Tempur Sealy International Inc (TPX) 2004 Q3 法說會逐字稿

Welcome to the Tempur-Pedic International third quarter conference call.

At this time, all participants are in a listen-only mode.

Following management's prepared remarks, we'll hold a Q&A session.

To ask a question, please press star followed by one on your touch-tone phone.

If anyone has difficulty during the conference, please press star zero for operator assistance.

As a reminder, this conference is being recorded October 21, 2004.

I would now like to the turn the conference over to Harriet Fried of LHA.

Please go ahead, ma'am.

Good afternoon and thank you for participating in today's conference call.

Joining us from management are Bob Trussell, President and Chief Executive Officer; and Dale Williams, Chief Financial Officer.

Tom Bryant, Executive Vice President and President of the North American Operations, will also be available for questions.

Before we begin, I'll read the Safe Harbor statement.

Any statements made by Tempur-Pedic International during this 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 involve risks and uncertainties and that actual results may differ due to a variety of factors that could adversely affect the company's business and prospects including economic, competitive, operating and other factors discussed in the company's filings with the SEC.

Any forward-looking statement speaks only as of the date on which it is made and the company undertakes no obligation to update any forward-looking statements.

In addition, I'd like to note that some of management's comments may reference non-GAAP financial measures.

A reference to the most directly comparable GAAP financial measure and other associated disclosures is contained in this afternoon's earnings release which is posted on the company's Web site and is being furnished to the SEC on Form 8-K.

With that, I'll turn the call over to Bob Trussell.

Bob.

Thanks, Harriet.

I'm pleased to be talking with you today after another exceptional performance by Tempur-Pedic International.

We think our results for the third quarter of 2004 and for the first nine months of the year demonstrate clearly that our company is the leading producer of premium mattresses and pillows worldwide.

We began creating our category in 1991 introducing products that provide greater comfort and sleep quality.

And over the last several years have been expanding steadily by driving awareness of the Tempur and Tempur-Pedic trademarks through our targeted advertising campaign and by significantly broadening our distribution.

So, it's very satisfying to take stock today to see how far we've come in such a short time.

In the third quarter, Tempur-Pedic International again delivered a record performance achieving 181.7 million in net sales and pro forma earnings of $0.23 per share.

This represents a 47% increase in sales over last year's third quarter and a 93% increase in pro forma earnings per share.

These results reflect the success of our overall strategy to further penetrate our existing distribution channels and to build our global awareness.

An important source of growth was our sale of mattresses for which dollar sales increased approximately 71% while unit sales rose approximately 52%.

Those of you who have followed Tempur-Pedic for some time know that we began introducing our mattress to mattress shoppers in 2000.

Before that we'd been selling in specialty stores.

Good accounts for our pillows, but not places where you're likely to find many mattress shoppers.

But in 2000 we began introducing our mattresses to mattress shoppers in furniture and bedding stores and the product category began taking off, especially as we launched new designs.

In the third quarter, two of our most recent models - the CelebrityBed and the Deluxe Mattress - represented a total of 55% of our domestic sales, up from 52% last quarter and 38% in the first quarter.

What's especially significant about this trend is that the higher price point models have increased our average selling price despite the pressure resulting from changes in our business channel mix as more of our sales come from furniture retail at wholesale prices rather than direct at full price.

In the third quarter we grew across all four of our sales channels: retail, direct, health care and third party.

Our growth was especially impressive in furniture and bedding retail where sales increased 108% to 71.2 million.

We generated this growth not only by adding new accounts and new stores, but also by generating strong growth in established accounts.

We believe we have been very strong - we believe we have very strong opportunities for continued future growth in this channel from both established accounts and new store additions.

As of September 30, 2004 our products were offered in approximately 3,900 furniture and bedding stores domestically, representing an increase of approximately 300 stores.

We were also in approximately 1,500 specialty stores in the U.S..

Additionally, we had a placement in approximately 280 retail stores internationally.

As I discussed earlier, Tempur-Pedic is not itself a retailer and therefore does not track same store sales.

However, we do monitor our sales in the U.S. furniture retail markets by customer accounts.

And we distinguish between sales from established accounts and sales from newly added customer accounts.

Established account sales are defined as sales to customers that the company has opened for at least 12 months.

We expect our established account growth for the full year 2004 to be between 40% and 45%.

We are very pleased with the continued growth we are experiencing in these established accounts thanks to our superior product, increasing brand awareness and the success of our new products.

