a lot of interest in the product, continuing to build the awareness of the brand and all those are continuing to help.

Okay. I appreciate that. In terms of the Classic model closeout sale, you mentioned that it had no impact on sales for the quarter. I was wondering if it had an impact on the impressive inventory reduction that you showed in the quarter.

Certainly the inventory reduction in the quarter was -- and that’s why I said, as we go forward, we would expect some moderate increase in inventory, particularly in the third quarter. You had no old Classic left, very little new Classic in inventory yet, and obviously we were stocked out on Rhapsody and GrandBeds for the most part. So as we fill in our warehousing system with the new products, we would expect a little bit of increase in the next quarter.

Okay. My last question is on the direct business. You can see down 18% here in the domestic channel and international seems explainable by the UK or the changes on the countries you’re working in. But I’m just wondering, looking at the direct business going forward, if this down 18% was greater than your expectations or if that’s generally the type of number we should be looking for going forward in that channel.

Well, I think that looking at our direct business -- and we’ve said this in the past. The impact that opening furniture and retail stores across the country, the way that we have, and we also know statistically, from the market research that the majority of consumers will shop furniture and bedding when its time to purchase a mattress. That it would have a negative impact and continue to have a negative impact on our direct business and we have factored that into our calculations and our guidance that we’ve given.

Okay. But as we’re modeling the different channels, is that a fair number that we should be using or should it be something less than that?

On a YTD.

Well, I think, if you look at first quarter to second quarter, its down a little bit. The direct business usually is down a little bit in the second quarter. I don’t know that 18% down on a quarterly basis is the right modeling number. I would have a just kind of very subtle decline from here.

On a sequential basis you’re saying?

Yes.

Okay, great. I appreciate it. Thanks a lot, guys.

Keith Hughes with SunTrust Robinson Humphrey.

Thank you. Where do you stand on capacity utilization right now in the plants on mattresses?

Well, we have available capacity in our Denmark facility. The Virginia factory, as it has been for the last year and a half, two years, is running 24/7. So we run that pretty full out.

When you add the New Mexico facility early next year, how much capacity is that going to have?

It doubles our U.S. capacity. It increases our global capacity by 50%.

Okay, doubles the U.S. and total global about 50% and so I guess we would see some kind of a margin drag in early ‘07, as you fill capacity up there? Or do you think the back half units are going to be enough to get you close on that?

Well, I would think that initially, at early ‘07, you would have a margin drag when that comes on, but we would think that for the full year ‘07 it would balance out. As we get closer to ‘07 and start giving ‘07 guidance, we’ll try to give you a little bit more color and direction on that.

Yes that would be fantastic. And I guess a final question. One thing I’m struggling with. To get to the midpoint of your revenue guidance range, given what you’ve already reported, you’d have to be up 20% in terms of dollars in the second half. You were up 8.0% in the first half. What’s going to change in the second half to get you to a higher number?

Well, if we look at our historical performance, setting aside 2005 as a little bit of an aberration, we tend to have a much stronger second half of the year. Third quarter, in the industry, is the seasonally strongest quarter of the industry, from a mattress standpoint. The fourth quarter tend to be a little bit seasonally softer in mattresses, but our business sees a seasonal strength in pillows. So, if we look at our historical performance in terms of first half to second half growth, if we have normal seasonality within the business, we should be fine.

I would also add that we will be shipping three new mattress models in the back half and then also the new pillow line will be shipping in the back half. So we think that will also contribute.

Yes. And just to kind of clarify, reiterate, last year we did not see the normal seasonal uptick that the business typically experiences. So 2005, the second half was a little weaker. So, from a comparative standpoint, if we follow normal historical trends, we should be able to deliver better growth in the second half.

Okay and that pillow line, you’re introducing that next week at the market. Is that correct?

Yes we are.

And when will that hit retailers?

We’ll probably start the shipping the following month, probably in August.

Okay. Thank you.

Al Kabili with Goldman Sachs.

Good afternoon. Just piggybacking on one of the questions related to the overall mattress industry, could you break out your existing store sales that have been around for 12 months versus new stores? Where did you see most of the growth? Were the stores that were open for 12 months or longer still seeing positive unit growth?

We actually don’t break that out. We give the overall performance and then we do report how many new doors that we open.

But we did see positive established account performance.

Okay and the second question is on the cost savings activity. Has most of the cost savings activity been already implemented going into the third quarter or should we see some more in the fourth quarter so that there’s sequential growth margin improvement? How do we think about that?

Our expectation, as had been related in my comments, is that we expect sequential, in the second half, gross margin improvement. Productivity is not a onetime thing. It's an ongoing thing. If you’re running a good productivity program you have a deck of projects and things that you’re working on and you work on them and as they get completed they start impacting your results.

We have a good operations team that we’ve put in place in the last year and a half and they’ve got a lot of things they’re working. Some completed that have contributed to the year so far and others that they continue to work on that will contribute, as we go forward, through the rest of this year and into the years in the future.

Okay and then a couple of housekeeping questions. I missed the furniture store revenue in the U.S. Could you break that out?

U.S. furniture and bedding store revenue for the quarter was $101.8 million, [inaudible - multiple speakers] [10%].

Okay, great. Thanks and you mentioned inventory perhaps picking up a little bit in the third quarter. How should we be thinking of overall working capital? Will that also be rising a little bit throughout the year?

