Tempur Sealy International Inc (TPX) 2004 Q2 法說會逐字稿

Good day, all sites are now on the conference line. At this time I will turn the meeting over to our moderator Mr. Dale Williams.

Good afternoon and welcome to the second quarter earnings call for Tempur Pedic International.. For the management team I would like to thank you for your continued interest in our company and for your ongoing support. My name is Dale Williams; I am 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, our President and Chief Executive Officer and Tom Bryant, our Executive Vice-President and President of the North American Operations.

Today, we will be discussing the company's second quarter results through June 30, 2004. Bob and I have some prepared statements, which will be followed by 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 language in our press release regarding any such forward-looking statements. It is now my pleasure to introduce Bob Trussell, our President and CEO.

Thank you Dale. The second quarter of 2004 was another outstanding quarter for Tempur Pedic International Inc. as we delivered record earnings with pro forma earnings per share of $0.18 or $151.6 million in net sales. The $151.6 million in net sales was a 33.4% increase over the second quarter of 2003 fueled by a 52% growth in mattress sales. We also achieved 43% mattress unit growth and increasing penetration of our higher price products.

We continue to execute our business strategy of further penetrating our existing distribution channels worldwide and to build our global brand awareness. Our sell through at the retail level remained very strong and the retail expansion again exceeded expectations in the second quarter. As of June 30 2004, our products were offered in 3,606 furniture and bedding stores domestically representing a second quarter increase of approximately 495 stores. We are also in approximately 1,500 specialty stores in the U.S.

In addition, in the second quarter we added 170 retail stores internationally in the market served directly by the company. Our combined domestic and international retail channels delivered 55% growth in the second quarter achieving net sales of 106.1 million. In the U.S., the total retail channel grew 65%, while the furniture and bedding stores grew 102% to 52.2 million.

During the quarter, we had a planned major systems upgrade to our Oracle platform, which impacted our direct response business in the U.S, which declined 8% year-over-year in net sales. This upgrade temporarily limited access to our direct response database, which caused delays in processing leads and conducting chain of influence mailings for a period of approximately one month. However, I am pleased to report that the system is fully operational and these direct response business finished the quarter with an outstanding June and is tracking well ahead of last year in July. While our direct response growth rate may slow as the retail distribution expands we believe the second quarter results in this channel were an aberration.

The company had an outstanding quarter internationally with 25% growth in net sales. And that was driven principally by a 36% unit growth in mattress sales. Our two new mattress models launched in Europe this year have been very well received and are contributing to this growth. We are experiencing growth across the world that more than offset the anticipated decline in Japan.

Overall our revenue growth continues to be driven by the retail channel expansion and by forward investment in sales and marketing to build brand awareness throughout the world. In the second quarter, our global advertising expenditure increased to 15.7 million, a 45% increase over the same period last year. We believe that this was the right level of advertising expense to support our rapidly expanding business and drive continued strong growth in the future.

On the product front, the new CelebrityBed continues to gain momentum and represented 13% of our domestic mattress sales in the quarter, up from 6% in the first quarter. It is now featured in 48% of our domestic retail account. In addition, the Deluxe Mattress continues to increase at a percent of domestic mattress sales as well. Thus our higher price point models have been very well received by the market and have increased our average selling price despite the pressure of the offsetting channel mix within the business.

Also we have focused some R&D resources on our pillow business and expect to launch two new pillows and complete the rollout of our new packaging in the second half of the year to refresh the product line.

As the business continues to expand, we are taking appropriate action to ensure that we are able to serve the growing market demand. The Denmark plant expansion is progressing well and it is scheduled to be online by the end of the year. In addition, we have completed the design of our new plan on Albuquerque, New Mexico and have made decision a build a facility larger than originally conceived to provide the capacity to serve the fast growing US mattress market.

We will construct a 750,000 square ft. building with initial mattress capacity similar to our Virginia facility but with sufficient space and flexibility to further increase matters production when required. The total cost of the new facility is expected to be approximately $90 million. Our current plan is to begin construction early next year and have the initial capacity come online in the middle of 2006.

We are very proud of the performance that the company has been able to deliver in the second 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.In addition, the systems -upgrade, positions our IT infrastructure to support our anticipated growth for years to come.