Now, in addition to delivering outstanding financial results, we had a number of important achievements in the third quarter which I would like to highlight.

First, I'd like to note that in August we completed the amendment and restatement of our senior credit facility.

That amendment included a 75 basis point reduction in interest rate that the company is charged on approximately 220 million of senior debt.

That also included a significant relaxation in a covenant structure consistent with progress we have made as a company in revenue growth, profitability and deleveraging.

For example, we no longer have a CapEx covenant.

As you can imagine, in a company that's growing as quickly as ours this was an important improvement since we need to make sure that we are adequately addressing capacity needs so that we can sustain our growth rate.

Second, in September we broke ground on a new plant in Albuquerque, New Mexico.

We are constructing a 750,000 square foot building with initial mattress capacity similar to our Virginia facility, but with sufficient space and flexibility to further increase mattress production when required.

We had originally planned to begin construction early next year, but we elected to accelerate our schedule and expand the plant design in order to meet the growing demand for our products.

We expect initial capacity to come on line in mid-2006.

Third, we continued to receive recognition for the quality of Tempur-Pedic's products and internal processes.

In September, our entire line of mattresses received the "Good Housekeeping Seal of Approval."

We are honored to have earned this latest endorsement which validates our own stringent quality control standards.

Since 1909, the "Good Housekeeping" Seal has been a highly recognized statement of the magazine's well known consumers' policy.

That policy provides that if a product bearing the Seal turns out to be defective within two years of purchase, "Good Housekeeping" will replace the product or refund the purchase price.

We are incorporating the Seal into all of our print, television, radio and direct-mail advertising.

Our mattresses will also be listed in both the printed and online versions of the magazine as part of the "Good Housekeeping Seal Directory."

In addition, we recently received ISO certification for our Denmark facility.As you probably know, ISO is a network of national standards from 146 countries working in partnership with international organizations, governments, industry, business and consumer representatives to ensure consistent manufacturing and quality procedures.

Fourth, during the quarter we began the process of refreshing our pillow line.

For the first time in two years we introduced two new pillows, the Supreme and the Body Pillow.

The Supreme is the softest most luxurious pillow we've ever created.

It has an ultra soft layer of Tempur pressure relieving material quilted right into the pillow cover.

It also has the exclusive dual sensitivity cover that allows the consumer to choose between a satin side and a cotton side with different temperatures and level of firmness.

Body Pillow is a longer pillow designed to support the user's stomach, hips, back and shoulders.

Both of these pillows are exclusive to Brookstone, which remains our largest pillow customer worldwide.

In the fourth quarter we expect to complete our expansion project for the Denmark factory, which will double its mattress capacity.

And following completion of consumer testing, we expect to launch the Japanese futon late in the quarter.

This will initially be just for the Japanese market, but over time we will consider rolling it out to other Asian countries as well.

Before I turn the call over to Dale to discuss our financial results in more detail, I'll review the guidance we provided in today's press release.

After taking into consideration seasonal trends in the mattress industry and the company's performance year to date, we raised our final guidance for the year 2004.

We currently expect the company's net sales to range between $600 and $665 million and pro forma diluted net income per share to range between $0.77 and $0.79.

In addition, we provided guidance for 2005 estimated sales to range between $810 and $830 million and pro forma diluted net income per share to range between $0.95 and $1.00.

As noted in our press release, these expectations are based on information available at the time of the release and are subject to change and conditions, many of which are outside the company's control.

I will now turn the call over to Dale.

Dale.

Thanks, Bob.

Let's first talk a little bit more detail about our sales performance.

As Bob mentioned, for the three months ended September 30, 2004, the company achieved net sales of $181.7 million compared to $123.6 million for the same period last year.

This represents an increase of $58.1 million or 47%.

We've experienced significant growth in both our domestic and international businesses as we have continued to execute on our core strategy of penetrating existing channels and investing to build our global brand awareness.

Domestic net sales grew to $119.6 million in 2004 as compared to $75.5 million for 2003.

An increase of $44.1 million or 58.4% and now our domestic business accounts for 65.8% of our total net sales.

International net sales grew to $62.1 million in 2004 as compared to $48.1 million for 2003.

An increase of $14 million for 29.1%.

The growth in net sales was attributable primarily to an increase in the U.S. retail channel of $40.5 million and $10.9 million growth in the international retail channel.

