Tempur Sealy International Inc (TPX) 2005 Q1 法說會逐字稿

Welcome to the Tempur-Pedic International first quarter 2005 conference call.

[Operator Instructions]

It's now my pleasure to turn the conference over to Ms. Harriet Fried of LHA. Ma'am, you may proceed.

Good afternoon, and thank you for participating in today's conference call. Joining us from management are Bob Trussell, CEO, Tom Bryant, President and Dale Williams, CFO.

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

Any statements made my Tempur-Pedic International during this call that are forward-looking are made pursuant to the Safe Harbor 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 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 statements 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 the management's comments may reference to 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 releases 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 company over to Bob Trussell. Please go ahead,

Bob?

Thanks for joining us on our call today. As the press release we issued this afternoon illustrates, the year is off to an excellent start at Tempur-Pedic International.

We kept up the fast pace of growth we established in 2004, our first year as a public company, increasing net sales 45% to more that 222.4 million.

During the quarter, net income under GAAP, rose a 127% to 26.8 million or $0.26 per diluted share while Pro forma net income 66% to 27.5 million or $0.27 per diluted share.

We're very pleased with these results, which actually represent the best quarter Tempur-Pedic has ever had in terms of net sales and earnings.

We're also very satisfied with the progress we've been making with our strategic initiatives, which are designed to help us continue expanding the category in capitalizing on a huge market opportunity we believe exists in the bedding category.

At this point I would like to ask our President Tom Bryant to go through our results in more detail and update you on Tempur-Pedic's other important activities.

Tom?

Thanks, Bob. As outlined in this afternoon's press release, it was another outstanding quarter for Tempur-Pedic as we successfully executed our strategy of driving solid growth by expanding our retail channel and our mattress sales. In addition, we are seeing signs and receiving industry data that confirms the visco-elastic category as a whole is continuing to expand.

I'd like to touch on the highlights of the quarter's performance for you. First, let's review the results by our sales channels. As expected, the largest increase here came from our retail sales channel where overall sales rose by 62%. This reflects our focus and continued success in establishing the Tempur-Pedic brand in the mainstream bedding channel.

Our growth in the seasonally strong first quarter was exceptionally robust in the U.S. where retail sales increased 74%. Sales were also up significantly internationally rising by a total of 40%.

A portion of these increases reflect the fact that we substantially increased the number of furniture retail stores in which we sell our products. In fact we added a net of approximately 330 stores in the U.S. substantially over our target number of 75 per month.

Internationally, we added approximately 170 stores also well above our target of 25 per month.

As of March 3first, 2005, our products were offered in approximately 4,430 furniture and bedding stores and 1,500 specialty stores domestically. Internationally, our products were offered in approximately 3,470 stores. As a result of this performance, for the balance of the year we are now targeting 30 to 40 stores per month internationally and 80 to 90 stores per month in the U.S.

At the same time, I am pleased to say that we are also generating strong growth in our established accounts. As we've mentioned in previous conference calls, Tempur-Pedic is not itself a retailer and therefore is not able to track directly individual store sales.

However, we do monitor our sales in the U.S. furniture retail markets by customer accounts. As most of you know, in this industry, a customer account may range from one store to a chain such as Rockaway or Mattress Firm, which can have as many as 200 stores. We distinguished between sales from established accounts, which are sales to accounts the company has opened for at least 12 months, and sales from newly added accounts.

As you all recall, our guidance for 2005 is based on established accounts in the U.S. growing at a rate of 30% to 35% for the year. Based on the first quarter, we are confident in our guidance in this area.

Also during the quarter, we saw strong sell though as some retailers chose to buy ahead of the February first increase and actually ran special beat the price increase promotions. As a result, we believe our volume in the first quarter benefited from this one-time promotional activity by approximately $10 million to $12 million.

Our direct sales channel also grew nicely in the first quarter with total sales increasing over 14%. Growth in the U.S continued to trend somewhat ahead of our expectations, as we continued to invest aggressively in a massive advertising campaign to build our brand name recognition.

Our international direct sales business was down marginally for the quarter reflecting the timing of our advertising expenditures in the U.K. This is not an indication of trends expected for the rest of the year.

Sales in our healthcare channel were also up almost 8% as we continued to improve and innovate we do business. As you recall, in December of 2004, we recruited Paul Coulis, a 29-year veteran of the healthcare industry as President of our Tempur-Pedic Medical business in the U.S. Paul is developing a strategic plan for this business and will help us capitalize on the many opportunities that we feel exist in the U.S. healthcare market.

Finally, consolidated sales from our third party distribution channel were up only marginally from last year first quarter. This reflects the fact that our strong performance domestically was largely offset by strategic pullback in certain third party markets internationally.

Now, let's talk for just a moment about our sales by product. As you can see from the breakdown included in our press release, our mattress sales grew very significantly, as they did throughout 2004. Affirming the fact that Tempur-Pedic has established itself as a long-term player in the mattress industry.

In the U.S., Dollar sales rose 72% while internationally they increased 51% driven primarily by strong unit sales growth. Demand for our high priced -- our new higher priced Celebrity and deluxe mattresses remained strong. In fact, together, these 2 premium priced products accounted for 64% of domestic mattress sales.

