Tempur Sealy International Inc (TPX) 2004 Q4 法說會逐字稿

Welcome to the Tempur-Pedic fourth quarter conference call. (OPERATOR INSTRUCTIONS)

I would now like to turn the conference over the 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, chief executive officer, Tom Bryant, president, and Dale Williams, chief financial officer.

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 Website and has been furnished to the SEC on Form 8-K.

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

Go ahead, please, Bob.

Thanks for joining us on today's call.

We've just completed another very successful year for Tempur-Pedic.

I'm especially pleased to be speaking with you today.

This year's fourth quarter performance was by far our strongest to date, continuing what is already an outstanding year.

We easily beat our sales and earnings guidance for 2004, even though we just raised that guidance last quarter.

Clearly, the business model we have developed for Tempur-Pedic International, including our manufacturing, distribution and marketing strategies, has proven extremely effective.

At this point, I'd like to ask President Tom Bryant to take you through the highlights of the quarter.

As most of you know, Tom, who joined us in 2001 as executive vice president and president of North American Operations, was promoted to president in late November and is now overseeing all Tempur-Pedic's day to day domestic and international business activities.

Tom has led the tremendous growth we've generated in the U.S. and will oversee the continuation of that growth worldwide in the future.

Tom?

Thanks, Bob.

It's certainly a pleasure to be talking with you after such an outstanding quarter and such an outstanding year.

The details in this afternoon's press release, our net sales for the fourth quarter totaled $198.4 million, 45% higher than in 2003.

Diluted pro forma earnings per share rose 79% to 25 cents, while diluted earnings per share under GAAP rose 92% to 23 cents.

For the full-year, our net sales were up 43% and diluted pro forma EPS was up 49%.

One of the most encouraging aspects of these strong results was that our growth came from so many different areas, from the sale of our mattresses and pillows, from retail direct response and our other sales channels, from existing accounts and new accounts, and from both the U.S. and internationally.

This strong across the board performance clearly demonstrates how beneficial our company's diverse business model is.

Let's go through these achievements 1 at a time.

An important source of growth in the fourth quarter, as it was for the entire year, was our mattress business.

Dollar sales for these products increased approximately 59% in the fourth quarter, while unit sales rose approximately 47%.

Mattress growth was driven primarily by 62% revenue growth and 54% unit growth in the U.S., matched by strong demand for our new higher priced Celebrity and Deluxe mattresses.

Together, these 2 premium priced products accounted for 62% of domestic mattress sales.

In total, mattresses accounted for 64% of our dollar sales.

Our pillow sales are also developing nicely.

Those of you who listened to our third quarter call will remember that we introduced 2 new pillows, the Supreme and the Body Pillow last quarter.

Driven by these new products, our U.S. pillow sales rose 28% in the quarter, leading to 20% growth worldwide.

It's also important to note that in the fourth quarter we grew across all 4 of our sales channels, retail, direct, healthcare and third party.

Our growth was especially impressive in our largest channel, retail, where net sales increased 52% to 145 million.

Within that channel, furniture and bedding sales in the U.S. grew 88% to 71 million, our direct, healthcare and third party channels grew by 17%, 14% and 103% respectively.

The impressive growth in third party sales was due to continued expansion into new markets, as well as increased distribution in existing markets.

We generated growth in the retail channel by adding both new accounts and new stores, of course, but just as importantly, by generating strong growth in established accounts.

As of December 31, 2004, our products were offered in approximately 4,100 furniture and bedding stores and 1,500 specialty stores domestically.

Internationally, our products are now offered in approximately 3,300 stores.

As Bob has mentioned in previous conference calls, 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 market by customer account and we distinguish between sales from established accounts and sales from newly added accounts.

We define established account sales as sales to accounts that the company has opened for at least 12 months.

In our third quarter conference call, we noted that we expected our established account growth for 2004 to be between 40 and 45%.

I'm happy to say that we exceeded that target, actually achieving 49% growth in our established accounts for the full year.

I'd also like to note that fourth quarter sales grew both in the U.S. and internationally.

Net sales increased by 53% in the U.S. and 33% internationally.

The company's international growth also benefited from the weaker U.S. dollar.

In addition to producing record financial results, we achieved the operational goals we had set for ourselves.

First, as planned, we completed the expansion of our manufacturing facility in Denmark, doubling the facility's mattress capacity.

This expansion will help us keep pace with growing demand throughout Europe and Asia, as well as in the U.S., until our new facility in Albuquerque is completed.

