Tempur Sealy International Inc (TPX) 2004 Q1 法說會逐字稿

Please stand by for realtime transcript. The. Good day. Welcome to the Tempur Pedic International Incorporated first quarter earnings call. I will now turn the call over to your moderator Mr. Dale Williams. Go ahead, please.

Good afternoon and welcome to the first quarter earnings call for Tempur Pedic International. The management team would like to thank you for your interest in the company and for your continuing support. My name is Dale Williams and I'm the Senior Vice President and Chief Financial Officer for Tempur Pedic International and I will be hosting the call this afternoon along with Bob Trussell, President and Chief Executive Officer and Tom Bryant our Executive Vice President and President of North American operations. Today we will be discussing the company's first quarter results through March 31, 2004. Bob and I have prepared statements which will be followed by a question and answer period. In addition I must remind you that during this call we may make certain forward-looking statements and I direct your attention to the cautionary statements our the press release regarding any such forward looking statements. It is my pleasure to introduce Bob Trussell President and Chief Executive Officer.

Thank you, Dale. The first quarter of 2004 was an outstanding quarter, as we had a record performance in sales and pro forma earnings. During the quarter we successfully executed our business strategy of further penetrating our existing distribution channels worldwide and continue to build our global brand awareness. The company delivered 153.1 million in net sales for the first quarter and pro forma earnings per share of 16 cents. The 153.1 million in sales was a 45.7% increase over the first quarter of 2003 and 12% sequential growth over the fourth quarter. Our sell through at the retail level remain very strong and the retail expansion exceeded expectations in the first quarter. As a March 31, 2004 our products were offered in 3110 furniture and bedding stores representing a first quarter increase of approximately 400 stores. We are also in approximately 1500 specialty stores in the U.S. Internationally, we now have about 3100 retail stores as well in the market served directly by the company which represents a first quarter growth of approximately 300 stores.

Our combined domestic and international retail channels delivered 57% growth globally in the first quarter and achieved net sales of 104.7 million. The U.S. combined retail channel grew 72% while the furniture and bedding stores grew 121% to 48.2 million. Along with the growth in the retail channel we are equally pleased that our combined domestic and international direct response business continues to show strong growth. Globally the direct response channel grew 31% in the first quarter to 25 million in total sales. One of our key growth initiatives is to expand the successful direct response model into other European countries and we have officially launched this program in France and are encouraged by our initial results. Our third party channel delivered 48% growth in the quarter demonstrating good results from our 2003 initiative to improve the performance of these distributors. Overall our revenue growth momentum continues to be fueled by our retail channel expansion and by our forward investment in sales and marketing to build our brand awareness throughout the world. In the first quarter our global advertising span increased to 17.8 million.

A 41% increase over the same period last year. We believe this was an appropriate level of advertising spend to support our rapidly expanding business and drive continued strong growth in the future. As the business continued to expand, we are taking appropriate actions to ensure that we are able to serve the growing market demand. In the first quarter we completed the expansion of our Virginia manufacturing facility doubling our U.S. mattress capacity. Manufacturing demonstrated excellent execution as the Virginia expansion was completed on schedule and on budget, while operating the plant at full capacity. In addition the new capacity has come on line seamlessly with no production delays. We also launched an expansion projects at our Denmark manufacturing plant this year. We expect to complete the Denmark project by the end of this year and at that time we have -- we will have doubled our mattress capacity in Europe as well. In addition to expansion projects on existing plants, we are nearing completion of the detailed design work for our third plant that will be located in Albuquerque, New Mexico.

Along with managing our capacity additions, another key strategic growth driver is new product development. In the first quarter we opened a new world class R&D center in the U.S. to focus exclusively on the North American market. We also launched three new mattresses, the Celebrity bed, our new top of the line mattress product in the U.S. began shipping to stores and represents our third premium mattress offering in the U.S. market. The Celebrity bed has been well received by both consumers and our retail partners and we will expand distribution throughout 2004. In addition to this Celebrity bed in the first quarter we launched the European Deluxe mattress in a new mattress line exclusively for the scandinavian market which has also been well received. The launch of these new mattresses in the U.S. and Europe and their early success indicates that consumers are increasingly willing to pay higher prices for true value added premium sleep products and that they are increasingly looking to Tempur Pedic to fulfill their demand for such products. We continue to expand our efforts to develop exciting new products that will meet the needs of customers around the world.