Based on the second quarter results and our current expectations about the continued performance of the business for the reminder of the year, the company is reaffirming its guidance for 2004. We except full year net sales to be between 620 million and 640 million and pro forma fully diluted earnings per share to be between $0.70 and $0.73.

In addition, based in part on strong performance to-date for the month of July, the company currently believes that it is more likely than not at the pro forma diluted net income per share for 2004 will be in the upper half of this range. The company knows that its 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. Let's first talk a little bit more about our sales performance. As Bob mentioned for the three months ended June 30 2004, the company achieved net sales of $151.6 million compared to $113.7 million for the same period last year. This represents an increase of $37.9 million or 33.4%.

We have experienced significant growth in both our domestic in international businesses as we continued to execute on our core strategy of penetrating existing channels and investing to build our global brand awareness. Domestic net sales grew to $91.7 million in 2004, as compared to $65.6 million for 2003, an increase $26.1 million or 39.8%.

And international net sales grew to $59.9 million in 2004, as compared to $48 million for 2003, an increase of $11.9 million or 24.6%. The growth in domestic net sales, which accounted for 60.5% of our second quarter net sales was attributable primarily to an increase in the retail channel of $27 million. And the growth in international net sales was also attributable primarily to growth in the retail channel internationally of $10.5 million.

Mattresses continue to show outstanding growth as mattress sales grew 52% in the quarter while pillow sales were flat. We note that pillow sales in the second quarter last year included unexpectedly high sales in Japan, resulting from unusual public relations exposure the company received last year from an unsolicited product endorsement by a major sports figure.

Regarding profitability, in the three months ended June 30, 2004, GAAP operating income was $33 million compared to $27.1 million for the same period in 2003, a growth of $5.9 million or 22%. Excluding stock base cotton fashion expenses $1.5 million that was previously disclosed, our pro forma operating income was $34.5 million or 22.7% of sales in the second quarter of 2004, an increase of 27% year-over-year.

GAAP net income for three months ended June 30, 2004 was $16.9 million compared to $14.7 million for the same period in 2003. Pro forma net income was $18.4 million or $0.18 for fully diluted share compared with $14.9 million representing a growth in pro forma net income of $3.5 million or 24% and 12.5% growth in EPS.

Fully diluted share count 103.1 million shares in the second quarter 2004 compared with 93.7 million shares in 2003. We considered this to be an outstanding profitability growth, given a tough comparison against the Japan bubble of last year, which contributed significant pillow volumes with the very little operating cost required to support the surge. Pro forma net income excludes the previously disclosed stock based compensation expense.

The growth and profitability for the business was principally driven by the increased gross profit of $18.3 million on higher net sales. Gross profit for the quarter is 53.3%, which was better than expected due to factory productivity and purchasing initiatives.

Year-over-year, the gross profit rate declined from 55% as projected primarily due to the changing mix within the business. The retail channel contributed 70% of our revenues in the second quarter 2004 compared to only 60% in the second quarter 2003. The retail channel mix affects gross margin and now we are selling in to the retail channel at wholesale prices versus the full MSRP that we receive in our direct channel.

Operating expenses for the second quarter 2004 were increased relative to Q2 2003 as we continue to drive investment in the business to support our growth. Additionally it is important to know the G&A expenses in the second quarter included approximately $1 million in cost associated with our Sarbanes-Oxley 400 compliance program as we have accelerated the schedule to meet those requirements. And till, we now believe the compliance program will cost approximately $2 million in 2004. But we expect that most of these will be cost non-recurring in future years.

In addition to the operating results of the business, I want to address a few key balance sheet metrics. Our total outstanding debt as of June 30, 2004 was $311.5 million, a reduction of $65 million from December 31, 2003. Net debt as on June 30, 2004 was $286.4 million as cash-on-hand at June 30, 2004 was $25.1 million. Net accounts receivable grew $14.9 million from year-end to $75.2 million at June. Inventory declined from year-end $3.5 million to $54.8 million at the June close. And accounts payable to declined $2.4 million from year $23.5 million at the end of June.