Yes. Given that with sales growth we will get, with the sales growth and the channel mix you continue to get some use in your receivables. We’ve been getting benefit of inventory for the last three quarters. I would expect a modest use on inventory as we move forward here. So working capital will be a little bit of a use of cash in the second half.

Okay, great. Thank you.

Anthony Smith with BNP.

Hi, thank you. This is related to an earlier question about potentially increasing the share repurchase authorization again. What is the restricted payments basket on the senior sub?

The senior sub currently is 50% of net income.

I’m sorry, I didn’t --

Fifty percent of net income.

Right.

So, for example --

Do you know what the current basket is?

Well, we just reported $26 million in net income, so its $13 million.

And the accumulated basket?

The accumulated basket was used up in the two hundred --

It was, okay, so it's only $13 million. Okay. Thank you, that’s it.

Joel Havard with BB&T Capital Markets.

Thanks. Dale, that last point on repurchase, you said $86 million, average, for the second half. Was that about your end of quarter figure?

Yes.

Okay. Thank you, that’s it.

Chris Terry with First Dallas Securities.

Hey guys, kind of a follow-up here. Curious to know what percentage of your domestic mattress volumes are coming from the Denmark facility currently.

Right now, none.

None? Okay. When you do bring the new capacity on line there in New Mexico, what demand will that serve, looking out maybe ‘07, ‘08 timeframe? Are there new markets out there that you would look to maybe tap into with that new capacity?

Well, there are opportunities. We expect ongoing growth in the business. To kind of clarify your previous question, you asked how much of the current demand is being supplied by the U.S. factory and it's in the U.S. It's all of it, but remember, last year we brought a lot of mattresses over from our Denmark facility. We imported about 60,000 mattresses.

We said late in the year last year, start of this year, that the plan was to -- we consciously built our inventory last year to try to carry us over to Albuquerque. And we’ve been working that down gradually throughout the year, in terms of what we built excess to tide us over.

Okay. Are you guys currently doing anything in Mexico or South America?

We have third party distributors that service - I don’t know the exact number of countries - in South America. We do have a distributor in Mexico. We have distributors in a number of the South American countries.

Okay. All right. And that facility, that’ll be solely mattresses or a combination of pillows?

Albuquerque is solely mattresses.

Okay, all right, and how does that compare to the Virginia facility?

The initial capacity is the same in mattresses.

Okay. All right. Thanks, guys, appreciate it.

[DeForest Hindman] of Paradigm Capital Management.

Hi Tom, hi Dale. Can you touch on the marketing spend on the second half, what we’re thinking about that? And then I have another question on the balance sheet.

Marketing or advertising spend?

Advertising spend.

Well, what we have always said is we try to spend between 10 and 11% of sales in advertising. In the second quarter, we spend 10.5%. For the YTD, advertising spend was 10.9%. It's always a little higher in the first quarter than it is in the second quarter. But we would expect to see advertising spend in the second half to be right in that 10.5 percentage kind of range.

All right. And then just on the receivables in the second quarter, similar to the first quarter number, are we going to see those go down in the second half or what’s our expectation on those?

Receivables?

Yes.

Oh, I would expect receivables to continue to grow with revenue growth.

All right. Thanks.

Mark Rupe with Ryan Beck & Co.

Hey guys, just a follow-up on the pillow launch in the back half of this coming year. If I remember right, in 2004 in the back half you had also a pillow launch in the U.S. and it drove a lot of growth in the pillow channel in that quarter, in the quarter specifically. Are we expecting -- I think it was 20% in the fourth quarter of ‘04. I mean, are we expecting some kind of a decent benefit from that launch?

Well, certainly we would like that, Mark. The pillow you’re referencing was the Supreme Pillow that was an exclusive product for Brookstone in 2004. That pillow had phenomenal success. We also had a new pillow that was launched in the fall last year that was not as successful as the Supreme was the year before. But we expect that the Symphony will deliver and perform for the business. We think it’s a great pillow. We think it meets a nice segment of the market and I'll have Tom comment some further.

Yes. I would just say that obviously with pillows, as Dale mentioned earlier, one of the other questions, fourth quarter and the seasonality factor of the holiday is an important contributor to our business. The pillow that Dale was just referring to and you asked about was launched in limited channels of distribution, whereas this product we’re putting in all channels of distribution.

Perfect. Thank you very much.

Steve Springer with Target Capital Management.

Good afternoon. Could you tell me the stock-based compensation, your estimate of stock-based compensation for the quarter?

Yes, Steve. Last year in the second quarter of 2005 we pro forma'ed $655,000 of stock-based compensation. We no longer pro forma because of FAS 123(R), but for 2006 second quarter it was very close to the same number. It was $605,000.

Okay. Thank you.

Ladies and gentlemen, this now concludes the Q&A session. At this time I would turn the call over to Mr. Bryant for closing remarks.

Thank you. We’re extremely confident of the long-term prospects for Tempur-Pedic and believe we will remain the clear leader in the viscoelastic category and expand our position as the worldwide leader in the premium bedding.

Consumers are showing a strong willingness to choose our product and brand awareness continues to expand. Our momentum has increased and we believe we have significant opportunities for growth while continuing to improve our operating productivity and cash generation.

Thanks again for joining us this evening. We look forward to talking with you again in 90 days when we will review the third quarter.

Thank you for your participation in today’s conference. Ladies and gentlemen, this concludes the presentation. You may all disconnect and have a good day. 17