We are very proud of the performance that the company has been able to deliver in the first quarter and we believe that we are making the appropriate investments in the Tempur Pedic brand, manufacturing and R&D necessary to sustain strong future performance. Based on the first quarter results, our current expectations about the continued performance of the business for the remainder of the year, the company is updating its guidance for the year. We now expect full net year sales to be between 620 million and 640 million, and pro forma fully diluted earnings per share to be between 70 cents and 73 cents. These ranges have been adjusted from our prior guidance of net sales between 573 million and 602 million and pro forma EPS of between 60 cents and 66 cents. The company notes that expectations are based on information available at the time of this release and are subject to changing conditions many of which are outside the company's control. I will now turn the call over to Dale to discuss the financial results in more detail.

Thanks, Bob. First let's talk some more about our sales performance. As Bob mentioned for the three months ended March 31, 2004 the company achieved net sales of $153.1 million compared to $105 million for the same period last year. This represents an increase of $48.1 million or 45.7%. We've experienced significant growth in both our domestic business and internationally as we've continued to execute on our core strategy of penetrating existing channels and investing in our global brand awareness. Domestic net sales grew to $93 million in 2004 as compared to $58.6 million for 2003 an increase of $34.4 million or 58.7%. And international net sales grew to $60.2 million in 2004 as compared to 46.5 million for 2003 an increase of $13.7 million or 29.3%. The growth in domestic net sales which accounted for 60.1% of first quarter revenues was attributable primarily to an increase in the retail channel of $28.2 million and in the direct channel of 5.1 million and the growth in international net sales was attributable to growth in the retail channel of $9.6 million and the third party channel of $3.4 million. Regarding profitability for the three months ended March 31, 2004 GAAP operating income was $30.5 million compared to $22.4 million for the same period in 2003, a growth of $8.1 million or 36%.

Excluding stock-based compensation expense as previously disclosed, our operating income was $32 million or 21% of sales in the first quarter of 2004, an increase of 44%. GAAP net income for three months ended March 31, 2004 was 11.8 million compared to 10.9 million for the same period in 2003. Pro forma net income was $16.6 million or 16 cents per fully diluted share compared to $10.9 million representing a growth in pro forma net income of 5.7 million or 52% and a 33% growth in earnings per share. Pro forma net income excludes the one-time loss on debt extinguishment associated with the redemption of $52.5 million in senior subordinated notes that occurred January of this quarter and previously disclosed stock-based compensation expense. Fully diluted shares for the first quarter 2004 were $103.1 million -- excuse me, shares. The growth in profitability for the business was principally driven by the increased gross profit of $23.7 million on higher net sales. Gross profit for the quarter was 53.1% which was better than expected due to higher production volumes and factory productivity initiatives. Year over year, the gross profit rate declined from 54.8% as predicted primarily due to the changing mix within the business. The retail channel contributed 68% of our revenue in first quarter 2004 compared to only 64% in the first quarter of 2003.

The retail channel mix affects gross margin and that we're selling into the retail channel at wholesale prices versus the full manufacturer's suggested retail price that we receive in our direct channels. Operating expenses for the first quarter 2004 were increased relative to first quarter 2003 as we continue to drive investment in the business to support our growth. It's important to note that GAAP presentation of G&A costs includes a $1.5 million amortization of stock-based compensation that was previously disclosed and associated with our initial public offering in December. In addition to the operating results of the business, I want to address a few key balance sheet metrics. Our total debt out standing was $309.8 million, a reduction of $67.2 million from December 31. In addition to the redemption of $52.5 million in subordinated notes in January, we further reduced outstanding debt $14.7 million in the first quarter. Cash on hand as of March 31, 2004 was $11.6 million and first quarter depreciation and amortization costs was $6.9 million.