Consolidated pillow sales were not as robust, actually decreased slightly due to declines in our international sales, which are not completely offset by the growth in our domestic sales. This was not a surprise to management.

Last year after assessing the strong market potential in Asia, we implemented some strategic changes in our international third party sales channel business taking steps to establish and grow our own subsidiary distribution in certain markets.

Although these steps will have an impact on our results short-term, we're committed to our strategic position in key markets in Asia and elsewhere around the world. In the long run, we believe this strategy will protect our product and brand positioning and will be very positive for our business.

In addition to producing exceptional financial results, we achieved the operational goals we established for the quarter. First, let's talk about the progress we made with our futon products. As you may recall, Japan is one of our largest operations outside the U.S. But Tempur-Pedic is still viewed primarily as a pillow company.

A large percentage of Japanese do not sleep on western style mattresses and have more restricted space in their homes with some rooms having multiple functions. So our challenge was to develop our products that is foldable, lightweight and storable.

In January, we began delivering our futon to large department stores, where we have sales reps, who can introduce customers to the features and benefits of our new product.

Although the sales rollout is still in its initial stages, the reaction to the futon to date has been very positive and the rollout is proceeding ahead of plan. We're now starting to expand distribution into bedding and futon stores.

Another new product we recently unveiled here in the U.S. is "The EuroBed by Tempur-Pedic." This modern style of the EuroBed is something very new to the mattress industry. It combines some very striking design elements with a high profile platform foundation that is covered in a micro-fiber suede and is designed to complement the slick style of the mattress.

We first introduced EuroBed in Europe in April of 2004. And have been very pleased with the sales to date. The EuroBed will start shipping in the U.S. in June.

We also plan to launch an additional mattress model in the U.S. later in the year.

Finally, let me just mention that the construction of our new manufacturing facility in Albuquerque in New Mexico which will help us serve growing demand in North America has been proceeding on schedule.

As a result, we continue to expect the initial capacity to come online in the second quarter of 2006. Once it's up and running, we will no longer need to import mattresses from Europe which will have a positive effect on our gross margin.

As a result of the volume increase in the first quarter, we began, as we did in 2003, to import mattresses from Europe to meet demand in the U.S.

I'll now turn the call over to our CFO, Dale Williams to discuss our financial results in more detail.

Dale?

Thanks, Tom. Let's first talk about our sales performance for the quarter in more detail. As Bob mentioned earlier, for the 3 months ended March 3first 2005, the company achieved net sales of $222.4 million compared to $153.1 million for the same period last year. This represents an increase of $69.3 million or 45%.

We experienced significant growth in both our domestic and international businesses as we continued to execute on our worldwide strategy of expanding distribution, investing in marketing and advertising and continuing to grow our market.

Domestic net sales grew to $147.9 million in the first quarter, as compared $92.9 million for the same period in 20004, an increase of $55 million or 59%. Domestic sales accounted for 67% of our total net sales as compared to 61% in last year's first quarter. International net sales grew to $74.5 million in the first quarter, as compared to $60.2 million for 2004, an increase of $14.2 million or 24%.

Our growth in net sales was attributable primarily to an increase in the U.S. retail channel of $14.7 million and $14.9 million in the international retail channel. We continued to have outstanding growth in our mattress business as worldwide growth grew 65% in the quarter primarily on strong unit growth of 51%. For the quarter mattress revenue accounted for about $154 million.

Regarding profitability. As noted in the press release for the 3 months ended March 3first 2095, GAAP operating income was $41.4 million compared to $30.5 million for the same period in 2004, a growth of $18.9 million or 62%. Excluding stock based compensation expense of $700,000 as previously disclosed, our Pro forma operating income was $50.1 million or 23% of sales in the first quarter of 2005, an increase of 57%.

The growth in profitability for the business was principally driven by the increased gross profits at $114.2 million on higher net sales. Gross profit for the quarter was 51.4%. The gross profit rate decreased from 51.8% last quarter and from 53.1% in the prior quarter.

As Tom mentioned, due to our exceptional U.S. growth, we began importing mattresses into the U.S. from Europe in the first quarter to meet strong demand, just as we did in 2003, utilizing the capacity we added in Europe in fourth quarter of 2004. We incur shipping costs on these products, and this will continue until additional capacity comes on line in the U.S at our new manufacturing facility in the second quarter of 2006.

In addition, as discussed last quarter, we implemented a price increase on February first of this year. We allowed our retailer accounts to order inventories in advance of the increase, and many if them did. Receiving that inventory in January and February. Therefore, the impact of the price increase only started in the latter part of the first quarter and will be more fully realized starting in the second quarter.

Finally, the decrease in the pillow sales internationally that Tom discussed which carry a higher margin in mattresses, also impacted our margins in the first quarter. We continue to expect some impact on the margins in the rest of the year due to the overall shift in product mix toward mattresses and channel mix toward retail.

Operating expenses for the first quarter 2005 decreased relative to first quarter of 2004, as the extraordinary revenue growth in our retail sales channel growth provided leverage in excess of our ongoing investment in our business.

GAAP net income for the 3 months ended March 31st 2005, was $26.8 million compared to $11.8 million for the same period in 2004. Pro forma net income was $27.5 million or $0.27 per fully diluted share compared with $16.6 million or $0.16 per fully diluted share representing a growth in Pro forma net income of $10.9 million or 66% and a 69% growth in EPS.