We continue to have outstanding growth in our mattress business as sales grew 69% in the quarter on unit growth of 52%.

In addition, pillow sales grew 5% for the quarter, which represents an improvement versus prior quarters, reflecting our renewed focus on improving the pillow business.

As noted in the press release in the three months ended September 30, 2004, GAAP operating income was $42.8 million compared to $22.7 million for the same period in 2003, a growth of $20.1 million or 88.5%.

Excluding stock based compensation expense of $1.3 million that was previously disclosed, our pro forma operating income was $44.1 million or 24.3% of sales in the third quarter of 2004, an increase of 94.3%.

GAAP net income for three months ended September 30, 2004 was $22.4 million compared to $0.3 million for the same period in 2003.

Pro forma net income was $23.7 million or $0.23 per fully diluted share compared with $12.3 million representing a growth in pro forma net income of $11.4 million or 92.7%.

And 76.9% growth in EPS.

Fully diluted share count was 103 million shares in the third quarter of 2004 compared with 96 million shares in 2003.

Pro forma net income excludes the previously disclosed stock based compensation expense and loss on debt extinguishment cost in 2003.

The growth in profitability for the business was principally driven by the increased gross profit of $32.7 million on higher net sales.

Gross profit for the quarter was 52.9%.

Year-over-year, the gross profit rate increased from 51.2% primarily due to the factory productivity initiatives and freight savings as last year we were having to import mattresses to the U.S. from our Denmark facility because we did not have sufficient U.S. capacity.

Operating expenses for the third quarter 2004 decreased relative to third quarter 2003 as the extraordinary growth provided leverage in excess of our ongoing investment in the business.

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 September 30, 2004 was $295.9 million, a reduction of $80.6 million from December 31, 2003.

Net debt as of September 30, 2004 was $270.7 million as cash on hand as of September 30, 2004 was 25.2 million.

Net accounts receivable grew $32.3 million compared to December to 92.6 million at September.

Inventory declined $4.9 million to 53.4 million.

And accounts payable increased $3.7 million to 29.6 million.

Third quarter depreciation and amortization cost was $7.2 million and year-to-date capital expenditures were $23 million.

To recap our presentation, we continue to execute on our core 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 delivered outstanding third quarter results with 47.1% sales growth and 92.8% growth in pro forma net income.

And we have increased our guidance for the total year of 2004.

This concludes our prepared remarks and we will now take questions.

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One moment for the first question.

Our first question is from Jonathan Shapiro (ph) of Goldman Sachs.

Please go ahead with your questions.

Hi guys, how are you?

Great.

How are you, Jonathan?

Good, thanks.

A couple quick questions.

First on the international.

Direct Response growth picked up quite a bit.

Is that France?

Is that U.K.?

What's behind that?

That is a combination of the - of all the markets over there.

But mainly it's the U.K. right now.

The France market's still in a test mode.

We tested earlier in the year.

We pulled back, actually, in Q3 but we're doing another test that began in late September for DR in France after working out some of the bugs.

So, implicit in sort of what you're thinking about for '05, you're not - that's not a big jump in France or, you're not entering into other markets or anything like that?

We're still feeling our way.

It's not as easy over there as it is here.

We believe that we can make it a viable part of the program in France and then use that as a springboard to other countries.

But it's going just a little slower than it would over here because of all of the different aspects that you meet in an overseas DR campaign.

On the sales and - or the selling expense for the overall company ticked down to about 19% of revenue versus 21%, I think it was in the second quarter and then last year.

Is that - are you now where you're at the point where you're trying to leverage that expense or is there something else going on there?

No, Jonathan, basically what's going on is, you know, we have a plan for the year in terms of how we're going to spend our money from a media standpoint.

And what we experienced in the third quarter was we spent to the plan or even a little bit over because we were seeing exceptional performance.

But the revenue growth in the quarter, you know, it just way exceeded our expectations and you can't keep up with it.

OK.

And then last question, I may have missed it, did you give the retail store number?

The revenue number for the retail furniture stores?

The revenue number for the retail channel - furniture and bedding retail in the U.S. was $71.2 million.

And the number of stores was 3,900.

Great.

Thanks very much.

OK.

The next question is from Bob Drbul of Lehman Brothers.

Please go ahead with your question.

Hi.

Good afternoon - good evening.

Hi, Bob.

The first the question is, on the comp type number that you gave, Tom.