We are also pleased with the announcement yesterday by Moody's Investor Services that our debt ratings have been upgraded. To recap our presentation, we continue our execute on our strategy of focusing on our core products, further penetrating existing channels, continuing to build our global brand awareness and investing in the business to support growth. We've delivered outstanding first quarter results with 45.7% sales growth and 52% growth in pro forma net income and 33% growth in EPS and we have raised our guidance for the total year 2004. We're off to a great start in 2004 and expect our strong performance to continue. This concludes our prepared marks -- remarks and we will now take questions.

Thank you. To ask a question, please press the star and one on your touch tone phone. To withdraw that question, press the pound key. Again, if you have a question, please press the star and one on your touch tone phone. We will pause for questions to register. We'll take our first question from the side of Chris Huffy from Goldman Sachs.

Good afternoon, gentleman.

Hi, Chris.

Hi, Chris.

A couple questions, if I could. Just going through the income statement. The G&A you're to up to -- just sort of backing out the cheap stock charge which I am assuming is still $1.5 million for the quarter?

Yes.

A G&A of about $14.4 million.

That's 13.9, Chris.

13 -- 9? Oh I'm sorry, including the R&D. I'm sorry. Yeah.

That's alright.

But you're sort of steadily increasing there, is there anything specifically sort of associated with being a public trade company is that there? Or is there some costs in there that are tied to revenue that I'm just unaware of?

There are costs associated with being a public company that are new to us. Exchange fees, you name it there's a long laundry list of cost that go along with being a public company. In addition one of the other significant cost drivers that we're incurring here in the first half of the year is consulting support on getting ready for SOX 404, Surbanes Oxley 404 compliance. We are an accelerated filer, so we have SOX 404 compliance this year so we're working very hard to make sure that everything is in shape to meet those retirements.

And this is a controls requirement?

Yes.

And so what you're doing, is you -- you've hired consultants here, accountant types to sort of review your controls such that any changes you have to make in order to pass that audit you'll be able to do so at the end of the year?

Exactly. Going through documenting all the controls, testing all the controls and all of our operations globally.

Okay, seems right. And you think that those -- those costs will sort of run through the June quarter but then the peter out toward the end of the year when you just have to go into the audit?

Yes.

Do you have the inventory levels?

Yeah, inventory for the first quarter -- combined inventory is $57.4 million, it's down about $1 million from year end.

Fifty seven point four million from $1 million, and the AR, accounts receivable?

$69.8 million globally and that's an increase from year end of about 9.6 which is pretty well in line with the revenue growth.

Okay and that's just tied, that's tied to the 400 new stores you got out there, et cetera.

Well it's tied to just your billing cycle. As you get higher revenues, and you have billing cycle as revenue grows your receivables grow.

Now you added a couple more stores, this is the last question I'll ask and let somebody else ask but, a few more stores than I kind of anticipated -- 400 stores in the quarter in the U.S. retail side roughly. Was that even more than you guys were anticipating? Is this going to be a front end weighted thing. Should we expect that in a quarterly basis? What are you thinking?

Chris this is Tom Bryant, to answer the first part of the question, yes. It was certainly more than we were projecting for the quarter. We were out on the road show. We had put together a model for this year saying that we would project opening between 50-70 new stores a month in the U.S. going forward so certainly we did much better in the first quarter. And looking out I believe that you know, given what we know today that we would be looking more in line going forward 60 to 80 compared to 50 to 70 before.

60-80 a month now going forward.

Yeah.

And of these stores and other stores, how many have taken Celebrity bed?

We actually are very pleased with our distribution gains thus far. You know we just launched it this quarter, started shipping this quarter and we are in approximately 40% of our furniture retail accounts with that product.

Terrific. Great, thanks very much, guys. I'll let somebody else go.