Second quarter depreciation and amortization cost was $7.1 million. To recap our presentation we continue to execute on our strategy of focusing on core products further penetrating in to existing channels. Continuing to build our global brand awareness and investing in the business to support growth. We delivered outstanding second quarter results with 33.4% sales growth and 23.9% growth in pro-forma net income and we have reaffirmed our guidance for the total year 2004. We are off to a great start in 2004 and expect a strong performance to continue. This concludes our prepared remarks and we will now take questions.

If you have a question at this time [OPERATOR INSTRUCTIONS]. We will take our first question from Christa Zuber (ph) of USB.

Hi, great job guys. Could you just give us an update on the competitive environment both in terms of you know visco players and the traditional inner spring and you know what you are seeing overall in pricing thanks?

Sure, this is Tom Bryant. We really haven't seen any significant change in the competitive market for visco elastics, certainly since the last quarter we haven't seen any other competitors in the mattress category gain any type of traction and we at this point haven't seen any new entries that have gained any significant distribution. So, I guess what the overall impression we have right sort of status quo.

Thank you. And what about just follow-up if I may, receptions to the retail display the shop-within-shop concept and your proposal for somewhat of a smaller concepts for those you know - smaller square footage areas?

Right, well we have now placed about 800 of our three bed galleries that displays our three different models. We placed a 150 of our two bed galleries and we are rolling out an additional 500 over the next two to three months for the two bed. So it's been very well received.

Thank you very much.

Our next question comes from Chris Hussey of Goldman Sachs.

Good evening gentlemen.

Hi, Chris.

Hi, Chris.

Two questions. One looks like the same store sales on your US retail business may have declined Q over Q. Just trying to understand that is it have to do mainly with the timing of when you brought in the new stores or do you have any comment in terms of same store sales growth?

At that point we've never reported same store sales Chris, I am assuming you mean sales per store?

Yes, I can do average sales per store. If you take the average number of stores and then you take the revenue number of 52.2 that you gave us here.

Right.

So, when you add almost 500 stores the timing of when those stores come on line has a big impact on a one-quarter basis. A big part of the stores that we added came in later in the quarter. So, it is skewed a little bit there.

I mean Dale is your answer to that implying that while you don't report same stores sales you may know what same sale stores are and if you were to report same store sales we would not see it declining?

Correct.

Thank you. Second questions then is on your advertising expense or why don't just talk about the total selling expense as a percentage of sales. It did come down again Q over Q. very, very good job their couple of 150 basis points or so. You know was that a planned sort of slow down in terms of advertising expense because you know you were having trouble with the Oracle system and your direct response you are not going to be able to full fill orders. Or is it tied to ad rates or I can say more ad supply getting squeezed out with the election year any comment there?

No, it was more by design. If you look at it our direct response advertising we traditionally have heavier program in the first quarter in order to get a substantial leads that we have done can mine for the balance of the year. So, we actually spend more in the US on advertising in the first quarter but as I said that's how we budgeted to the year.

OK, I will let some other's ask questions now. Thanks so much.

Thanks Chris.

Our next question comes from Joe Altobello at CIBC World Market.

Thanks. Good afternoon.

Hi Joe.

Just a quick update if you could on what's going on at Brookstone. Obviously pillow sales were down year-over-year and sequentially I was curious if they changed some of their demos. And if I could follow up on that this is probably a tough question but if you guys could estimate what the Oracle upgrade will they cost you in terms of direct response sales in the quarter?

OK on the first one - we don't talk specifically about Brookstone since they are a public company and we've chose not to do so. We classify Brookstone along with our other specialty retailers that and that we segment our overall retail business into furniture embedding and then specialty. So we could talk a little about the specialty if you like. Your second questions in terms of we have put a pencil to it. We believe that it costs to some where between $2.5 and $3 million in revenue during the quarter.

OK great thank you.

Our next question comes from Bob Druble of Lehman Brothers.

Hi, just two questions for you. The first one is - when you look at the - you know the expansion of the new accounts. Can you just give us an idea how big your largest account was may be for the second quarter year-over-year and for the first half of the year, year-over-year, where you are right now?

Well, we are still opening a variety of accounts meaning, we still allow monetize as well as account with multiple locations we open some accounts that had 83 stores to that particular accounts and some down as small as one. But I would say, you know, if you look at 83, 45, 35 that were pretty average.