We broke ground on a 750,000 square foot plant in New Mexico in September that will help us serve customers in Western U.S., Mexico and South America.

Construction is proceeding on schedule and we expect the initial capacity to come online in the second quarter 2006.

In addition, following completion of consumer testing, we began shipping our new futon mattress to Japan in December.

Japan is one of our largest operations outside of the U.S., but Tempur-Pedic is still viewed primarily as a pillow company there.

The majority of Japanese do not sleep on Western-style mattresses and have more restricted space, with each room having multiple function.

As a result, it's important that the product people sleep on be foldable, lightweight and storable.

We hope that over time the futon will prove a significant new product for the company and we plan to eventually launch it in other parts of Asia as well.

During the quarter we continued to receive recognition for the quality of Tempur-Pedic's products.

In December, our ComfortPillow became the only visco-elastic pillow to be awarded Best Buy status by "Consumer Digest" magazine.

As I'm sure you know, the Best Buy recognition is given only to products that provide exceptional quality and value to consumers.

This distinction builds on the editorial recognition we received from "Consumer Digest" in 2003, when the Tempur-Pedic mattress was originally rated as a Best Buy.

We have begun displaying Best Buy logo on all of our ComfortPillow packaging, as well as our advertising materials.

Finally, I'd like to note 2 key additions to our executive team during the fourth quarter.

Matt Clift joined us in the newly created position of executive vice president of operations.

Matt will oversee all aspects of manufacturing, research and development, information technology, human resources and operations, both domestically and abroad.

In addition, we recruited Paul Coulis to serve as president of Tempur-Pedic's U.S. medical division.

Paul's 29 years of experience in the healthcare industry will help us capitalize on the many opportunities that exist to expand the distribution of our products in the U.S. healthcare market.

At this point, I'll turn the call back to Bob to go over Tempur-Pedic's major initiatives and guidance for 2005.

Bob?

Thanks, Tom.

I'd like to talk a little now about our growth strategies for the future and the sales and earnings guidance for 2005 that we provided in this afternoon's press release.

As we indicated, our overall goal is to build on our leadership position in the premium segment to become the world's largest and most profitable mattress company.

In order to achieve that goal, we will continue to implement the business model that's proven so successful over the past few years.

In 2005 we will continue to extend Tempur-Pedic's presence in furniture retail, both in the U.S. and internationally.

Our goal in 2005 is to open approximately 75 stores per month in the U.S. and 25 stores per month internationally.

Our guidance is based on established accounts in the U.S. growing at a rate of 30 to 35% for the year.

We will also continue to introduce new products, such as the Japanese futon, and at least 1 new mattress in both Europe and the U.S.

And we will continue to invest in building brand awareness both domestically and internationally by maintaining our media spend at approximately the same percent to revenue as in the past.

Finally, as Tom mentioned earlier, we will continue investing in our manufacturing capacity and in our research and development capacity to maintain Tempur-Pedic's market leadership position.

We are optimistic that the many initiatives we have underway will result in another record year for Tempur-Pedic International.

And we have, therefore, raised the preliminary financial guidance we previously provided for 2005.

We now expect the company's net sales for the year to range between 830 to 850 million.

In addition, we expect pro forma diluted net income per share to range between $1 and $1.05.

We have -- we expect sales and earnings in 2005 to follow quarterly patterns consistent with that of 2004.

Our earnings guidance reflects the company's traditional practice of incurring heavier market expenditures in the first quarter of each year.

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

I'll now turn the call over to our Chief Financial Officer, Dale Williams, to discuss our financial results.

Dale?

Thanks, Bob.

Let's first talk more about our sales performance.

As Tom mentioned, for the 3 months ended December 31st, 2004, the company achieved net sales of $198.4 million compared to $136.8 million for the same period last year, which represents an increase of $61.6 million, or 45%. (audio interruption) year, net sales were $684.9 million compared with $479.1 million in 2003, growth of $205.8 million, or 43%.

We've experienced significant growth in both our domestic and international business, continued to execute on our core strategy of penetrating existing channels, (audio interruption) to build our global brand awareness.

Domestic net sales grew to $126.5 million in the fourth quarter as compared to $82.6 million for 2003, increase of $43.9 million, or 53%, and accounted for 64% of our total net sales.

International net sales grew to $71.9 million in the fourth quarter compared to $54.2 million for 2003, increase of $17.7 million, or 33%.

While we experienced growth across all our channels, growth in net sales was attributable primarily to an increase (audio interruption) retail channel, $39.3 million, $10.1 million growth in international retail channels.