Can you talk a little bit about, you know, how that was this quarter and sort of maybe if you just look at it versus last quarter and how that's trended throughout the year.

Was there a major change or re-acceleration this quarter when you look at that type of statistic?

Actually, we're looking at it in terms of the year and what we're anticipating based on where we've been tracking and what we anticipate in the fourth quarter.

So, that 40% to 45% growth is based on that.

We're not giving out, you know, quarterly numbers on that but just more or less what we've seen and what we anticipate.

OK.

OK.

And around the futon launch, can you give us a little bit more information in terms of the marketing plans that you have around that launch?

Well, we have the distribution already in place there.

So, it's a matter of rolling it out.

So, it's not like we have to go knocking on doors and introducing ourselves.

So, it's a question of implementing that and we think that, you know, that will start in the latter part of Q4 and roll out throughout the year next year.

I would just add, if you look at the marketing model that we're using with that product, it's very similar to what we've done in the past with pillows.

That is that we have more of a push model there where we have employees working in all the major department stores who educate the consumers and push the product out the door.

That's a very different model than what we have in the U.S. or in most of Europe.

Yes, I mean, we have a great pillow business in Japan and in that way it's very much like the U.S. was at first.

Our experience here was it took awhile to educate the consumer as to the value of the mattress whereas the pillow is a little bit of an easier sell.

And so, I suspect it will be the same way there.

I think we'll get it in the stores, but I think that it will be a slower ramp up throughout the year next year as we build consumer awareness.

And in Japan, keep in mind, it's even more of a radically different way to sleep than they're used to.

We had the same problem here or same issue here and it'll take some time.

But not nearly as long as it took here, because here we didn't have the distribution back in the mid-90's.

OK.

And one final question for Dale.

You said that the mix shift's becoming less of an impact on the gross margin now.

Can you just give us an update on your gross margin assumptions for the fourth quarter and for '05?

Well, for the fourth quarter we would expect gross margins to - probably to deteriorate just a little bit from the third quarter.

The mix shift certainly jumped dramatically in this quarter.

A gradual mix shift has less impact than a gradual (ph) mix shift.

For '05 the key thing for gross margins in '05 that we're looking at for a reduction in gross margins next year is we're going to have to be importing mattresses again next year.

So, the mattress, as the year progresses and the number of mattresses that we're importing on a quarterly basis increases throughout the year we'll see more and more pressure on gross margins.

In terms of more detailed '05 guidance, at this point what we've got is a higher level analytical view of '05.

We're working through detailed budging through next year.

Right now on the next call we'll provide a little bit more information for '05 guidance.

Great.

Thank you.

Your next question is from Nishu Sade (ph) of Smith Barney.

Please go ahead with your question.

Hi.

Congratulations on a strong quarter.

Thanks, Nishu .

My first question is on the guidance for the full year, which is, you know, basically telling us what's going to happen in the fourth quarter.

You're looking for sales to be down a few percent and you're mentioning seasonality as the factor behind that.

Can you help us to understand what sort of impact that will have on your sales?

I mean, are we going to see that only in certain channels like U.S. retail or will it affect international retail as well?

And so, could you just walk us through what your thinking is?

Just talking a little bit about the industry first.

And specifically what we see in the U.S.

If you look at the industry data from just going back the last couple of years there's a definite seasonality impact between second - I'm sorry, between the third and fourth quarter.

If you look at the actual percentages for the last two years it's been about a 13% decrease in the fourth quarter.

And that's probably not too surprising given the Christmas season and the holiday season and how people shop during that period.

So, we're certainly are not anticipating that type of a decrease, but what we've found is that as we've become more - more of our business selling more of our mattresses through retail outlets that we are impacted in a similar way on the seasonality curve.

OK.

And a second question on the retail penetration.

Your store count increased by 300 in the third quarter which is in line with the 90 to 100 per month that you've been talking about.

But it's noticeably less than the 500 you increased in the second quarter and the 400 you increased in the fourth - in the first quarter, I'm sorry.

So, can you help us to understand what's behind that?

Is that just a temporary slowdown?

Would you expect that to pickup again in future quarters or has the kind of momentum of that slowed?

We still feel very comfortable with the numbers that we've given out in the past in terms of 90 to 100.

The numbers jump around quite a bit in terms of when we open an account, when they come on board and how many doors are tied to that particular account.