Pro forma net income excludes the previously disclosed stock based compensation expense. Fully diluted share count was 103.4 million shares in the first quarter of 2005 compared with 103.1 million shares in 2004.

In addition to the operating results of the business, I wanted to provide a few key balance sheet metrics. Our total outstanding debt as of March 3first 2005 was $260.5 million, a reduction of $29.2 million from December 3first 2004.

Net debt as of March 3first 2005 was $247.5 million. Cash on hand as of March 3first 2005 was $13 million. Net debt was reduced $13.8 million in the quarter.

Our continued strong cash flow enabled the early repayment of the outstanding balance of the European term loan. This repayment led to a write off of $700,000 in deferred financing costs in our first quarter results.

Net accounts receivable grew $5.1 million to $98.9 million in the first quarter. Inventory grew $7.5 million to $73.7 million, as we increased our inventory due to the longer lead time required to bring in products from Europe.

Accounts payable decreased $1.2 million to $33.6 million. First quarter depreciation and the amortization costs was $7.4 million. Capital expenditures for the quarter were $18.7 million of which $16.1 million related to the construction of our Albuquerque in New Mexico facility.

Additionally, as previously disclosed on April first, we secured a $40 million revolving credit facility, as a bridge to permanent financing for our new manufacturing facility.

Regarding guidance. Company is updating guidance based on many factors. We are taking into consideration the emerging seasonality of the business, our actions related to the third party business mix in Asia, the one time blitz in sales in the first quarter related to the beat the price increase promotions, along with the continued strong trends in the first quarter of 2005.

We are increasing the full year guidance we provided on March 9th, 2005. We now expect net sales for 2005 to range from $880 million to $890 million, rather than being in the vicinity of $880 million. We expect Pro forma net income to range between $1.10, $1.13 for fully diluted share rather than being in the vicinity of $1.10.

We also expect GAAP diluted earnings per share to range between $1.08 and $1.11 rather than being approximately $1.08 per fully diluted share. As noted in our press release, these expectations are based on information available at the time of the release and are subject to changing conditions, many of which are outside the company's control.

This concludes our prepared remarks. And at this point operator, we would like to open the call to questions.

[Operator Instructions]

Your first question comes from Robert Drbul from Lehman Brothers.

Hi, good afternoon.

Hi, Bob.

Couple of questions. First one I guess, you guys talked about some of the industry data that you had around the visco category. Two questions around that.

Can you share some of that data in terms of where you see the size of the industry and the growth rate of this segment of the industry right now?

And then, I guess there's a lot of talk about some competitive entries that you're dealing with, whether it's China knock-offs or some of the branded entries. And I just wondered if you could maybe address some of those threats a little bit for us?

Yes, in terms of the industry data, on the category Hispa for the first time on the annual report for 2004 broke out some data from the innerspring markets. So it basically segmented the non-innerspring category. So one of things that we were able to see for the first time on that data was that the innersprings continued to be 85% of the markets. But that the non-inner springs are now 15% of the overall market in the U.S.

The other thing that, from the industry itself the number, as you mentioned, Bob, the number of competitors who have introduced products over the last few years and continue to do so, and in some cases, obviously gaining some distribution and making some sales, and we -- also you see our numbers, and so if you just look at the combination of the fact that our business is growing along with some of these entries who are having some success getting their products out there at retail. That indicates that the fiscal market is continuing to grow aggressively, and we're continuing to take market share as we do that.

In terms of the competitors, we've seen a lot of competitors over the years and we're continuing to see that -- there are a couple of companies -- quite a few companies now, 3 or 4, who are bringing in visco from the 40's.

Again, based on what we're seeing out there, and based on our own performance, we feel pretty confident in our opinion that what's happening is the category is being expanded, that the overall fiscal market is continuing to grow, people are starting to become more aware of some of the drawbacks to the traditional innersprings

OK. I just have one more question for you and in terms of a lot of new accounts, were there any, 1 or 2 large ones you would call out, that you think have the biggest potential of some of these newest accounts that you've just added?

Well, you know, one of the things that we've seen since we started going aggressively into the retail furniture and bedding channel is that as we continue to open the new doors, that we don't see any deterioration in the caliber of the doors -- meaning that, you know this is a very fragmented industry, with the average account only having 2 doors. Also there are a lot of independents, but they do exceptionally well.

So what we're seeing is the mix as we continue to open doors like we did in the first quarter, we expect the sales from those doors to be just as robust as the doors that we've opened a year ago. That's because that mix is still continuing. There are some chains, but there are some mom and pops and -- but quite a few independents the way we've seen in the past.

Great. Thank you very much.

Your next question comes from the line of Jonathan Shapiro with Goldman Sachs.

Hi, good afternoon.

Hi, Jonathan.

Wanted to follow up a little bit on the, as you termed it the "One time blitz" in sales you got from the pull-forward before the price increase? If you look at the -- I guess you said $10 million to $12 million -- what I'm trying to sort of back through is what you think that would be on a -- on an earnings basis? Sort of incremental growth margin on the last margin sold, you know that whole thing. If I do a back of the envelope I'm coming with up with about $0.03. Is that about right?