Continued to have outstanding growth in our mattress business (audio interruption) worldwide sales grew 59% in the quarter (audio interruption) of 47%.

In addition, pillow sales grew 20% for the quarter, which represents an improvement versus prior quarters, reflecting our renewed focus on improving the pillow business.

For the year, mattress revenue accounted for $433.3 million, growth of 61%, pillow sales grew 8%, $138.1 million.

Our other products grew 38% during the year and accounted for $113.5 million in net sales.

Regarding profitability.

As noted in the press release, for the 3 months ended December 31st, 2004, GAAP operating income, $44.7 million compared to $24.9 million for the same period in 2003, growth of $19.8 million, or 88% (ph). (audio interruption) stock-based compensation expenses, $.9 million that was previously disclosed since it is associated with our secondary offering completing in November of $.9 million, a pro forma operating income $46.5 million, 23.5% of sales in the fourth quarter of 2004, an increase of 71%.

GAAP net income for the 3 months ended December 31st, 2004, $23.9 million compared to $11.6 million for the same period in 2003.

Pro forma net income, $25.7 million, or 25 cents per fully diluted share, compared with $13.9 million, representing a growth in pro forma net income of $11.8 million, or 85%, a 79% growth in EPS.

Fully diluted share count was 103.2 million shares in the fourth quarter 2004 compared with 97.3 million shares in 2003.

Pro forma net income excludes the previously disclosed stock-based compensation expense and costs associated with our secondary offering.

Growth and profitability for the business was principally driven by the increased gross profit, $31.1 million on higher net sales.

Gross profit for the quarter was 51.8%.

Year-over-year, the gross profit rate decreased from 52.4%, primarily due to the global channel mix and higher material costs associated with the adoption of TB 603, new California fire code.

The impact of the new fire standard cost will be recovered through our announced February 1st price increase.

Operating expenses for the fourth quarter 2004 decreased relative to 4Q 2003 as the extraordinary revenue growth provided leverage in excess of our ongoing investment in the business.

Full-year 2004, GAAP net income was $75 million compared to $37.6 million in 2003, growth of 100%.

Pro forma net income grew 62% in 2004, (audio interruption) in 2003, 84.4 million.

Pro forma fully diluted earnings per share were 82 cents 2004 compared with 55 cents 2003, growth of 49%.

In addition to the operating results of the business, I want to address a few key balance sheet metrics.

Total outstanding debt as of December 31st, 2004 was $289.7 million, a reduction of $86.8 million from December 31st, 2003.

Net debt as of December 31, 2004 was $261.3 million and cash on hand as of December 31, 2004 was $28.4 million.

Net debt was reduced $101 million in 2004.

Net accounts receivables grew $33.5 million in the year to $93.8 million.

Inventory grew $7.9 million in the year to $66.2 million.

Accounts payable increased $8.9 million in the year to $34.8 million.

Fourth quarter depreciation and amortization costs, $7.3 million, capital expenditures for 2004, $38.4 million.

One additional piece of guidance we need to convey is related to capital expenditures in 2005.

As we have finalized contracts on our equipment purchases at the Albuquerque plant, we now expect to spend $70 million on the plant in 2005.

This does not represent an increase in total expenditure for the plant, the change in the timing of the spend from early 2006 into 2005.

I will now turn the call back over to Bob for his concluding remarks.

Bob?

Thanks again for joining us on our call this evening.

To sum up, we are very pleased with Tempur-Pedic's results for the fourth quarter, especially with the company's strong across-the-board performance.

But even though we made so much progress in 2004, we believe we still have significant opportunities to grow market share and brand awareness worldwide.

We're confident that our business models and strategies position us well for continued success in the coming years.

We look forward to talking with you again after the end of the first quarter.

Thank you.

Operator?

(Operator Instructions) One moment, please, for your first question.

Your first question is from Omar Fodd (ph) of Lehman Brothers.

Good afternoon, gentlemen.

Hey, gentlemen, how are you?

Pretty good, Omar.

Congratulations on the great finish to the year.

Thanks.

Dale, I just wanted to follow up on some of your comments at the end there around the gross margin.

I had a couple more questions after that, too.

You had talked about kind of the impact from the global channel mix shift, which we all understand pretty well, I think.

And the higher material costs from California.

When you talked about your ability to recover those costs, kind of with a price increase - the announced price increase February 1 - could you go into that a little bit more and, especially, I know you're probably have to ship some mattresses in from Europe as you kind of exceeded the capacity at the Virginia plant.

