Tempur Sealy International Inc (TPX) 2005 Q3 法說會逐字稿

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

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

Following management’s prepared remarks, we will hold a question-and-answer session.

As a reminder this call is being recorded October 20, 2005.

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

Thank you, operator.

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.

After prepared remarks, we will open the call for questions.

Please note that in statements made by Tempur-Pedic International during this call that are forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Investors are cautioned that forward-looking statements including the Company’s expectations regarding sales and earnings for the fourth quarter and total year 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.

Factors that could cause actual results to differ materially from those identified in the forward-looking statements include economics, competitive, operating, and other factors discussed in the press release issued today and in the Company’s filings with the SEC [inaudible] including in the Company’s annual report on Form 10-K under the heading Special Notes Regarding Forward-Looking Statements and Business Risk Factors.

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

In addition, I would like to note that some of management’s comments may represent non-GAAP financial measures.

A reconciliation to the most directly comparable GAAP financial measures and other associated disclosures is contained in [inaudible] earnings release which is posted on the Company’s web site and has been furnished to the SEC on Form 8-K.

With that introduction, I will turn the call over to Bob Trussell.

Please go ahead, Bob.

Good evening, everyone.

Thanks for joining us for review of Tempur-Pedic’s third quarter 2005 results.

Our sales for the period were in line with the top end of the range we provided last month totally 206.1 million.

This represents a 13% increase for the 2004 third quarter.

Our net income on a pro forma basis was above the range we provided in September, totally $0.24 per diluted share compared to $0.23 last year.

Dale will explain later in the call pro forma net income [inaudible] for expected repatriation of forward earnings at reduced tax rates as provided by the American Jobs Creation Act of 2004.

Proceeds from the repatriation will be invested in our U.S. operations consistent with the objectives of the act.

In addition, this afternoon we announced that our board of directors have authorized the repurchase of the $80 million in the Company’s common stocks pursuant to share repurchase program described in our press release.

We are very pleased to announce this program as we believe provides an excellent opportunity to increase shareholder value.

It also indicates our confidence in the Company’s future and our ability to drive growth in the visco-elastic category, Tempur-Pedic growing array of superior products, our powerful distribution models, and our extensive and effective campaigns.

At this point, I would like to ask Tom Bryant to review our operations within the quarter in more detail for us.

Tom?

Thanks, Bob.

As we discussed in our September guidance call, sales in the U.S. developed [inaudible] in the third quarter than we originally anticipated.

Although they were well of those in last year’s third quarter.

According to data from international sleep products association, the overall industry performance was choppy for the first 2 months of the quarter, with August being much stronger than July.

ISPA data for July and August is similar to what we experienced.

The sales being soft in July and rebounding to our expectations in August.

For us, however, September did not bring seasonally uptick we normally experience.

While industry data for September are not yet available.

Based on ISPA from our retailers from recent projections from ISPA, we believe the industry probably saw [inaudible] month than many had expected.

In a report just released, ISPA is now forecasting industry growth rate of 9% for the year which based on ISPA data through August translates to a 4% growth rate for the last 4 months due to dramatically higher gas prices, a more uncertain outlook for consumers, and likely contraction in housing markets.

On our conference call last month, we talked at length about the factors we think caused slowdown in our sales in our third quarter including most notably the general slowdown in the U.S. mattress industry and changes in consumer purchase patterns.

Despite this challenging environment, we continue to expand our distribution in the furniture retail channel during the quarter, adding approximately 270 net furniture stores in the U.S. in line with our target for 2005 of adding 80 to 90 stores per month.

In total, we were in approximately 5100 doors in the U.S. as of September 30.

Factoring in seasonality, we now expect to add approximately 50 to 60 additional stores in the fourth quarter, which would imply an approximate average of 110 new stores per month over the full year.

Internationally, the expansion of our furniture retail channel actually accelerated significantly, as well as we opened approximately 190 new doors, certainly on the high side of our 2005 target of 30 to 40 doors per month.

This acceleration reflected strong demand for our premium products across our international market, which includes close to 60 countries.

In total, we were in approximately 3840 doors internationally as of September 30.

Domestically, total sales grew 11% while internationally they grew 19%.

Our new marketing programs in Europe help to pull more customers into the stores and convince them of the benefits of Tempur-Pedic products.

We also launched our Scandinavian Bed Collection, which had previously been available only in the Nordic countries across Europe.

In Japan, we launched our new pillow line on schedule and continue to rollout the futon.

As we noted previously, we believe that the second quarter of this year represents the trough of our international third party pillow business and that the steps we have taken to improve the business are proven effective.

Now, let’s take a look at our sales channels.

During the quarter, sales in our retail channels overall rose 19%, reflecting our emphasis on penetrating furniture and specialty stores.

In the U.S. retail sales increased 15% led by furniture retail at 20%.

Internationally retail sales rose 31%.

This increase reflects continuing distribution and market share gains being made around the world for the Tempur-Pedic brand.

Sales from our direct sales channels decreased 4% from the third quarter of 2004.

We believe primarily because of the timing of key promotions in the U.S.

Our international direct sales business was up marginally for the quarter.

During the quarter we accelerated the rollout of our newest mattress models in the U.S.

We began shipping the EuroBed in July and it is already in approximately 24% of our retail accounts.