Well, I think that's a little bit high, given our general additional investment that we do in the first quarter, related to higher advertising, our guess would be that it's probably a little closer to penny to a penny and a half.

OK, I'll check and run back and do the math a little bit later.

Well, keep in mind this is retail.

Understood. And I guess I want to ask about that. If this was product that was being in January, and I guess some of you are still shipping in February, but the orders had come in before -- is it that you think that this is sales that were pulled forward -- almost that retailers were taking demand from later in the year?

We're not just talking about it month to month clearly then, this would be, people that you thought mattresses April, May, June, that were actually buying it -- you know, January, let's say January-February, is that right? If you're just talking month to month you wouldn't have actually seen any impact in the first quarter. So either it gets actually got really got pulled in the early part of the quarter, from future quarters.

Well, actually what we think is because the retailers had -- we allowed them to order extra, we were delivering the January orders into February. We don't really believe there's a pull-ahead. What we believe is because what we saw from the retailers was extensive promotion of our product -- much more than normal, a lot of really big, beat the price increase promotions that carried over into February. We think that there was -- because of the level of promotion, there was some additional demand generated, occurred in the first quarter.

Now would those people have later in the year have bought something? Maybe -- we can't really determine that. But just based on our historical trends, historical patterns, we believe there was some extra business in the first quarter that was really a result of the level of promotion that the retailers were doing.

OK. And I assuming you guys -- given the price increase, your typical policy of not liking your retailers discounting, sort of on this one-shot basis, not terribly exciting to you?

Well we actually -- when you see that they were selling the product based on what they paid for the product. So in essence, we didn't view it as a discount.

OK. And on a separate subject on the importing mattresses from Denmark -- I guess this is coming a little bit early in the year than we had been expecting, based on comments you guys made on the last quarter. Is this, just trying to get ahead, make sure you guys don't have any issues as you do? Or was it the sale that much ahead of you -- what was the reason for doing it much earlier in the year than I guess was sort of implied, based on the last quarterly call?

Well, basically if you look at the level of business we did in the first quarter, we needed the import to support the first quarter business. In addition, once we start getting into the mode of importing, because of the longer supply chain -- it takes about 4 weeks to ship products from Denmark and get it to the States. So you have to build up your inventory. We don't have the capacity to build the inventory in our Virginia facilities, so that additional inventory had to come from Denmark as well.

OK, and since second quarter is a little seasonally slower, you maybe don't need to do as much, or you sort of factor that into what your -- would that be the right way to think about it -- you cut back on that in the second quarter? You build less inventory than you might otherwise have had to?

Yes, that's what we would expect, we would import a little less in the second quarter, because it is seasonally slower and maybe not quite as much inventory build.

And roughly what are you guys paying, on a per mattress basis for the imports?

It's -- we're averaging right between $50 and $55.

OK, and just one last little question. On the -- you guys talked about a net new door count. Is that -- I know you'd lost mattress discounters. Is that net of the however many stores they had -- the 330, in the U.S.?

Yes. In any account during the quarter that we cut off, we deduct those accounts that we cut off from the net numbers. So this is truly a net of any account that we stop doing business with.

Your next question comes from the line of David Campbell (ph) with Thomson Davis.

Thank you, good afternoon.

Good afternoon.

Would you quantify the price increase? And comment also on how the customer and retailer have accepted that?

Sure. First of all, the acceptance has been expected, meaning that no change in reaction from the consumers or the accounts. We have a variety of ways of tracking consumer reaction -- everything from our focus group testing, but also we have a direct response business. That business, on February 1, when we raised prices, anyone calling into the centers, were getting the higher price.

So, obviously, you can see from our business, and in the U.S. on Direct, which was up 18% over last year in the quarter, so a bit -- what took place in March was obviously at a higher price. So, the reaction is what we expected, which is -- the demand wasn't impacted by that price increase.

And how much, again, was that price increase?

The -- if you look at it from a mattress standpoint, our Classic, we took it up $100 and our other 2 products, on the Queen size, we took up $200.

That's 6% to the company.

OK. Can -- and also, you also said you raised your door plan for this year -- the monthly door increase, can you say exactly where you are getting the additional doors? Which channels or which regions?

Sure. Well first of all, as we've previously stated, there are approximately 30,000 doors, or doors, currently selling mattresses in the U.S. We actually have raised our target for the U.S. in terms of our internal goal which is 10,000 now, we used to be 9. So if you look at where we were at the end of the firstt quarter, which is about 4,430, we still have substantial room to continue to open new accounts and new doors.

And they will come from across the country, it won't be dominated by a particular region, or a particular class, again because it is such a fragmented business. On the retail side, we expect the mix in the future to be very similar to the mix that we've experienced in the past.

Your next question comes from Keith Hughes from Robinson Humphrey.

You have a lot of things going on in the gross margin line this year. Dale, the first quarter gross margin, is that going to be represented by what we're going to see for the rest of the year, somewhere between 51/52?

It's somewhere between 51/52, yes. And we'll see a little bit of help with getting more impact of the price increases in the latter quarters. However, depending on the volumes, and the level of importing, you know that's a pretty big drag. We think that the import -- just the additional freight costs, costs in the order of a million dollars in the first quarter.

OK, the new mattress you're going to show the public in Las Vegas in July. When will that be ready for shipment to customers or retailers?