Kind of how do all these factors - how do you expect them to play out in terms of the gross margin line in '05?

Yes, in terms of channel mix, one thing I would point out there is, in addition to channel mix, we typically discuss, as in retail versus track, et cetera - one thing we did note in the fourth quarter was an impact in gross margin in terms of country mix and the international operation.

Where certain countries performed better than others and it impacted the overall gross margin of the business.

As we move forward, our expectation in 2005 is the overall impact of all the factors going into next year, the higher costs associated with TB603, the potential costs, later in the year, having to import some mattresses, as well as the price increase, is that would look for gross margins for 2005 to be roughly at the range we're at - where we were running in the fourth quarter.

Okay.

Okay.

Great.

In terms of - Tom talked briefly about the futon.

Can you talk more specifically about the plans or the status of that rollout?

Sure.

We started shipping the product into Japan in fourth quarter, at the end of the year.

Our employees in Japan are in the process now of going out and gaining the distribution and so we're basically at that stage where we're rolling it out to the customers in Japan.

So, it's pretty early to get any feedback yet, but that's sort of the status right now.

And in terms of kind of your financial plans for the year, I mean, are you taking kind of a conservative approach to how you're going to include the futon aspect of it or ...

I think we are, given the market and the price point on the product.

At this point, we're taking a conservative approach.

Okay.

Great.

One last question.

I wanted to ask you guys where you ended up in terms of advertising expense in the U.S. ...

Got broke up at the end.

Sorry?

The advertising expense.

I wanted to see where you ended up on advertising expense in the U.S. in '04 and kind of what your plans are for advertising spend in '05.

Well, we ended the full year at about 10.6% of net sales in the U.S. and that, of course, was a result of our top line growing so rapidly.

So we got some leverage there.

As we go into 2005, we have bumped the percentage up in terms of our plan, so that we would be spending a - having an increase in the overall media for the full year that sort of corresponds with the top line.

Okay.

But as a percentage of sales, it will come up a little bit from 10.6, you think?

Yes.

Initially, it will go back to where we were budgeting for 2004, right around that 12%.

Twelve percent.

Okay.

Okay.

Great.

Thanks.

Your next question comes from Jonathan Shapiro of Goldman Sachs.

Hi.

Just one quick thing that I missed.

What was the furniture store revenue last year in the U.S.?

Last year?

Or I think you gave a dollar amount.

I just - I didn't catch it.

Okay.

Well, for the quarter - fourth quarter was 71 million.

Right.

And I think you said what the increase was.

Yes.

It was an 88% increase.

Okay.

Thanks.

On the - I guess 2 other questions.

On the California fire, you talked about the price increase coming in February 1.

Are you guys now in a position where, sort of everything you're selling in the U.S. or at least in California is compliant?

Sort of how did the process work there and when did that start?

We've - we started our process during 2004, knowing that California regulation went into effect in January.

So, we are in complete compliance with the new regulations in California and continue to be in compliance with all state and federal regulations.

Okay.

And then, last question, on the capacity.

In terms of shipments from Denmark to the U.S., do you guys have a sense or sort of what's implied in your guidance in terms of when that might start - when in '05 that might start.

Right now, if we - looking at 2005, we do not have to import any mattresses to meet our guidance.

We have been able to increase some throughput and improve productivity at our Virginia facility.

Now, that's subject to change, obviously, if we exceed expectations.

Then we would have to start.

But looking at the numbers surrounding our guidance on mattresses, we would not have to import.

A high-class problem.

All right.

Thanks, guys.

Your next question comes from Krista Zuber of UBS.

Congratulations on a great quarter.

Just getting back to the futon.

As far as - you thought that there might be a rollout to the rest of Asia, is there sense on timing or types of distribution targeted for that?

No, our first objective is to really focus on Japan.

We think that's where the largest opportunity is.

And we want to see how well that product does in that market.

And then, as we evaluate the results, we then will make a determination and put a timeline together as to how we would roll it out into other markets in Asia.

Okay.

Great.

And secondly, could we get a sense, given the new hire in the healthcare segment, what's going on there as far as regulation and legislation and do you have anything to announce there?

Thank you.

Well, unfortunately, in terms of - the federal government hasn't changed, at this point, how reimbursements are being done for pressure ulcers.

The treatment is still being reimbursed compared to prevention.

So, nothing has really changed in Washington, at this point.

We are very excited about recruiting an executive with Paul Coulis' background and experience.