Thanks, Chris.

We'll take our next question from Raisa Zahaztadah [sp]of Lehman Brothers. Go ahead please.

Good afternoon.

Hey Raisa.

How are you Raisa?

Capital spending for 2004, still $35 million or so?

Yes.

Okay.

We spend $5.1 million in the first quarter.

Okay. And in ah -- would you think that gross margin performance on a year-over-year basis would be somewhat better going forward given the fact that your new plants should be at a higher run rate partly offset by the fact that your sales nets will be more towards retail?

Yes. We expected for the year that gross margin would be down and the biggest hit on that comes in the first couple of quarters of the year on a year basis due to the additional capacity and also because of the bubble that we had in Japan in the first half last year.

All right. Can you give us some color on sales performance in some of your key international market?

We want to give data on that in basically in three categories as far as geography goes. U.S., rest of the world and then -- and then our third party countries rather than going country by country. The rest of the world subsidiaries grew 25.8% quarter on quarter last year. And third party country as a group grew 48.1%.

I see, and how are you progressing on your direct channel marketing efforts in the U.K. and France?

The U.K. as you know we've had DR there for a long time, the same model that we employee here and we're very pleased with that. The new venture is in France of this year and we are doing TV and print testing and we are generating sales there. We want to do further testing to better optimize, find the right message and the right media before we kind of push the button on that. We also plan on doing a DR test in Germany later this year.

Great. Thanks a lot.

Thanks Raisa.

Our next question from Bob Druble of Lehman brothers.

Good afternoon.

Hi, Bob.

Some questions on the advertising. I think you said up 41% globally. Can you give us what it was up in the U.S.? And I guess can you give us an update on your plans for the full year both in the U.S. and globally in terms of percentage of sales a dollar number? And then the other one would be, when you look into some of the investments you're getting, are you still getting the same impressions per month and sort of some of the cost per impressions or what you're getting with these incremental investments you're making?

To answer the first part of your question in the U.S. specifically, our advertising for the first quarter we increased that 43% compared to last year same quarter. As we move forward our attempt is to continue to spend aggressively maintaining our budgeted percent of sales and certainly we expect that the efficiencies that we've been getting historically for our DR business in the U.S. will continue meaning that our needs and our costs per leads and our cost per order would stay in line with where we have historically been.

Okay. Great. Thank you.

Thanks, Bob.

We'll take our next question from the line of Chris Azuber from UBS. Go ahead, please.

Good afternoon. What were the start-up costs of new U.S. -- the manufacturing capacity?

Just looking at strictly start-up costs, roughly a million dollars.

Okay. Great. And as far as retail price points for the three new beds that were launched in the quarter, can you run over that for us?

Sure. Our classic -- our original product, just comparing apples to apples here, you're looking at a queen-sized product, the original is $1500 and the new celebrity that we launched is right at $3,000.

Okay, and what about the European Deluxe?

The European Deluxe, of course it depends upon the currency, but it's similar to our Deluxe which is about $300 higher price point than their standard model.

Okay. Okay, great. And any sense of the contribution of these three new beds to the sales gain in the quarter or kind of the expectation going forward?

Well certainly looking at, I'll speak specifically for the U.S. where we've launched the Deluxe and the Celebrity in the first quarter. The deluxe product attributed about at retail, where we're selling the majority of that particular model, it accounted for about 40% of our mattress value at retail and the Celebrity is tracking at about 10% of our retail business now.

On the Europe side, the impact on the quarter would have been minimal because of the timing of when these new mattresses were introduced in the quarter.

Okay. And as far as the direct you know, sales market overall, U.K., France, Germany, can you give us a sense of how big that market is? I mean, is it generally how people buy in those markets?

Every country's a little bit different. It's not as developed as the U.S. The U.K. is second in the world basically but it's an increasingly accepted form of marketing especially in Germany, France and Holland.

Okay, great. And one final question, if I may. Can you give us any assort of an outlook or update on, you know, a mattress -- a potential mattress product for the Japanese market? I believe, you know, on the last conference call you were potential on track for a sort of a second half '04 announcement?