Yes, we haven't exactly determined that yet, we're still in the development and testing process. I plan it would be to -- of course unveil it July in Vegas and it would start shipping sometime in the back half. Haven't determined exactly which month yet.

Your next question comes from Joe Altobello with CIBC.

Hey, guys, good afternoon. A follow up on the last question about this new mattress coming out in July. In terms of what you're seeing from your focus groups, what is the appetite for a price point north of your Celebrity bed?

Well, we think not only from our market research, but also our retail dealer network, is that there's still room there above our Celebrity price point. So certainly as we continue to look at our pricing strategy, and our new product development strategy, we don't think that there's a ceiling there of a higher price point product. We don't think, the Celebrity is certainly is not as high as we can go, let's put it that way.

OK. Then on the gross margin number, I was curious if there was any impact from rising raw materials cost. It seems like you guys, every quarter are probably the only company that I cover that seems to be able to escape that.

Joe, the primary cost factor in the first quarter was a cost that started occurring in the fourth quarter, which was related to the new California fire code, EB 603, where we took that additional cost. That was why we raised prices, but because of the level of volume, and the level of ordering that we allowed retailers to do to carry on through February sales, that we bore the brunt of that cost for the quarter.

OK. And last question -- I guess you guys saw that Brookstone is getting bought here. What is the thinking there, is that a risk or could that be an opportunity down the road for you guys?

At this point, the feedback we're getting from Brookstone is that they do not expect any changes and that we're not expecting any changes in the relationship that we have with them. As to what's going to happen down the road, I think we'll just have to wait and see, but right now, no one's expecting a change.

Your next question comes from the line of Michael Cox with Piper Jaffray.

Good afternoon, thanks for taking my call. Just have a couple of questions -- housekeeping, and I'll start with those slots for doors for the quarter?

Yes, yes. The slots, we actually finished at 2.27 versus a year ago, if you looked at the quarter, or we say at the end of the year we were 2.18.

2.18 at the end of '04?

Yes, right.

And, could you give the sales at the furniture and bedding stores domestically, within the retail?

$93.4 million.

OK. And then, on the housekeeping side, lastly, on the specific product mix between the 3 different mattresses?

The Classic, domestically, the Classic represented about 36% of our business, little less than 36 and the balance was between the Deluxe and Celebrity.

OK. So you'll give those on a combined basis now, going forward?

Yes, I mean we could give it to you broken out -- just rounding 46 on the Deluxe and the Celebrity is up to 17, but that's a rounding number.

OK, and then on a bigger picture scale, could you discuss in a little more detail the pillow sales, and why they were down year over year, and what we should expect going forward in 2005?

If we look specifically at the international business we had, we have third party distributors, independent distributors in a number of countries in Europe as well as Asia. We also have, you are probably aware of in North America, like Canada's a big dealer for us.

But we determined that they were a couple of third party distributors who had been shipping pillows specifically outside of their assigned markets and that we decided to become very strict with that and control that, to try and keep it from having a negative impact long-term on what we are trying to develop in Asia.

So that is in the base last year, that pillow volume, third party, the international business that has been our base since they shipped out quite a few pillows last year and this year as we were tightening up and trying to control those exports outside of their assigned areas. That was the negative impact.

We are going to continue to control that, as we try and focus more on developing and growing the brand in Asia through our own operations, so basically what happens in the quarter.

Your next question comes from Mark Rupe from Adams Harkness.

Hi guys, couple of questions here. As far as importing of mattresses from overseas, is it fair to say it's in that 15% or 20% for the U.S. market? Is that too high?

Mark, I am sorry what was the number?

15% or 20% -- is that too high of the U.S mattress?

First quarter? Of what we sold in the first quarter?

No, that were imported from Denmark?

If you look at our U.S. sales, that is in the ballpark of what we imported. However a lot of those were as we said, for inventory.

Got it, OK. And in Q2 that we ramped down pretty significantly?

It will go down a little bit towards the end of Q2, given that Q3 is typically seasonal, it is a strong quarter, (inaudible) quarter we will have to build inventory somewhat in the latter stages of Q2 to be prepared for Q3.

Right, OK. And then as far as the -- looks like the specialty store sales for the U.S. had a nice bump-up of 20% plus in the quarter, is that the kind of the promotions or is that part of the sell-in from the Supreme and the Solution beds going to the Relaxback and Brookstone?

I think we have actually been experiencing, you know, really excellent growth and distribution at our specialty stores like Healthyback or Relaxback with the new products. And we are rolling that now that product you mentioned for Brookstone, the Supreme, we are rolling past that this quarter really, what didn't impact much last quarter.

OK. And as far as the expectations for EuroBed, obviously Celebrity penetrated, I think in the first quarter 40% of your accounts. Any expectations on what the EuroBed will what do compared to the success overseas?

Not at this point. We were very pleased with the reactions from our customers when we were down in the high point, we expect, you know to be able to gain some additional floor space with that product, which is unique (inaudible) fine. I think the price point from a (inaudible) strategy, is positioned well, so we are very hopeful as we move forward.

But we really haven't tried to assign any goal that we would be willing to share externally in terms of that distribution rollout as a percent of our total base.

Your next question comes from the line of Krista Zuber with UBS.