I guess how big is Brookstone now in the U.S. as a percentage of your total business and how much as you depended upon Brookstone declined as this year has progressed?

Yes, but Brookstone continues to be little bit less than 5% of our business now, whereas the year ago they were about 9% of our worldwide business. So, the customer concentration around Brookstone as we have talked about declined almost on a daily basis just for some additional contacts, as we expand the distribution with for some additional contacts of our top five single customers globally and the same quarter accounted for 13% of our revenue, where a year ago it was 22%.

Great.

And significance expansion of the business in terms of presents and new stores contributing a lot to us.

OK. Can you elaborate little bit more on the markets in Asia and may be the full time ride in Japan and in terms of you know where you are in your process and sort of what we should be looking for?

Yes, Bob we are testing now, consumer testing with various models of the Futon and we believe we are on schedule for a second half of the year roll out of the Futon in Japan.

OK and then one final question. You know, within lot of the industry at the medium stuff there is being a lot of talk about the new flammability issues. Can you just give us an update in terms of where Tempur Pedic, in regards to be in compliant on many of these?

Sure, certainly, currently we are in compliant with all State and Federal regulations as it relates to the standard. We are also working very diligently and have done an anticipation of those standards changing. And right now that the best of our knowledge is that is the change will take place first part of next year and of course, our plan is to change our products so that we are also in compliance by that time.

Great. OK thank you very much.

Thanks Bob.

We will take a follow up question from Chris Hussey of Goldman Sachs.

Hi, guys, on the U.S. pillow business, may be you could just comment a little bit it was it looks to me it was down a little bit -anything caused in the U.S. pillow business I know I cannot understand how about you might sue in Japan but you would have affected the U.S. side?

I think we had a couple of things happening. One is that we have some of our larger customers just timing on when the order falls over three months period, if you look quarter-to-quarter that certainly can have an impact. We also frankly felt that and have for quite a while that we needed to refresh our product line, we haven't introduced a new pillow in over two years the packaging hasn't been changed in almost five years. So, we have been working on both the doors and as Bob mentioned we are in the process of rolling out new packaging, which we think will have a very favorable impact on the shelves and then rolling out two new pillows in the back half. So I think it's a combination of addressing a stale package as well as new product that is going to help us going forward.

Great, thanks guys.

Our next question comes from Michael Cox at Piper Jaffray.

Yes, thanks guys for taking my question. You commented on the Celebrity bed demand and that on that product line. Could you comment on demand trends at your other price point categories?

Sure, if we take a look at our Delux model for example, it's continuing to do exceptionally well in the second quarter. It accounted - the Delux accounted in the U.S for about 39% of our volume and we are continuing to get excellent penetration. We are now up to about 74% distribution on the distribution, on the Delux 48% on the Celebrity. So what we are seeing is that the consumer is very accepting Tempur Pedic new models and higher price points.

OK, and are you still targeting at 60 to 80 new retail outlets per month given the out performance you had in the last two months?

No, I mean given the fact that we you know we are right at 400 in the first quarter, 495 in the second quarter. We are now changing that estimate between 90 and a 100 per months going forward for the year.

OK, great and then one follow up on the model, Capex for the second quarter and any guidance for the full year?

Yes, Capex for the quarter was - for the quarter was about $8.8 million or 10.8 year-to-date. For the year our Capex expectation is still to be in the $30 million range, little bit less than that.

OK, great thank you a lot guys.

Our next question is a follow up from Christa Zuber of USB.

Hi, yes could you just give me sense of the scope of the Futon roll out, whether its just for Japan or you know regions beyond that and number of stores?

Yes, it will be initially just for the Japanese market but we believe that if it is successful, it would be something that will roll out to other Asian, third party countries that we sell to and including eventually China.

OK, any sense of number of stores at this point?

The number of non-Japanese stores?

Well, actually Japanese stores.

That's the beauty of the Futon for us is we have the distribution there already. So, it is not going to be very difficult for us, we have stores hungry for new products and when we find the mile leverage which has been that is the optimal product for that market. We will be able to place it in just about all of our Japanese stores very quickly, which is over a 1000 stores.

OK, great and could you also just give us an update on what you are seeing on the raw materials side? Thanks.