So, he just started at the end of the year, but we are putting a significant focus behind the medical opportunity that we have.

Great.

Thank you.

Your next question comes from Mark Rupe of Adams Harkness.

Hey, guys.

Great quarter.

Just a quick question.

The new mattress that you guys are going to be launching next year.

Any timeframe when that might come out?

And then secondly, any idea what the price point's going to be?

We're in the process of testing different concepts, but we haven't formulated a final product nor a price point.

Our thinking, at this time, is that it would be midyear.

Okay.

At the big trade show that's scheduled for July in Las Vegas.

Okay.

And then, you've obviously rolled out the new fixtures, the new packaging.

When will we see, possibly, a different ad message or, as more and more competition comes into the market, further differentiating yourself?

Well, we continually evaluate and change our message.

That's one of the advantages that we have is that we're able to do detailed testing before making any changes.

So, we know what works ahead of time.

So, right now, we're extremely pleased with the results that we're getting from our advertising message and don't foresee any need to change that at this point.

And then lastly, on the direct side, any updates on France and Germany?

We are still evaluating our rollout in France.

Our intent is to - we targeted Germany for the next rollout.

But we haven't made a final determination as to the timing on Germany.

Okay.

Perfect.

Thank you.

Your next question comes from Stephen Kim of Smith Barney.

Good evening.

This is actually an issue for Stephen.

Congratulations on a strong quarter and a strong year.

Thanks.

Thank you.

First question is on the established account growth figures that you began to talk about in the third quarter.

In the fourth quarter, did that - or in the fourth quarter, the growth in the established accounts - we that primarily as a result of better sales of the higher price point products or what that units or how did that work, that mix?

Well, we think it is certainly a shift to the Deluxe and the Celebrity.

And if you take a look in the fourth quarter, the Celebrity was about 17% of revenue, mattress revenues in the U.S.

So, that was up from 13% in the third quarter.

So, we are seeing the continuing acceptance of the higher price point Celebrity.

So, that's certainly a major factor.

Great.

So, how are the units doing then in the established accounts?

Units are doing well also.

I mean, if you look at the overall units of growth in the fourth quarter that we mentioned, we wouldn't have been able to get that type of growth without seeing the favorable numbers from our established accounts as well.

Great.

And what are you thoughts on what's driving the success - the surprising, in some senses, success of the higher price point mattresses.

I think 2 things is that, in the past, consumers have been reluctant to pay higher price points for innerspring mattresses, which was basically the only choice they had because they perceived correctly that it wasn't a major difference between one innerspring and the other.

With our product, there's a significant difference and that point of difference is not only visible to the consumer, but we're able to communicate that difference in all of our advertising, our POP materials, the education of our store personnel through our training network.

So, I think that what that tells us is the consumer sees the value, even at that higher price point, in this new technology.

Great.

Okay.

And final question.

Store count growth, you are kind of taking that number down.

I think you said to 75 stores a months, whereas previously you've been talking about 80-100.

Also, I think your store count in the back half of '04 grew a little bit more slowly than in the first half.

Can you talk about how that affects your expectations for future growth and maybe, in particular, the first quarter as well as the full year '05.

I think we've built our guidance around, as Bob said, approximately 75 new stores per month, whereas this year we averaged about 115 per month in the U.S. and about 42 per month in the rest of the world.

So, I think that we have seen the changes in terms of the number of new doors shift between quarters.

And a lot of that has to do when we open an account.

We can open an account with multiple number of stores and that can impact a particular quarter, depending on when we officially opened it.

So, I think that given the guidance that we've provided, 75 is - approximately 75 is a good target.

And how would you rate the difficulty you've been having recently - or I'm sorry - difficulty or ease in opening new stores?

Is it becoming easier because of growing awareness?

Is it becoming difficult because of increasing saturation?

How is that, how are you viewing that?

I think it, overall, I would say that it is easier.

We are a better known product.

We have been the talk of the industry in all of the trade publications, trade shows.

So people are much more aware.

We're driving a lot of consumers into retail stores, asking for the product.

So, we have not seen any more difficulty dealing with new accounts this year, meaning in '04, I should say, than we did in '03.

And we wouldn't anticipate that necessarily in '05 either.

One thing I would add is that the larger chains that we've been able to get over the last couple years are going to be fewer if our - between going forward.

And so that's one reason why we're a little bit more conservative with the guidance on the number of stores because it's more onesies and twosies now rather than the big change that we've been able to get in the recent past.

Great.

Thanks a lot.