Good evening, most of my questions have been answered, just a couple of housekeeping. Could you give us a sense of the advertising spend within the quarter and projections for '05?

Sure. The total spend in the first quarter was well over 25 million, 25,780 and that broke out where the U.S. was a little over 17 million and the balance was in our international operations. You look at it on a percentage compared to the same period last year, overall we had increased our advertising about 44%.

OK, great, and there's sort of a target or goal for 2005?

Well we are looking in the U.S. specifically at a spend of little over 60 million and compared to last year's 46 million. So that is the U.S. target.

And then finally just give us a sense what return rates in the quarter on mattresses, please, thank you?

Yes, the return rate overall was slightly above 6/6.4. And specifically for a direct response business in the U.S., it was 13.5.

Thank you.

Your next question comes from the line of Todd Schwartzman of Sidoti & Company.

Good afternoon. Could you discuss any opportunities you might expect with Olsen (ph) International and whether you might create any new products for their market?

Well, I think the, you know the determining factor there will be the relationship that Brookstone will have and how they will operate within the parent company, you know obviously we have been exceptionally successful with Brookstone and the model that we've built is that something that, you know we could expand in some of their stores in Asia, I guess that's yet to be determined.

What percentage of sales did Brookstone represent in the quarter?

We don't give out specific accounts, but we'll tell you that if you look at our top accounts, we didn't have any account represented, any account above 4% of our total.

Keep in mind first quarter is really Brookstone's seasonally slowest quarter.

Looking at the Deluxe mattress and the Supreme sold through Brookstone, both retail for about $2,100. Could you compare the features and benefits just for us to get a sense of deficit (inaudible)?

Well, the Supreme product that they have, actually retails for about the same price as our Deluxe, you know which is 2099 and their Supreme pillow top also is priced right at the price of our Celebrity, 2999. There are some differences in the construction of the product. Difference in the, for example, on their Supreme Deluxe. The cover is different in the Deluxe that we sell.

And in also the construction of the product and the Tempur material that we use has a slightly different formulation on the Tempur material. So there're some subtle changes there. But the main thing is that it's a product that will give them a point of difference on the floor and also give them an exclusive product for their customers.

I missed your -- I'm not clear in your explanation as to the differences in construction and difference in their covers.

Right. The cover difference is both in terms of the -- visually if you look at the cover next to our Deluxe for example, it's completely different cover. It's still stretchable, terry type of material, but again it's more for the visual effect than any other benefit on the cover. The covers basically perform the way that the terry performs on our Deluxe model. And then in terms of the construction, as I said, there are some changes in the construction. But, that's basically the difference.

It sounds like that's proprietary. You won't share that.

Well, yes, we're not going to give out the details of how we're making the product, right.

OK. Last question. You talk a little bit about this merging seasonality, what we might expect over the next several years?

Well, if you go back and look at the industry data on this, traditionally, you have a down quarter, in the second quarter. It bounces back in the third quarter and then because of the holiday season around the fourth quarter, and fourth quarter is traditionally the weakest quarter, and you can look at the data.

For example, the second quarter last year, that was down about 5% versus the first quarter and the -- traditionally, the fourth quarter can be as much from 10% to 13% below the third quarter. Now, that's as an industry as a whole.

And the key there is as we are getting bigger and higher concentrated in the furniture and bedding channel, which is the mainstream of the mattress market, we expect to see more and more of that industry seasonality because that seasonality reflects itself in those channels.

And once Albuquerque is up and running in Q2 '06 on a full year basis, let's say, looking out to '07, would you expect Q2, Q3 to show the greatest growth margin -- or what kind of patterns would you expect, once you've got a full, once you anniversary if you will be, the opening of Albuquerque?

I'm not sure that Q2 '06 is going to show a dramatic change in gross margins because the plan will just be coming on line. It won't be operating at full volumes yet; it'll be ramping up. So, you may still have a little bit of importing going on in 2Q of '06 as we're ramping the Albuquerque facility.

In addition you'll have -- once you start up the factory, you start depreciating the factory, so you'll have new depreciable cost that may not have the volumes to completely offset that. So, as you get in to Q3, Q4 of '06, you should start searching that turn.

And after '07 what would you expect to be the seasonally strongest quarter margin wise?

Historically, the third quarter is our seasonally strongest quarter. Both on the top line and on the margin line.

Your next question comes from the line of Stephen Kim with Smith Barney.

Hi, good afternoon. Congratulations, again on the strong quarter. It's actually an issue for Steve. First question is, now, traditionally, your marketing has focused on visco as a sleeping surface, compared to springs and other sorts of mattresses.

Now that the category has grown some, and you have bigger name competitors, is the nature of your marketing going to change or you're going to begin to talk about the competitors more?

Well, just to clarify. Our advertising, we don't spend money, time or energy talking about visco. We talk about Tempur material. And the reason we talk about Tempur material of course is its proprietary material. It's not like the other viscose that companies use. So, we're developing the advertising and the image of the brand and the product is all built around Tempur, not Visco.

And, of course, the success that we've had with the advertising campaign in building our brand awareness, both here and internationally, at this point we will continue that strategy.

At some point in the future, we can always evaluate if someone starts making any significant inroads into the category, we could always address that. But right now, we would not want to give anyone any credibility by addressing what the consumer, right now will not perceive as a product with parity.