What we saw in the first and second quarters - especially the second quarter a couple of the accounts that we opened had multiple doors and compared to, you know, if you look at our overall average of about two to two and a half doors per account because it is a very fragmented industry out there at the retailed level.

So, it was sort of more in line with what we see in the market itself in the third quarter.

But in terms of what we're expecting we still are saying that we should do around 90 to 100.

And are the stores that you're opening now - are they getting bigger?

I mean, I imagine as your reputation grows you'd be able to land larger accounts with larger outlets.

How is that trend?

Well, it does vary.

Again, because of the fragmented market what we see a lot of times is a one or two store operation - Mom and Pop, if you will - actually do a lot more volume per store than some of the larger chains.

So, you know, if you look at it in terms of the type of volume that we're getting through those accounts into the individual stores it would bounce around quite a bit.

But we find quality of the accounts that we're opening up has not deteriorated from the time we'd actually started our rollout.

And we look the fact that we're in about, you know, 43% of our target for the total number of stores that we're going after.

And we look at what's still remaining.

We think that there's still a lot of high quality accounts.

The door is out there for us to penetrate.

OK.

Great.

One final question, the issue that you had with the database and them sending out of the direct response marketing materials in the second quarter.

Can you talk about how the recovery's going from that?

Is that back up to normal?

Or are you still ramping up again from that?

No, I think if you look at our numbers, specifically in the U.S. for direct, what you will see is what we sort of predicted would happen.

And that is that once we had our system issues behind us that we would get back on track with our run rate.

And that's exactly, you know, what we have seen through the third quarter.

We're back with the growth rate that we were experiencing prior to the system issues.

Now that those are behind us it's sort of where we are and what we expect to continue.

Great.

Thanks a lot.

Actually, Dale, it's Steve Kim.

Could I get in there a couple of questions?

Sure.

OK, thanks.

First of all, with respect to new store penetration, can you walk us through the remaining stores that you have on your target list?

Have they even been contacted?

Is this something that is a phased rollout that they're aware of and you have some early read into it?

Or is it a situation that you haven't even contacted them yet, but, you know that you want to go to them, but they don't necessarily know that you want to go them?

I'm going to let Tom answer that.

Yes, I mean, it's a continuous process.

You know, we have hired more sales people to knock on the doors.

We're more active in the trade shows throughout the country.

But we haven't necessarily, you know, contacted all of the potential accounts that we have in our target numbers at this point.

Continuing to do it.

It's not something that happens, you know, overnight.

It's something that we found is a gradual process of identifying the accounts, making sure that they are the type of stores that we want representing our brand and that they also, obviously, pass the criteria that we've setup in terms of everything from their credit history to how we expect them to comply with our policies and procedures.

So, it - we still think, as I said, the reason why we're optimistic and we continue to look and anticipate 90 to 100 month is because that rollout is not, you know, even halfway at this point.

OK, great.

And the last question relates to the competitive environment.

When you go into these stores, I guess I was curious as to whether or not you're finding that the retailers have already got visco products maybe because some of your competition sees what you're doing and sort of is trying to enter some of the furniture stores more aggressively as well.

Has that occurred?

Can you speak to that?

And are you seeing, you know, increasingly that you're actually being successful in getting somebody who's a furniture retailer or the furniture store who already has a visco product that they're actually replacing it with yours?

Have you seen any of that activity?

No, actually we haven't as we - it's very similar to what we commented on in the last quarter.

We really haven't seen any competitors gain traction in the marketplace in terms of market share, distribution or any potential volume.

So, basically, when we go into our retail stores or stores that we've opened - the 300 that we've opened in the last three months - basically we're going in and replacing inner springs.

We're not going in and finding visco-elastic mattresses on the floor.

Great.

Thanks very much.

The next question is from Mike Cox of Piper Jaffray.

Thank you.

Congratulations on a very nice quarter guys.

Thanks.

It looks like you have nice skiing (ph) in pillows up 5.3% year-over-year versus I think it was flat last quarter.

Is that a result of the new packaging?

Or what factors would you attribute that to?

Yes, packaging helps.

You know, the furniture stores continue to sell more and more pillows as well as mattresses.

One of the other key things, obviously, is on the second quarter we were up against the Japanese bubble from last year.

You know, the key thing from a corporate standpoint is we have been so successful and so focused on the mattresses, which is our primary focus of the business still, but we had decided that we needed to put a little bit more attention to the pillow business since we hadn't had a new product in two years in that side of the business.