Your next question comes from Keith Hughes of Robinson Humphrey.

Thank you.

You alluded to this earlier, but I wanted to get a little more detail.

How much of the business is Celebrity - the CelebrityBed now?

On kind of a run rate basis as you're in the year.

Well, if we look at the Celebrity on a dollar basis, we, in the fourth quarter, the Celebrity - and this is just the U.S.

I'm speaking of because we haven't launched the Celebrity outside of the U.S.

But looking at the U.S. market, Celebrity was about 13% of revenue, mattress volume, in Q3.

It jumped up to 17% in Q4.

Our penetration level, obviously, that's one of the factors that's driving the top-line number on the Celebrity.

We moved up our penetration from about 57% at the end of the third quarter to about 61% at the end of the fourth quarter.

Is the number that you just said - 13 and 17 - that was percentage of unit volume?

It was dollar volume.

Volume.

Revenue.

In the U.S. Okay.

And your call was broken up several times.

You had talked in the prepared comments, I believe, about a 30-35% same account sales in 2005.

Is that correct?

Yes.

That's the - what we're anticipating in 2005 compared to the 49 percent in 2004.

OK, that's my questions.

Thank you.

Your next question comes from Joe Altobello, with CIBC World Markets.

Thanks, good afternoon guys.

Good afternoon.

Have a question on the industry first.

I know this is probably a tough number to get to, but what would you estimate was the growth rate of the premium access market in the US in '04?

Well, we haven't had any data yet published for '04.

The last information that was put out by any of the industry sources goes back to about midyear, and it was still showing substantial growth in the premium segment compared to the overall market.

I think that the time -- now, do you recall was at 17, 20 percent something like that on the growth factor?

Yes, thinking was about 20 percent.

From a total industry standpoint, through November, you've got a unit growth of 3.7 percent and a dollar growth of 10.6 percent, but that's total industry.

OK.

They haven't broken it out yet.

Unidentified Unidentified Company Representative : And we don't get monthly or quarterly breakout of the segmentation of the industry.

Right.

Based on our results, we think that the premium segment is going pretty rapidly.

About 20 percent in the US?

I would say yes.

Yes.

That'd be a good guess.

You guys are going still at this point three times segment average.

Yes.

Yes.

OK, just want to make sure I'm interpreting that correctly.

The other question, curious, obviously you guys have a pretty big international business, and I'm sure have a lot of stash parked overseas.

Is there an opportunity to take advantage of the tax holiday by repatriating some of those funds?

Yes, Joe, it's something we are looking at.

Certainly, we need to get final guidance or final rules established by the IRS.

Those are supposed to be out sometime in the next few weeks.

Once we get those new rules, then we also need to, you know, apply them against our situation.

Something that we think might be an opportunity for us.

We also need to run it against our credit agreement and make sure that we don't have any issues there.

But you know, certainly something that we're looking at, don't have any firm plans one way or the other yet because all the rules are final yet.

OK.

Fair enough, thank you.

Your next question comes from Bob Drbul, of Lehman Brothers.

Hi, good evening.

Hi.

Hi Bob.

A couple questions.

First, can you talk about the trends on the return rates and what you seen throughout the business?

Second one, can you talk a little bit about average slots per door and how that's trending year of the year and your expectations for that?

Sure.

On the returns, if we take a look at the fourth quarter, we had an overall return rate of about 6.5 percent, and for our DR business, it was around 13.5 percent.

And what we've seen is if you go back and look at our return rate, both overall, which obviously is being impacted by our retail channel, but even in our DR that we've seen the return rate as a percentage of revenue come down this year, and there's a number of reasons for that, but it's an encouraging trend.

What was your other question Bob?

I'm sorry.

Average slots per door.

We're at -- we ended the year at 2.18.

2.18.

And then one final one, can you talk a little bit about the largest customer as a percentage of sales, where that is in the US?

And I guess when you look at your top 10 customers, how is that playing out from your total U.S. business as well as maybe the total revenues?

I think what we're seeing, that we've looked at it in terms of the overall international market not just the US.

I mean we've got the same things happening in the US, if we look say at a top five, which is ones that we attract pretty steadily, you know, they've gone from about 19 percent of our revenue down to about 13 percent.

That's overall globally, but we've seen the same trends as we continue to accelerate our furniture and bedding store roll out, as Bob said, a lot of those accounts are made up you know in the US -- sorry, the industry itself only average a little over two stores per account, but as we shift that volume, we're seeing our key customers, if you will, the largest customers, become a smaller percentage.