OK, and another subject. The Futon mentioned that the launch is going according to schedule. When can we expect that to begin to have an effect on your International sales and perhaps, are there any targets you can share with us for what you expect it to contribute this year?

No. We're not giving out specific information on Japan. We obviously would expect, as we continue to gain distribution, both in the department stores and the many bedding and futon shops there are in Japan, that it will have an impact, favorable impact on the business. But, at this point we are not giving any additional color details around the futon or the Japanese market, as a standalone operation.

OK. That was it from me. Thanks.

Your next question comes from the line of Omar Sak (ph) with Lehman Brothers.

Thanks, Good Evening. Actually wanted to follow-up. I don't know if you can answer this or not on the Japanese market question. I was wondering, do you have an estimate, or is there an estimate out there in terms of the size, the Dollar size of the futon market in Japan as it is right now?

We've looked at the size of the market in terms of how many, the estimates on how many units are sold. Dale, do you remember what that number was?

It about 10 million units, futon units per year sold in Japan.

OK. Is there -- the way the market is structured out, is there like a leading player. Is it a highly diversified marketplace in terms of what products are being brought to customers?

No, it's a very diversified -- not a lot of brand loyalty or branding. Lot of it is similar to the way the innerspring market has developed in the U.S., which is the commodity based on price.

OK.

And our goal there will be, to do the same thing in Japan, as we did in the U.S., which is de-commoditize this 2 timing market over there.

Great. One other thought, have you talked about a price point, a retail price point for the new EuroBed at all?

We are looking at that product from a set standpoint, what the pricing strategy is, between the Celebrity and Deluxe. It's going to be 29.99 for a set, compared to the Deluxe 23.99 and the Celebrity 32.99, so, sort of fills that gap which we think is there.

OK. Now, in terms of your -- if you think about your product line in Mattress, if you think about your product line right now, you've the Classic, Deluxe, now the EuroBed and then the Celebrity at the high end, it's 4 skews and then plans to roll out another one it sounds, later in the year. What kind of distribution plans do you have in place, or what kind of expectations do you have?

I mean, what's your feeling for the sense of the -- of retailers to be able to put 4 Tempur skews on a floor, for certain retailers to be able to show them all, or are you expecting that they'll still kind of, figure on that 2 to 3 range in terms of skews they'll put on the floor?

Well, I think that's yet to be determined. I mean, we had an excellent reception from our retailers at High Point when we launched this product. We also know that each time we have introduced a new model that it's allowed us to gain incremental floor space. One of the reasons for that, of course, is that the models that we have on the floor currently, continues to do so well in terms of the returns to the retailers' profitability.

So, at this point, we're not prepared to give any estimate on what we think the distribution may be, on the Euro. Obviously, we have internal targets that our sales group is working towards. But at this point, we're not sharing that.

Can you talk qualitatively, when you rolled out the Celebrity, did you find that some retailers added the Celebrity -- a lot of the retailers added the Celebrity to their existing Tempur skews on their floor, or did retailers take the Celebrity and replace the Classic with it? What kind of trends did you experience with the Celebrity?

Yes. I think, if we look at it in terms of information that we provided, as we look at our slots per store, keeping in mind that there are a lot of mom and pop stores out there, various sizes of stores, but that we've been able to continually move up our slot, meaning the space.

So, we're averaging at the -- in Q1 of this year, 2.27 slots per store. So, obviously we're thinking that, as we introduced this Euro, that that hopefully will help, based on what we've seen in the past when we introduced a product, and we're able to gain additional floor space.

Great.

I would just add that, we think that our average will move toward the 3.0 mark. We don't know when we're going to get there, but our better customers, some years from now, will have 5, 6, 7, or more skews on their floor.

Do you have a sense for the retailers that take a -- when you roll out a new product, they take the new product and they're not replacing them in existing Tempur products, what you are replacing, on the floor?

Yes, if you look at the market, since 85% of the market continues to be innersprings, the innersprings that one of the slowest moving innerspring models would be displayed.

Great. All right, thanks.

Your next question comes from the line of Nike Walia (ph) with Lehman Brothers.

Good afternoon. Most of my questions have been answered. I had just one housekeeping question. What do you expect CapEx to be for '05?

For '05 we expect CapEx to be in a neighborhood of $85 million. That's, as we talked on the fourth quarter call, that's 70 million spend on the Albuquerque facility. And we typically run -- we've been running in the last few years, 10 million or so of maintenance and general growth capital. We think that'll, as we continue to grow and get bigger that number will increase. So that's where we would expect this year, about 85 million total in CapEx.

And how do you expect to break out across the year, first quarter?

In terms of break out across the quarters, we don't give quarterly guidance.

OK. No, I just meant whether it'll be back-ended or ...

Well, we spent -- of the 70 that we were planning to spend in Albuquerque -- as I mentioned earlier we spent 16.1 million the first quarter. That will continue to ramp.

OK. Perfect. Thank you very much.

And next question comes from the line of George Chalhoub with Deutsche Bank.

Hi, the -- in terms of the overall segment of the industry increasing, as you mentioned before, some of those Chinese made visco-elastic mattresses are coming in at price pointing to 6.99 to 8.99 area. You mentioned before that you focus on the Tempur material and you draw the differentiation that way. Is that how you plan to keep it, or are you concerned that the industry -- this segment of the industry may becoming more promotional for these entries?