So, we've got some renewed focus there and we're just starting to see, probably, the inkling of that.

OK.

Do you have any early indications on sales of the new pillows at Brookstone?

We're just starting to shift those into the Brookstone stores.

So, it's a little early yet.

OK.

In terms of mix on the mattresses.

Can you breakout specifically the penetration of the Celebrity mattress?

Sure.

If you look at our penetration on Celebrity now is 57% of our account base.

OK.

Then finally, the G&A ticked up sequentially from 16 million to about 17.7.

Is that indicative of a new run rate or was there something special in the quarter to account for the increase?

No, G&A was up quarter-to-quarter.

We're continuing to invest heavily in Sarbanes-Oxley.

We had some additional costs associated with our amendment and restatement of the credit agreement.

So, there are a number of factors contributing to kind of a one time quarterly increase in G&A that are not ongoing.

OK.

Great.

Thank you.

The question is from Keith Hughes of Robinson Humphrey.

Please go ahead with your question.

Thank you.

In the past you've - or at least last quarter you told us how much the CelebrityBed was to revenue.

Percent to revenue.

Can we get that number again?

That was 13% during the third quarter average revenue.

And of the stores you've been opening, what's kind of the average number of SKUs you're getting placed in those stores?

I would say the average is two models.

And those two models would be?

It's going to be either the Deluxe or the Celebrity or the Classic.

We only have three and it will vary.

We have seen more of our newer accounts that we've been opening going with the Deluxe and the Celebrity.

But the Classic continues to do exceptionally well.

OK.

Thank you.

The next question is from Joe Altobello of CIBC World Markets.

Please go ahead with your question.

Thanks.

Good afternoon, guys.

Hi, Joe.

I had a question about '05 new product pipeline.

It sounds like you've actually got two new pillows out now at Brookstone.

On the mattress side, I'm sure if you mentioned this, are you guys still looking to introduce one new mattress SKU per year?

That's correct.

So, I would imagine that one would be out roughly in the spring?

In the timing?

Yes.

Now, as far as the price point, that would be above the Celebrity?

We are not in a position right now to give out information on that future new product.

But we think certainly as we look at our overall R&D and product development process and look at the market and what our customers are telling us, we certainly think that we can go up market even though we have the Celebrity out there at about $2,800 for a queen.

But there's still room to go up.

I'm not saying that that's what it's going to be, but we think we have room to continue to go up.

OK.

And in terms of CapEx, what's your budget this year and more importantly, next year with Albuquerque?

For this year, you know, we've spent 23 million year to date.

We were planning to spend in the high 20's to approximately $30 million.

Since we have accelerated Albuquerque we would now expect to spend about an additional 10 million this year.

So, close to 40 million this year.

Next year in terms of a detailed budget, as I mentioned earlier, that's still being worked out but at a macro level that we would think that kind of a normal ongoing run rate.

You know, Albuquerque will spend on the order of $30 million next year.

And then our normal maintenance capital and growth capital.

So, it may be about 40 million, but we'll give you more specific instruction there on the next call.

You'd call it 70 million, roughly, for '05?

No, no, no.

At a top, 40.

Oh, 40 total including Albuquerque?

Yes.

You've got to remember, this year in the approximate 40 you've got about 10 in Albuquerque and about 17 on Denmark.

So, essentially, that combined spend this year will be replaced with just Albuquerque next year.

OK.

And the priorities for free cash flow uses, I assume, would still be debt reduction over the next, you know, 18 months or so?

Correct.

Excellent.

Thank you very much.

The next question is from Mark Rupe of Adam Harkness.

Please go ahead.

Hey, guys.

You've done an excellent job of penetrating retail accounts and taking slots away from the inner spring guys.

What inning are you in as far as taking market share at the store level?

Is it still early phase?

How sustainable is the 40 kind of percent run rate going?

Well, if you look at our market share, we're still a relatively small player, but we have the best product in the world.

So, we're pretty optimistic about the opportunity to continue to gain share in the marketplace.

OK.

And then as far as the international doors that were added, were they concentrated in one market?

They were spread across Germany, France, Spain and Italy.

Those were the main markets where we saw grow, number of doors.

OK.

And then as the FR (ph) standards come up next year, any cost implications and will that be passed onto the customer?

If you look at the changes that we will make in our product there will be an increased cost for compliance and we plan to take price increase along with virtually everyone in the industry first part of next year.

Perfect.

Thank you.