A Bob, this is Dale.

I would just like to add to that.

In terms of looking at this year versus 2003, you know, if we look at the top five customers in 2003, you had obviously the one big U.S. customer.

The other top four on a total year basis were in Japan.

You know, related to the Japanese bubble that we had in the first half of 2003, where this year what we see in a top five customers is one Japanese customer, a couple of U.S. customers, and some other European customers.

So it's much more balanced across the world, and you know, we saw a shift in the top customers because of the Japan bubble last year.

OK great, very helpful, thank you.

Your next question comes from Todd Schwartzman, of Sidoti & Co.

Good afternoon.

Was the 49 percent in established accounts the figure for the full year '04?

Yes it was.

What was it for the fourth quarter?

We don't have it for the fourth quarter, we just did our calculation for the full year.

We gave guidance around the full year and so we gave the results for the full year.

But is it that you don't give the quarterly number or it's just not available for Q4 just yet?

We don't give quarterly.

OK.

And you alluded to their being several reasons for the return rates coming down.

Can you discuss those please?

Sure.

We think there are a couple of them.

One is that we started an initiative to save the business from the standpoint of consumers, when they call to return the product, we have a group of people who work with the customer to understand the reasons for the return, and in a lot of cases if a person is calling to return the product you know after one or two nights, it's a simple (inaudible) convincing them that they have -- truly have more time to test the product, and by having them sleep on the product for a longer period of time, then they fall in love with it.

So that's a factor.

The other one is that with our database we've been able to do a better job on the demographics and selecting the type of customers that we are aggressively going after from that database, matching of the demographics with the characteristics of the average customer of Tempur-Pedic.

So those factors and will say think that as our product becomes better known, brand awareness grows, the acceptance of the product, that also is a factor in returns.

So how much more room for improvement would you say on the DR side there is from that 13 1/2 percent?

We haven't really tried to project that out.

I mean we're extremely pleased at where we are now, given that you know with the direct response model within the industry on direct selling, you know, you're usually looking at a 30 plus return rate on a trial basis, so for us to get down to where we are, we're very pleased and we really at this point we're continuing to work on it, but we have put and the projections around how low we think we can get.

OK, and also with the expected implementation next year, I guess 06, of the new federal standard, fire standard, will there be any incremental costs for you in order to be in compliance?

There's incremental cost to our products as we mentioned, for TP603, and that's the same standard that will go into effect for the rest of the country.

So yes, there is a costs associated with that.

OK, and finally, could you maybe remind us what the reasons are for the lower ASP's in the quarter for pillows?

If we look at the below volume, a lot of it has to do with the SKUs that we sell.

We have products starting you know at $100, going up to $165.

And the U.S., if you look at it on a by region basis, in the U.S. average ASP's are actually up on a year over year basis in the fourth quarter, and I think that's influenced by the new pillows launched that we launched, the Supreme and the Body Pillow.

Internationally, the ASP is lower, and that affects the total results, and it -- really, that's a function of Japan versus other countries.

OK, thanks.

Your next question comes from Terry Warzecker (ph), of Rocker Management.

The dollar's been weak relative to the European currency since the beginning -- since the last time you guys provided guidance.

How much of the increased guidance is a function of the weaker dollar?

None.

What we have done, in terms of our plans for 2005, is our plan is based on what we saw as the average exchange rate for 2004.

That's what we based their budget on for 2005 on.

You know, at the time that we did the initial guidance, we you know saw the direction the dollar was moving, made some guesses, in terms of where it would end up.

You know, from a total year average standpoint, it's not significantly different than what was -- than what we were projecting.

So the change in guidance is completely around just additional volume.

OK.

Accruals for sales returns in the December quarter last year was $10.7 million.

What was it in this quarter?

That level of detail will be in the K.

OK, and you were breaking up, Dale, when you were giving us the rise in receivables since the beginning of the year.

Did you say 33.5 million?

Let me double-check.

Yes, 33.5 million.

OK.

And then finally, you know, it's been well reported in the press that Sealy is coming with their competitive product.

Have they gained a foothold in any of your existing storefronts, best you can tell with ...

They don't have a product in the market yet.

Yes, but have you heard of any of your existing customers taking the product?

No.

Accepting -- you have not?

OK, that's -- oh, finally, on cash flow from operations, is that a number you can share with us?

Unidentified Company Representative It'll be in the K.

OK, thank you.

That's all.

Your next question comes from George Chalhoub, of Deutsche Bank.