No, for a couple of reasons. And one is that we've always seen cheap products, imitations, being introduced into the marketplace for years. We've seen people attempt to dramatically under price us. We've seen people who price their product higher, hoping to communicate that their product is better. And of course, we've seen strategies where would be parity.

The product that we have, at this point, no one has been able to replicate and -- but at the same time, the other big hurdle is that we are continuing to significantly invest in building brand awareness and creating demand for our products. While we see cheap products come in from the Far East, what we don't see is, getting one stepping up this place with a $60 million advertising campaign to establish a new brand in the category.

Right. Thank you.

Your next question comes from Paul O'Neill (ph) with Omega Advisors.

Yes, I -- all my questions are basically answered. But back to the distribution issue. You said that one of the things you're going to need to sort of, grow the sales in Japan or new distribution resources to get sales rolled out across Japan.

At the same time you just said that, one of your distributors in that region was selling pillows into another region and you didn't like it.

So, clearly that part of the world, it sounds like you're going to have to rely on distributors more than you would, in the U.S., or at least distributors that you know of or, know how they operate business et cetera.

The guy who was shipping, let's say, in the part that he shouldn't have been, is he now, not shipping there, or is this person being replaced with someone else? And are these the same people that you have to deal with in Japan? Maybe just a little bit more highlight in that area.

Just to clarify the actual -- some of the activity that we have seen on the third parties that we mentioned earlier, the third party were not in Asia. Third parties were actually in Europe shipping products to Asia.

OK.

So, wasn't our distributors in Asia. So that was clarification.

In terms of how we're working with these guys. We are continuing to monitor them closely and watch the product that they purchase, the quantities that they purchase, and there are some other ways that we can help control what may be, going out the back door towards Asia.

OK. Thank you.

Your next question comes from Steve Splendor (ph) with Target Capital Management.

Yes. I'd like to ask what is the -- I have several questions, basically, demographic type questions. What is the average age of a mattress buyer?

Well, it depends on the mattress, if you look at it in terms of price points, that can impact it. So, if you're looking at the demographics -- from Hispa, if you're looking at the demographics for Tempur-Pedic.

Tempur-Pedic demographics suggest that the target market is 40 to 65 -- pretty broad market. Disposable income, household income $45,000 and up, joint income. So, that's the market that we see. And what we have seen is that the average age as well as the income over the years, has gone down.

OK. To what extent is our sales -- do they move along with the changes in the housing market? For example, we're currently in a very strong housing market, have been for the last couple of years. Although it's my understanding that basically mattress sales have been weak for the past 3 years.

I don't know where your data's coming from, but if you look at the industry data, it's just the opposite. Last year, the industry in the U.S. grew 11%. So it was a very strong year.

If you look at it over a 20-year period, this industry has not been impacted very much by housing starts, by downturns in the economy. Twenty years the industry's only had 2 down years. So, it's a type of product that, obviously, based on those statistics, not high directly to the economy or the housing starts. Now, at the same time, housing starts will always help.

Right. So, to what extent would -- could you say that, I mean, one of the phenomena in the -- an analysis of the housing market is, is that the post war baby boom demographic has -- they are substantial buyers of second homes. They are also people that have -- tend to have back problems, and they're expected to continue to be very strong -- a very big factor in second-home buying for the next 10 or 15 years. So, it would seem that they would dovetail very nicely with your product.

Well, actually one of the benefits of having a direct marketing program the way that we do, we're able to segment the market. For example, you mentioned the baby-boomer specifically. You know there are roughly 77 million baby-boomers in the U.S. You mentioned that they have a few more aches and pains, but they also have higher disposable income ...

Right.

... They're willing to pay a higher price for better designed, better engineered product.

And so, we're able to actually do a lot of target marketing directly towards baby-boomers because of our marketing model. So, we look at that demographic group, as a very important group, and we will continue to address, moving forward.

Are there any studies that have done, any kind of empirical studies that have been done, relating to the degree to which Tempur-Pedic mattress relieves back pain?

Yes, there are a lot of different studies that have been done over the years, centered around the pressure relieving properties of our Tempur material, which again, is proprietary material. There are other studies that have shown the benefits in clinical setting. And of course, our mattress continues to be unlike any other on the market, a product that, even in a nursing home or hospital setting, you don't have to push back on your body that creates the bed sores and pressure sores.

So, from that standpoint, it is a unique product and there are a lot of benefits to people who are looking for a solution to a problem.

And it's all the time we have today. Please proceed with your presentation, or I would like to turn the conference back to Mr. Bob Trussell for any closing remarks.

Thanks again for joining us today to discuss Tempur-Pedic's first quarter results, and our plans for continuing to grow the visco-elastic category in our brand.

We're very pleased with the strong consumer acceptance we've been getting, especially with our high priced mattresses and pillows, higher priced mattresses and pillows. We think it's evidence of the fact that consumers have recognized the quality of our proprietary material, its durability, and the additional comfort it provides.

Combining that quality with our aggressive media plan, expanded distribution, and new product introductions, is what gives us so much confidence in Tempur-Pedic's future.

We look forward to giving you another update in 3 months.

Thank you.

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.