The next question is from Krista Zuber of UBS.

Good afternoon.

I just wanted to get a sense of, you know, what the average (inaudible) or media spend has been in the quarter?

Kind of the outlook for '04 and if there's any special promotions for the fourth quarter last year that we should sort of be aware of that you might be anniversaring this period?

Well, if you look at our advertising in the U.S., we spent during the quarter about $11.4 million, which was about a 38% increase from the same period last year.

When we look at the fourth quarter, we will continue to spend at a similar rate what we saw this year.

Nothing special in terms of being up against a particular promotion or a particular campaign from last year.

Nothing like that.

OK.

Great.

And then just sort of a macro, big picture view on, you know, what's going on with raw materials and freight costs?

Thanks.

Sure.

We have seen some slight increases in raw material.

We've been able to - as in the past we've been able to offset those by our volume discounts that we get from our vendors and suppliers.

So, basically, you know, we haven't seen any type of raw material increases that would cause us to raise our prices onto the consumer.

OK.

And freight cost?

The outlook there?

Freight cost we've seen go up, as you can imagine, with some of the fuel surcharges.

We have during the year adjusted our freight - taking our freight expense up as well as taking the freight that we charge the customers up.

So, we've been able to try and balance that off throughout the year.

OK.

Great.

Thanks.

Good job.

The next question is from Omar Saad of Lehman Brothers.

Please go ahead.

Thanks.

Let's see, I wanted to follow up on one of the questions about the sales in the furniture and bedding specialty chain.

I know you'd said 71.2 million.

Do you have the number in terms of the percentage increase year-over-year for that?

That's 108%.

108?

Yes.

And a couple more general questions.

I wanted to just also follow up on kind of the shop in shops that I know you're using in some of your retail accounts.

Whether it's the two SKU or the three SKU, I wanted to see if you happened to have any kind initial numbers in terms of what you're seeing when you kind of convert an account from not having kind of the Tempur-Pedic specific display to having it?

And if you're seeing kind of a kick there?

Well, we think we are.

You know, we've got about 830 of our three bed out there now.

We have over 600 now of our two bed displays.

But because we are not able to get sales data at store level, we have to pretty much rely on looking at our account base.

So, certainly, when we look at our established accounts where we put these and the increases that we've seen, it makes sense to do it.

We get incremental pops because of that.

And in a lot of cases, we've been able to get in another model on the floor like in the case of the three bed display where in some stores we only had two, but by giving them the three bed display we were able to appear in another slot.

OK, great, great.

I also wanted to ask kind of some more general industry questions.

And you know, if you're seeing any trends in the just overall mattress industry?

I know some people - some out there are concerned about the tie to housing - to housing markets and, you know, the consumer spending environment.

I know you're still at such a growth phase it's probably not as relevant to you as it is to some other players out there.

But I know that as you're getting bigger you're probably feeling the industry more.

I just kind of wanted to get your view on what's happening out at the kind of the macro industry level and where you expect it to go in the future?

Yes, I think if, you know, you look at the industry data that we have available to us - and it's pretty good historical data going back 20 years.

And obviously, during the historic period you're going to have all types of economic environments to deal with.

And what we've seen in the past is that this industry has been pretty consistent, you know, with single digit growth each year.

And it appears to be happening again this year.

But how its impacting us it's not so much in terms of tying into the industry growth because you're right, we are growing so rapidly.

But what we're seeing that would tie to the industry, as I mentioned previously, would be some of the seasonality trends that the industry as a whole sees.

Great.

Thanks.

The next question is from George Calhoun (ph) of Deutsche Bank.

Please go ahead with your question.

When you go into some of the stores and you've taken basically a placement away from the box spring folks, can you - is it a situation where you completely displace them or they reduce the SPU (ph) exposure to that box spring maker?

Well, what will happen is they will take a particular box spring model.

And usually, obviously, they'll pick their slowest moving model to take off the floor.

But if you, you know, if you go out and look at retail stores you'll see that there are a lot of different models of inner spring mattresses on the floor.

So, it's basically the way they make a determination is that if they're going to put in our product and they're going to put in two of their models they'll bump off two of the slowest moving inner spring models.

And who, in general, are the folks they're supplanting?

Is there a specific maker or brand that you are more consistently supplanting than others?

No, you know, it is obviously going to be one of the S's in most cases.

You know, Sealy, Serta, Simmons, Spring Air.