We really have not seen much change in raw material pricing. We actually from a purchasing standpoint had very - great deal of success I should say in terms of some of our sourcing by changing our vendors and put some of our covers in some of our textiles. So overall, I would say we really haven't seen much change at all in the second quarter.

OK, thank you.

Our next question is a follow up from Steven Kim with Smith Barney.

Hi, good afternoon, this is actually Nis Usad (ph) for Steve.

OK.

Hi, I wanted to follow up on Chris's question. Now you opened about in the U.S about 400 stores, I believe in the first quarter you said and about 500 stores in the second quarter and yet your sales, if you look at them on the U.S retail channel were basically flat. So can you help me to understand that discrepancy is that are going to correct at some point in time or we seeing something that is declining that is off setting the tremendous growth in beds?

I don't know where you have seen the sales and retail being flat.

Well, I am looking at the U.S. retail channel, about 68 million in the first quarter and about 69 million in the second quarter.

The furniture store is what we were talking about and that was 82 million in the -- excuse me -- U.S. is 52.

Yes.

Went from 49 to 52. Quarter to quarter.

Yes, furniture retail stores.

Quarter-to-quarter

I am sorry, can you repeat that it from 49 to?

So 52.2.

OK, so that would be an increase - again that would be I mean you are increasing your stores at a rate of about 15% or so and that sales growth is less than 10%. So what kind of?

7.

I am sorry.

It is about 7% growth.

Right, so then you are speaking of - you know it depends on the timing of our stores and when you are opening them. So what's especially considering that you are increasing the price point that you are selling at this is well with the CelebrityBed in the higher price point. Why is the dollar sales growth lagging the rate of store openings?

For the new stores that are opened are just getting their initial floor models and they are just getting going. So their stores, the new stores are lower sales per stores than a more matured stores. So you see you can't see say because we increased stores by 50% that we had an increase sales of 50%.

OK, so about how long does it take? Take like six months or nine months or how long does it take to get them up to the kind of full speed?

Tom.

I think it's somewhere between three and six months, I mean by the time we get the get the floor models out and we also send our trainers into the store to train that people there is a lag time there to getting the people up to speed in the stores and how to sell the products. So somewhere between three and six months is what we normally see.

OK and the second question is on the productivity improvement that you mentioned. What kinds of things are you doing to improve your efficiency and what kind of impact do you think that can have on your gross margins?

Well, a good example is as you know we expanded our facility in Virginia doubling our mattress capacity and one of the things that we have seen is that we have been able to have more throughputs. We have had ways based on some team based approaches to manufacturing up there where they come up with initiatives to take cost out, to improve that overall throughput on mattresses as well as pillows. So it's lot of those, just they have an ongoing process stand form both in Denmark as well as in Virginia. The managers at those facilities have ongoing cost reduction projects that they are continually looking at.

Right, so are you targeting any specific dollar amount or percentage amount from these initiatives or is it just a general ongoing thing?

Well, it is a general ongoing; they do have specific internal targets that they need to hit for the year in terms of those cost improvement targets.

OK. Great that was it for me thanks.

Our next question is a follow-up from Joe Altobello of CIBC World Markets.

Thanks, just to stay on the new store-opening question for a second. I am not sure if you talked about this earlier, but what's exactly driving the rapid pace of new store openings and I guess the follow up to that you guys at the end of '04 will be in many more stores than you expected be at when you started the year, so I am interested why you are not raising sales guidance, are these smaller store less reductive stores are entering?

I will answer that. The first part of that in terms of why we think we are accelerating is basically is helping of course with the amount of money we are putting behind marketing initiatives and the brand awareness. It is becoming a lot less difficult to get the product in and we are having more accounts contact us compared to in the past where we had to go out and knock on the doors. So just the excitement within the industry around this brand and around the product is certainly helping us open doors faster. We've also invested heavily and expanding our sales store organization. We have got more bodies on the street. More people out there calling on the account. So it's a combination of resources that were dedicated both on the marketing side as well as the sales side. I think it's helping. And on the other question I would just say that we average guidance after the first quarter.

Yes, but you also entered many more stores in the second quarter and just raised your second half into a door estimate as well, so I am just curious if you are just being conservative here?

I think we've taken into account some of the run-rate from the first quarter and we don't want to predict that we will continue to grow at this rate that we have been, which is an amazing rate of last six months.