A question about the industry.

Actually, Serta and Sealy are both coming in with, you know, visco elastic foam .

They perceive it to be direct competition to you guys.

Sealy also has a hybrid entity (ph), which is a combination of box spring and visco elastic, but mainly both of them, and these are obviously two big guys in the industry, obviously they have not launched their products yet, but do you have -- what kind of game plan could you have in mind to compete with those guys?

Clearly, they're going to try to come in and use their leverage with the retail base to gain slots in visco elastic, so what's your response to that?

Well, given the fact that if we look back historically, you know, we've seen a lot of competition coming to the marketplace with visco product, whether it's within a hybrid or a similar type of fact.

A good example was, you know, there was a lot of hype around the same mattress about a year ago, and I think we all seen what's happened to that.

We haven't seen, in the past, as they introduced products to compete, we haven't seen any one gain traction.

That's not to say that that doesn't happen in the future, but I think we have two things that may be very difficult for anyone to displace us in a retail store.

One is that we are the most profitable product on the floor.

We have the highest return on investment of any mattress on the floor.

And secondly, we have a massive advertising campaign that works very effectively in building brand awareness, and driving consumers to buy the product.

So our plan would be to continue to do exactly what we're doing now, which is continue to introduce new product, expand our number slot in the stores, expand our store base, and invest -- continue to invest in our advertising in marketing.

OK, so at this stage you haven't seen any even signals from any of -- any challenge (ph) that you're ready to obviously mainly the retail guys that, you know, maybe preparing themselves and preparing you to maybe shift a little bit of the floor space to someone else?

No I think if you go into a typical retail store in the U.S. and you count the number of mattress models on the floor, you'll find that there will be plenty of innerspring products that can be displaced before they displace their number one selling product.

OK.

My second question is your Cap Ex as obviously gone up a lot in 05, and I know what you mentioned, the shift in timing, you're bringing it closer to 05 than 206, but commensurate with that, what should we expect the depreciation and amortization to be?

If you can give us that number for the year please.

No, I'm not going to give you a specific number for 2005, but the cap Ex that we're spending next year will not be depreciated next year because it's under construction point (ph), you know ...

But some of it will.

Excuse me?

Some of it will, right?

No, it's under construction until the plant's completed.

Most of the equipment is going to be being delivered right at the end of 2005, into the early part of 2006, and what's changing the spin it's basically the final negotiations around progress payments.

So everything will still be capitalized?

Nothing will start getting expense before 06 is what you saying?

Not going to be in service.

OK, so they're not going to be in service, and therefore they won't be expensed before 06.

Right.

And lastly, just, you know, one house keeping item here, the -- you gave us (inaudible) that -- did you -- is that only -- is the term loan and the bonds the same and you only bought a little bit more or paid down a little bit more from the revolver, is this what you did, or did you paid down anything that's permanent debt in Q4?

Obviously, the sub debt is the same.

Right.

Term loan B's 131.6.

That's slightly down.

Term loan A is about 41.8.

The mortgage is 1.7.

1.7, OK.

And that kind of fluctuates with exchange rates.

And revolvers, it's 17.

OK.

Thank you very much.

Your next question comes from Mike Blicknick (ph), of Piper Jaffray.

Hi, congratulations on a great quarter.

Given the increase that we've seen in slots per day, do you get the sense that you'll be able to continue to increase that when the new model is introduced later this year?

We believe we can, from the standpoint that our existing models are doing so well, and our returning high profits to our dealers, and by you know -- if the Celebrity is any indication of the acceptance of -- and the Deluxe for that matter, any indication of how a new product will be received in the marketplace, we're very optimistic.

OK, great.

Do you have a target where you might be by the end of the year on that?

No, we haven't put together a target in terms of number of slots.

OK, and as far as operating margin goes, is it right to assume that you're looking at that maybe flattish year over year?

And longer-term, what is the ultimate target there?

Well, long-term our target or operating margin is to get in the 25 percent range.

For the next year, we would expect a modest increase in operating margin next year on a total year basis.

OK, and then lastly, is it possible to quantify all of the price increases you're looking at for February 1st?

And will those be uniformly applied or concentrated in California?

The price increase is approximately 6% increase on our mattresses and foundations, and it'll be across the board.

OK, great, thank you very much.

That is all the time we have today.

Please proceed with your presentation or any closing remarks.

I just want to say thanks again for joining us on our call this evening.

We look forward to talking to you again after the first quarter.

Thanks a lot.

Bye.

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

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

END