And we're at the same time as we were, still looking at a -- at second half '04 introduction of a futon product in Japan.

Okay, great. Great job, guys. Thanks.

Again, if you have a question, please press the star and 1 from a touch tone phone. We'll take our next question from the line of George Talupe [sp] of Deutsche Banc. Go ahead, please.

In your EPS expectations, how much of increase in raw material prices have you factored in for the remainder of the year?

In our cost base for the rest of the year we have modest raw material price increase expectation. We have not seen much impact of the recent rise in oil prices, personally due to our continuing increased volume of purchases. But we do -- we do from a protection standpoint have factored in some increase in raw material cost.

From a pricing standpoint, I mean, the reason I'm asking is other mattress companies are obviously mentioning that as being an item of caution, if you will, for their own cost of goods. And I was wondering what's different with you guys so you're not seeing that much of a materialty to it?

One big thing is we don't use steel, we use foam.

I'm talking mainly about the oil prices. Oil price, obviously -- [inaudible] away from steel. Obviously steel is an issue but away from steel.

Certainly oil prices have gone up. We have been able to continue to negotiate very good pricing on our polyoils which obviously are petroleum based and a big factor there is our continued growth rate. We continue to buy more and more volume of materials and so we continue to get the best prices available.

Okay. My other question in the domestic business, what's your view about obviously the growth rate you have there? How would you view it in terms of unit price, or average unit selling price versus volume for the rest of the year?

Well, if we take a look at the first quarter and we look at the mix, we would expect the mix in terms of our models, our higher priced models that we would expect that that would continue to grow at a small rate based on the fact we're continuing to gain distribution on these new models and the average sale price is certainly above the original model so we would expect some benefit from that.

And within the retail channel. But, when you look at the entire business, one thing to keep in mind is retail side we're selling at wholesale prices. We'll have some effective price due to higher priced models. However, retail continues to become a bigger percent of the total business so we don't think that it's going to have a big impact on the total business because on the direct side we're selling at retail prices.

Right.

That mixed shift moderates a little bit of the increase in model pricing.

Right. So it seems you're going to pick up some price increases or average in as selling increases from mix but kind of the lions share of the growth is probably going to be more volume driven for the year.

Yes.

Okay, and my last question do you mind breaking down for us the [inaudible], the term loan versus the bonds outstanding please?

The bonds outstanding is $97.5 million. The remainder of the debt is term loan. And of the -- within the term loans from a revolver standpoint, we currently are using about $9 million in revolvers so that's 97.5 million of the bonds, $212.3 million of senior. Within that 212 is about 9 million on revolvers and that 9 million also includes 4.5 million of LOC's.

Got it. And obvioudly the rest of it is availability right? There is no borrowing base cap you're hitting against?

No.

No. Our borrowing base we have significant room in the borrowing base.

Thank you very much.

Thanks, George.

Our next question will come Omar Asad Lehman brothers. Go ahead, please.

Good afternoon. Wanted to follow up on some of the questions that have been asked. Specifically one thing I don't think I heard you discuss was, in terms of the international growth, I think the international business grew 29% in the quarter, was currency a big factor in that or can you quantify how much benefit you got from currency exchange rates?

Currency impacted the growth rate about 7%.

Okay, great. And in terms of the growing retail network here in the United States, are you beginning to seeing cannibalization there or terms of slots per door or just sale, you know, in terms of comp store sales, are you seeing any slowdown in that respect as you role out at such a rapid pace?

No, we're not. I mean what we've seen is a -- you know, as we've continued to add doors, we've also seen our average slots per store increase and our existing customer base continue to grow as well so we haven't seen that type of cannibalization and it's basically we feel because we still have a relatively small market share and we have complete upside in terms of the size of the market to grow.

That's great.

Are you doing anything with kind of, you know, as you see the slots per door increase, are you doing anything with a shop and shop concept within some of your bigger accounts where you have, you know, more than one slot? Is that something you might do in the future?