OK. Thanks.

Our next question comes from Keith Hughes of Robinson Humphrey.

Thank you. Reports of the channel saw at least for the traditional innerspring producers some weakness sort of middle part of the quarter. Did you see any variation in your retail sales here in the sleep shops or in the furniture stores or was it fairly consistent.

Well, we have certainly have not seen a weakening although if we look while we don't report same-store-sales, we look at the accounts based on age and you know been pretty consistent with the growth that we see from our existing accounts and obviously the new doors that we got into has added to that but we really didn't see a weakening at retail level.

OK. And finally with the California standard coming up at end of the year are you anticipating any kind of price increase on products to defray some of the cost of that?

We are still looking at the cost of the final solution. So if we have a cost increase as a result of the new product we tell that we would be able to pass it along, we probably would.

OK, thank you.

Our next question comes from Greg McKinley of Jordy & Company.

Hi it's actually Serica Sony (ph) for Greg McKinley. I was wondering if we could get some additional clarity on the channels within the retail channel, the furniture and specialty i.e. year-over-year comparisons for both of those segments or a percentage break down for the quarter?

Furniture and bedding channel within retail was up 102% year-over-year, in the US, globally was up 81%. The specialty channel within the US on a quarterly basis was 4% over last year.

OK, great thank you.

Our next question comes from Brad Terpech (ph) of Sigma Capital.

Hi guys.

Hi Brad.

Can you give with me cash from operations you were for the second quarter please?

We will release that next Q.

Can you tell me how what the trajectory of the healthcare segment is, I know that you had a couple of big accounts and I was wondering what the overall turn of business is there?

The healthcare business overall globally was up 6%. It was up 13.5% for the quarter in the US. The healthcare market in the US is a market that is kind of lumpy. It goes up and down depending on accounts. It is something that we long-term think will be big business for us. It's still relatively small, you know $2.6 million in the quarter for us. But it is something that we have a lot of faith and belief in, that long term is going to be sizable business for us.

OK, can you tell me what you think the tax rate is going to be for Q3 and Q4?

Well the effective tax rate for the company for the year on a GAAP basis is 38.5%.

OK, then as you guys produce more and more mattresses I was wondering if you give out a sort of plan utilization or you can still me how many mattresses you could produce at existing facility, so I could back into it myself?

Yes,

Go ahead Tom

I was just going to say in terms of utilization we were at our Virginia facility, we are about 70% for the quarter and our Denmark facility we were about 76% utilization.

OK. I was recently reviewing store front numbers as well and I was going over the last call and you guys have talked about store fronts in North America, then also in International, could you just clarify you know when you said, you added 495, I think this quarter. Did you add international store fronts too, or does that include within the whole number?

No we added 170 additional stores internationally as well.

So the total store fronts was closer to?

670.

670, 665. OK and how is that trajectory gone and are there any markets on a country basis that are growing faster than others?

Yes, we have some very under penetrative markets over there. Some of the bigger one France, certainly Italy, Germany are the more matured markets in Scandinavian regions. So, every country is kind of different that we have great business Spain, which is really booming this year and Benelux business, also is really doing well. So, it's tries to answer, you know, as a group.

OK. And then I guess one last question and then I will let somebody else ask. There is, kind of, you were worried about the productivity of new stores? It tells what you guys have done as far as hiring new trainers and a sort of new support personal to roll out these stores, both of you can give it to me qualitatively and quantitatively in terms of how many trainers you have at the end of the year and how many you have today?

We have today, think we are in the process of running it out to 18 trainers we had at the end of the year. Even we had to within 14 to 15; I don't have the number in front of me. But we also recently hired in addition to the trainers, we recently hired very experience manger who will be overseeing the trainers, as well as continuing to recruit trainers. We found that adding dedicated trainers, who are all of the new retail stores, certainly has an excellent pay back. So, we are continuing to invest in that and we are continuing to expand the sales organization as well.

And I would just like to add, we are not seeing any slow down in the productivity of the stores. We had a tough month in April due to the systems upgrade, which affects not only DR but the other channels as well. But our sale per slot has come back very strong in the month of June and is tracking very strong. So, we don't see any slow down in productivity of stores.