But it will vary by store by region, you know, of the country by state depending on how each of those competitors are doing in that given market.

But there's not one common particular brand, if you will, that we find that we displace more than any other.

OK.

And looking at the - should we use 103 million diluted shares for the EPS projections you gave?

Yes.

OK.

And lastly, can you give me the debt breakdown?

I know you have money - 7.5 in bonds.

But your total debt declined by close to, you know, 40 million buckS sequentially.

Where did the debt come out of?

The term loan?

Yes, we had about a $20 million reduction in our European term A. And also, we had some reduction in revolver both domestically and internationally.

Do you have any outstandings on the default at the end of the quarter.

Yes, we do.

Let me find it.

If you don't mind giving me the revolver and the term loans total outstandings that would be great.

OK, in terms of revolver usage in the U.S. we've got about 13 used.

And internationally, we have about nine in usage.

Now, internationally part of that is setup for a - a piece of the revolver is setup under the new amendment as a working capital line.

And then we tend to have letters of credit that are ongoing.

They're counted against the revolver.

OK.

And what's the balance on the term loans, please?

You can give me the total number for term loans, not each one separately.

You'd have to add them up.

Wait for the Q.

OK.

You don't have the total right away you can give me now?

I'd have to add up (inaudible).

OK.

That's fine.

Thank you.

The next question is from Jon Bloomberg of Burgundy Asset Management.

Please go ahead with your question.

Hi, guys.

Just a quick question.

Actually, two quick questions.

First one, the 300 stores you added.

Can you breakdown the difference between adds versus just attrition?

The 300 stores are incremental doors that we opened during the quarter.

Right.

But how many of those net?

I mean, how many stores actually dropped out and how many were added?

In essence that is a net number - the only (inaudible) we have in accounts is that we closed is one that because of slow pay.

And if you look at from the standpoint, as I mentioned before, part of the criteria that we setup we're pretty tight and control that when we open the account.

So, we don't have a lot of accounts that are closing.

But it is a net number, if you will.

OK.

Last question.

The exclusivity period for the pillows at Brookstone.

How long is that?

We haven't determined any type of length on that.

It's indefinite right now.

OK.

Thanks, guys.

The next question is from Derek Coppo (ph) of Everest Capital.

Good evening, gentlemen.

My question is in reference to the Japan futons.

What price points are we looking for on those futons?

About $500 to $600 retail.

$500 to $600 retail?

Right.

Are they going to be kind of the same margins as they are in the United States?

Similar margins, yes.

Are you guys also going to have a same rollout (inaudible) do something with retail stores or furniture stores there?

Or also just direct?

Well, we plan on rolling it out through our existing retail network of department stores, furniture stores, et cetera that we have there.

The possibility remains that we would do a direct business in Japan in the future, but we have no plans to do that as of now.

OK.

Great.

Thank you very much.

The next question is from Greg McKinley (ph) of Dowdy and Company.

Thank you.

At the end of the quarter you had 3,900 domestic U.S. furniture stores.

What was that count a year ago, Please?

About 2,500.

OK.

And how many stores do you have domestically that, I guess, you'd categorize in the speciality channel?

1,500.

And what was that a year ago?

1,500.

Oh, OK.

It hasn't grown at all.

OK.

And then, the 93 million of revenue that you did in retail domestically.

Is that just the 71 million from furniture and then the remainder is with speciality channel?

Right, correct.

OK.

And that's a combination of mattresses and pillows.

Is it fair to say that your furniture channel is almost exclusively mattresses?

No, certainly the majority of the business in furniture and bedding stores would be mattress.

But we sell pillows as well.

OK.

And can you just give me a little background - what are these new pillow models?

What's the difference in the functionality?

Well, if you look at our traditional pillow - the ones that we had made our brand name with - they're more of a cervical pillow.

A therapeutic pillow for correctly aligning your spine when you sleep.

OK.

This particular pillow would be put into the classification of more of a comfort pillow.

It would be more for the comfort not for the therapeutic benefit.

OK.

Thank you.

There are no further questions at this time.

Please proceed with your presentation or any closing remarks.

I'd just like to thank everyone for joining us on our call this afternoon.

We are very pleased with Tempur-Pedic results for the quarter and the progress that our company has been making overall.

We look forward to talking to you again after the close of the year.

Thanks.

Ladies and gentlemen, that concludes your conference call for today.

We thank you for your participation and ask that you please disconnect your lines.

END