Yes, we have. Matter of fact in the first quarter we rolled out a new display case which is exactly that , a shop and shop. We rolled it out into about 700 furniture stores in the U.S. along with corresponding point of purchase materials and it's an all wooden base. It basically allows our partners, our retail partners to display all three models in a very aesthetic way.

Right, right. And what are the plans for that kind of concept going forward? Are you sticking to that with furniture stores or ...?

Right now we feel the biggest opportunity is for the furniture and bedding stores. Those are the -- our customers who have the size obviously where they can accommodate the larger display pieces. But at the same time for our specialty stores, we're also offering a custom-made piece that accommodates down to 1 skew on the floor.

How many skews in the shop and shop and the furniture and bedding stores?

Displays are for three so you could display the classic, deluxe and new celebrity so all three could be displayed and it's built around the mattresses are built around shelving for pillows so that you have pillow displays built into the mattress displays.

Right. Okay, great. Congratulations on the quarter.

Thanks.

We have a follow-up question from the side of Chris Azuber of UBS. Go ahead, please.

Thanks. The traditional steel bed makers have obviously, you know, been having some raw material pressures. What have you seen really in terms of price increases from them or in sort of competition traditional bedding? Have you seen anything?

Looking at some of the industry trade publications, we've seen some articles about different companies, spring companies taking prices as a result of the increase in steel pricing. I don't want to say, exactly, which company to pick in price but it's out there in the public domain.

Okay, great. Thanks.

Again, if you have a question please press the star and 1 on the touch tone phone. We'll take our next from the site of Randy Renfro Eagle Asset Management. Go ahead please.

Great quarter. My questions have been answered.

We'll take our next question from the site of Art Vascome [sp] from CIBC World Markets. Go ahead, please.

Hi, a couple of questions actually. Are you guys seeing any change in your return trends?

Overall in the U.S. we've seen them go down quarter -- this quarter, first quarter compared to last year. And last year overall we were at 9.3% in the first quarter this year we were at 8.4% and we saw our direct response where we're actually offering the trial program, we saw that stay right at about 18% so no change.

Okay. What about average selling price trends? Any change there? I know you try to encourage your retailers to keep it rather, you know, flat, if you will.

Certainly at the retail level we haven't seen anything, our customers are pricing the product appropriately based on the different model so that if you look at the retail price out there, you know, you'll have those three different splits. Was that the question?

Yes. And following up on a question that was two people ago, your sleep capsule, one of your retailers was saying that he sees of his stores with the one with the sleep capsule gets the greatest number of sales. Are you planning to expand that in the U.S.?

That's actually one of our older displays that we provided to our retail partners which was a enclosed environment. But what we have done is this year we moved more to the shop and shop concept and it allows us to get all three of our models on to the floor compared to the space capsule which is the old display model that we had last year it was basically designed for one model mattress.

One thing I would add is that the space cabin concept has proven to be very popular in Europe where we continue to expand that, and although we've had some success with it here, we feel it's really more of a European display.

Okay. Last question, in terms of competition, are you seeing any, I guess, specifically knock off visco brands that are getting extra slots in any of your retail stores? I tend to see a lot more advertising of those myself now.

We're not seeing any impact of the competing visco-elastic mattresses.

Okay. Thanks, guys.

We'll take our next question from the site of Jeff Coblars from Solomon Brothers Asset Management. Go ahead, please.

Hi guys, just curious about your operating rate of your Virginia plant. Can you say what you're running at right now?

Currently given the fact that we just expanded that facility, this month will be right at about 75-80% on mattress sites.

Okay. And then in Denmark, what kind of rate are you running at right now?

Denmark you may recall in the process of expanding our capacity for mattress there. They're currently in the 80s and that project will be completed by year end. It's also on schedule now to be finished by November of this year which will give us again double the capacity there.