OK. I know it's going to early on in the roll out on retail for you guys. I know it's early on but just a couple of years, I mean do you have any idea what you expect the optimum, you know trainer per store, trainer per account ratio to be? So, I imagine that's just a turnover guy selling mattress is pretty high?

Yes we don't actually have a ratio. What we are looking at is continuing to train and hire people as we expand the store base but we don't have a certain ratio, lot of depends on regionally, you know 1%, if we have a concentrated area with person who has less traveled, that comes in to effect. So, really don't have a ratio going forward, we are just, basically we have given the retail management group an open check book to hire whatever number of people they need to make sure that the training in the productivity continues.

OK, thanks. And actually one last thing, anything you guys are worried about?

No.

All right and have a good day.

Excuse me. Our next question comes from Brandon Elliot of Fried Associates (ph).

Good afternoon gentlemen.

Hi, Brandon.

Just real quick, the cost associated with the plant expansion in Virginia was any of that held over in to this quarter?

Yes.

OK. And how about cost associated with the Oracle - although you mentioned you probably lost 2.5 or 3 million in top line, any additional expenses associated with that?

Given the nature of the upgrading the bulk of the costs are capitalized in the systems but there is some operating cost that goes with it and that was incurred in the second quarter.

Not material amount though?

No.

OK. The Northeast, the Rockaway exclusive that expired - does that expire the first of this month or the end of this month?

It is at the end of August.

End of August. Are there any more discussions ongoing about additional retailers in the Northeast?

We are always evaluating each individual market. So we will continue to look at the Northeast in terms of coverage and in terms of having the right desk for the product line.

OK. Last question on the variability in the ad spending could you guys explain that a little bit more just on I think you talked -- you touched briefly on the seasonality of it. But how about just on the variability of it quarter-on-quarter and may be what the ad spending was second quarter versus first quarter?

Yes, I mean I will talk a little bit about the US, it can vary quite a bit but what I was referring to earlier is that the nature of our direct response business is very cost effective to heavy up the advertising in the first quarter in order to get an influx of leads and then throughout the year we can mine those leads meaning that we can do our chain of influence mailers out to those people to influence their buying decision. So we want to get as many names into our database as early in the year as possible. And that's one of the reasons why we start off with a heavy up advertising in the first half. You know if we look at it on the first half overall we have stayed right at in the US as a percent of our sales about where we were last year right around that 13% rate, 12.6. I think was the exact number for the US for this year in the first half. But that allowed us to increase our advertising spend by 44% even though the percentage stays constant.

OK. Great thanks.

Our next question comes from Omar Sadd (ph) of Lehman Brothers.

Thank you. Couple of quick questions, wanted to see if you could kind of give us an update on what you are seeing in the return rates, product returns. If there any trend happening there and kind of what you are running out now?

In the US where you know we have our direct response business. We continue to see those returns but because of the growth in our retail channel as a percentage we continue to see it come down so for example in the second quarter overall it was 7.6% of sales compared to the second quarter of the last year, which was 10.5%.

Great. Also wanted to talk about you know, your international growth was obviously was pretty strong in the quarter. Can you give us ideas what the impact of you know what the benefit was from currency translation?

Yes, we had about 4% impact of FX in the quarter. So that was down significantly from the first quarter. FX contributed million and a half less in second quarter revenue than it did in the first quarter and that was due to last year the dollar really started to decline in the second quarter. So the year-over-year comparison on the dollar - it is against a much weaker dollar.

And I just want to follow up a little bit. You know, in a lot of the trade magazines you see a lot of discussion about lot of different smaller operators kind of putting their hands, I mean they are trying to make their visco-elastic play with knock-offs and various types of competitive mattresses in your category. You know I wanted just kind of - if you give a little more color. I know you said that you are not really seeing any of these guys give any traction. What is your kind of approach to the competitive side of the strategy?

Well if you look at the amount of money that we are spending to build the brand awareness and to establish Tempur Pedic brand in the mind of the consumer. We think that is probably the best defense that you can possibly have and that's one of the reasons why as you mentioned when you do see an occasional competitor trying to enter the market with a knock-off type of product. The reason you see them in the trade publication, they are just not going to have the capital to trying his best in consumer advertising. So what they are hoping is by running a couple of ads they think in trade publications that are relatively cheap, that that will give some validation to their products. But basically postioning in as we need to so we think as long as we continue to and have to build this brand awareness and becomes synonymous with visco-elastic products, we continue to expand our distribution base throughout the country and we continue to be the number one product on the floor, in terms of return on the retailers investment, those were going to be very difficult barriers for anyone to penetrate.

Great news. So, none of your retail partners are coming back and saying "you know we have these other guys coming to us with the visco-elastic product, that's you know cheaper than yours or whatever" you are not getting any of that sort of.

No we are not.

Yes that's great, great thanks.

Our next question comes from Kevin Ballers (ph) of the Tiger Management.

Hi guys how are you?

How are you Kevin?

I have two questions. First of all I think you alluded to 15.7 million in advertising and I am wondering if you could tell us how much of that was in the US versus internationally?

Sure. That was 10.5 US and 5.2 rest of world.

OK. Could you give us an insight on - I know you mentioned that there was I guess some lost sales day with the systems issue and even if you have to resume those sales were there, I mean the growth in that area isn't really robust. I know you are working very hard to increase the sales in that area, since it is I guess, the most profitable sale for you. So you know even withstanding that glitch is there, was there something else unusual that is happening or is it such a small base or just much more lumpy, could you give us some idea there?

Certainly the system was as we said a major factor. The only other factor that we had in the US, with last year looking at the base year during the quarter, we ran a very successful promotion in DR, which was the 10th year anniversary of the company. We spent a lot of sizzle around that and that has really created a sort of a bubble for DR a little bit for last year. And it was our best quarter of the year, last year but I think to Bob's point on the system and DR was what we saw in June and what we are seeing in July is more back to the normal rate of quarter intake for that class of trade.

OK then finally, could you talk about may be is there an opportunity - quite bit of sales in the department store channel. Is there an opportunity you think for you to sell your products there or this is kind of nature of the way department stores work wouldn't really fit in with your no-promotion strategy?

Yes, certainly no promotion or discounting would be the barrier but also the fact that and in not all of these department stores but generally speaking you don't have a lot of sales people on the floor and the knowledge base of those individuals so, the more educated the retail clerks are the better it is for our product. But I think the no discounting and some of the promotional policies that we have in place would also be difficult to overcome.

Great thank you.

Our next question comes from Susan Haeger (ph) of Forstmann-Leff.

That was close. Could you just explain what the expenses to Tempur Pedic are for rolling out new stores and I am wondering with such an aggressive ramp up if there were some excess costs this quarter versus last quarter of the year before or actually year-over-year?

No, not really, I mean what we have is since we don't pay for starting of the product on to the floor, we don't pay any up-front cost to the retailer, there is no incremental cost we just have the normal type of cost associated with our sales organization for going out and opening up the accounts that once the accounts are open we ship them the product, so there is not really any incremental cost for opening new doors to us.

That's pretty much just the trainers.

Yes, I mean it's the trainers - in the sales organization on the commissions of the product but that is all built in to the budget as well.

OK, thank you.

Our next question comes from Randy Renfroe of Eagle Asset Management.

Hi, guys.

Hi Randy.

Hi Randy.

Good, can you talk a little bit about displays I don't believe I have heard you speak to that just in terms of the roll out that you've had just on the slot basis and also on the 495 doors that you have you shipped to all of those by the end of the quarter?

On the first question, our roll out of our three bed gallery we are up to about 800 of those out into the retail market we didn't start it during the quarter rolling out our two bed galleries to about 150 stores and our plan is to rollout an additional 500 over the next couple of months of the two bed galleries. So that is sort of where we are with our display pieces. What was your second question?

It was related to shipping to alternate source.

Right have we ship to all (inaudible). We certainly when we opened up the account it may not in those situations where we have multiple doors as we said before timing on those -- some of those came at the end of the quarter. We would not necessarily be in all of those doors towards or with the product at the end of the quarter. But generally speaking, once we open them we are in there within two to three weeks.

Right, thanks.

We have no further questions. I would hand back over to management for closing comments.

OK, we thank you for your support and your extension and again we feel like we had a great quarter. We are continuing our momentum and we look forward to talking to you again in the future. Have a good evening.