Okay. And then, Tom, the last question you were asked about the impact of tet ters putting out epifoam mattresses. When a competitor puts a foam mattress in the same door as yours. Can you say what the impact has been?

We haven't seen any impact. I mean we obviously have seen some spotted distribution out there of some of the knock off mattresses but in those cases, we haven't seen any downturn or reductions in sales per slots in those facilities or those stores compared to the others.

Okay, great. And lastly can you comment what you'll do with your free cash flow this year?

Well, essentially free cash flow for the company goes to pay for the continued investment in the company, capital expenditures for the company. At the end of the year we have within our credit agreement a type of free cash flow sweep where a certain percentage of the outstanding cash will be paid to pay down the senior credit facilities in the following year.

Okay. Thanks very much.

We'll take our next question from the site Nashu Sud of Smith Barney. Go ahead, please.

Good afternoon and congratulations on a strong quarter.

Thank you, Nashu.

My first question is about the new U.S. research and development facility that you were mentioning. In the past your spending on research and development has been relatively limited and your product development around you know, the size or the configuation of your products, you know, increasing the width of the Celebrity bed. And, so -- what can you expect from the facility maybe in terms of spending and also are you going to be experimenting with new foam config... foam formulations perhaps or what's the intention of that facility?

The primary is to have facilities dedicated to North America in terms of responding to the market needs here. As you mentioned up until the first quarter of this year are R&D facility for the U.S. was done -- was in Denmark and all the work was done there so what we've done is we've made a significant investment in the building and the equipment in hiring the people, we're still in the hiring mode right now and our intent is to have all of the research and development personnel at the Virginia facility dedicated to the North American market and keep our same number of people and spending level in Denmark to take care of the rest of the world's needs. And we're really open in terms of how we go about that to sort of answer the second part of your question, our primary guide though, for both departments will be to focus on simply our core business meaning mattresses and pillows. So there's a lot of things that we can do and a lot of different concepts and ideas that we have looking forward in that core business.

I mean, so what sort of issues will we be looking at? I mean, for example will you be looking into how you could reduce the break-in period for the mattress or perhaps to reduce the chemical odor when someone first buys it. Are you going to be looking at things like that or a continuation of the sorts of ...

When we look at our research and we look at the return that we do get back from consumers, those two issues are not -- really aren't issues for us. There's no such thing as a break-in period where the mattress -- some people it takes a little longer getting used to depending on how poor their sleep surface was before. But basically we would be looking for our R&D group to focus on coming up with improvements yet new models, of course, and basically built around the needs of the market and what the consumers are going to want in the future. One of the challenges they will have is, you know, improving on what we have now in terms of our product. It's the best thing on the market so that will be a challenge in itself. But we certainly want to stay ahead of the market in doing so.

Great. And second question is on your selling expenses, now as a percentage of sales, it was close to, I think, 23% for the second quarter in a row. I remember in a previous quarter, Bob, you mentioned there were some elevated selling expenditures that were temporary in nature. The selling expenses are -- they're kind of you know, above the long-term trends and as a percentage of your sales. Is that related to temporary things such as the roll-out of the gallery concept, the store in the store, or are we seeing a trend towards, you know, you folks spending more of your sales dollars on marketing as we go forward?

No. Actually as compared to the first quarter last year in the selling and marketing expenses are actually less of a percentage of sales than last year. So, although there were some costs with rolling out this display in the U.S. but because of the sales spiked so much, the expenses as a percentage of sales is in line with last year first quarter.

Okay so. We can expect to see roughly 23% of, you know, on average, sales going towards marketing expenses in the future as well?

That's correct.

Great. That was it for me. Thanks a lot. Thank you.

Again, if you have a question please press the star and 1 on the touch tone phone. We will pause for last questions to register. There are no further questions at this time. I'll turn it back over to management for closing comments.

Okay. Just in summery, great first quarter. We appreciate your attendance. We appreciate your questions and we're looking forward to continuing to have a great 2004. Thank you and good night.

This concludes today's teleconference. You may disconnect at this time and have a good day.