We began shipping the OriginalBed in late August, but it had been available in limited quantities.

Our primary focus has been on getting the models into distribution, and as of September 30, the OriginalBed was in approximately 28% of our retail accounts.

We will continue to expand the distribution of both of these new models throughout the fourth quarter.

Both the Euro and the Original, while early in their rollout, are driving increment slots.

We finished the quarter at approximately 2.8 slots per door, as compared to approximately 2.4 slots last quarter and approximately 2.0 slots per store at the end of last year’s third quarter.

Because we now have 5 mattress models in the U.S.

Going forward, we will provide a breakdown of sales based on price points rather than individual products.

We will group our products based on their queen-sized suggested retail price.

The price points we will use are less than $2000 and greater than $2000.

Therefore, at this time, the price point below $2000 includes the original and the classic.

Price points above $2000 includes Deluxe, Euro, and Celebrity.

In the third quarter, products below $2000 represented 32% of our U.S. mattress sales.

Products above 2000 represented 68% of our U.S. mattress volume.

For the second quarter of 2005, the breakdown was 33% and 67%, respectively.

These percentages represent dollars for each price point, not units, as a percentage of our total U.S. mattress sales.

With respect to the competition, as we’ve said before, we monitor sales of our products in stores that also carry competing visco-elastic offers and compare those sales with sales from stores that carry our products who do not carry competing visco.

We continue to see stores that have competitive visco offerings perform as well, if not better, than stores without knockoff visco products.

On the cost side like other companies in the furniture industry, we were negatively impacted by a number of factors during the third quarter.

As Dale will describe in more detail, these included an increase in raw material prices and fuel surcharges for the transportation and delivery of our products.

However, unlike some of our peers, Tempur-Pedic has not experienced significant shortfalls in raw materials because we source chemicals from multiple suppliers on a global basis and manufacture our own Tempur materials.

This aspect of our business model has been a significant advantage for the Company.

We have also been working to generate productivity improvement in cost reduction.

We have obtained significant cost reduction throughout several new sourcing and procurement initiatives and are continuing to take cost out of our manufacturing process while improving productivity.

Also important, we just closed on a new global senior credit facility that offers a number of benefits including a reduction in interest rates.

Dale will provide you with more detail on some of our cost reduction initiatives in a minute.

Our medical division has been working to rationalize each component of our healthcare business with the objective of not only developing a real growth platform for the Company but also supporting our larger consumer business.

Our recently announced partnership with Roho Group is an example of our innovative approach to creating relevant medical relationships.

At this point, I’ll turn the call over to Dale Williams to go over our financial results in more detail and discuss our new credit facility and repatriation program and the bond financing we expect to complete this quarter for our Albuquerque manufacturing facility.

Dale will also review our guidance for 2005.

Dale?

Thanks, Tom.

Let’s first talk about our sales performance for the quarter in a little bit more detail.

As Bob mentioned, for the 3 months ended September 30, 2005, the Company achieved net sales of $206.1 million compared to $181.7 million for the same period of last year.

This represents an increase of $24 million or 13%.

Year to date, our net sales were $621.1 million, a 28% increase over 2004.

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

Domestic net sales grew $132.3 million in the first quarter as compared to $119.6 million for the same period in 2004, an increase of $12.7 million or 11%.

Domestic net sales accounted for 64% of our total net sales as compared to 66% in last year’s third quarter.

International net sales grew to $73.8 million in the third quarter as compared to $63.1 million for 2004, an increase of $11.7 million or 19%.

Our growth in net sales was attributable to an increase in U.S. retail channel of $13.6 million, a $12.4 million growth in the international retail channel.

Foreign exchange impact for the quarter was neutral on a year-over-year basis but negative 1.2%, or approximately $2.5 million compared to the second quarter of 2005.

Regarding profitability, as noted in the press release, GAAP net income for the 3 months ended September 30, 2005, was $17.1 million compared to $22.4 million for the same period in 2004.

GAAP net income was reduced by a $0.06 one-time tax charge associated with the announced repatriation plan of foreign earnings and profits.

Pro forma net income which was $24.4 million or $0.24 per fully diluted share compared to a $23.7 million or $0.23 per fully diluted share representing a growth in pro forma net income of $0.7 million, or 3%, and a 4% growth in EPS.

Pro forma net income reflects a modest improvement in our global tax rate due to higher international mix and excludes the previously disclosed [inaudible] compensation expense and a one-time tax charge.

Fully diluted share count was 103.3 million shares in the third quarter of 2005 compared with 103.0 million shares in 2004.

GAAP operating income was $42.8 million, flat compared to the same period of 2004.

As we discussed in our call on September 19, the Company was following an advertising expense pattern associated with a much higher expected revenue level and when the normal historical pattern did not materialize due to macro-economic factors, it was too late to adjust spending patterns.

Gross profit for the quarter was 49.7% compared to 52.9% the prior year of 51.1% in the prior quarter.

Gross profit rates decreased due mainly to three factors.

First, as we have previously discussed, [inaudible] mix and product mix changes contributing to lower gross margins.

Retail, our fastest growing channel, had lower margins because we sell at wholesale prices.

The retail segment represented 77% of our business in the third quarter compared to 75% in the prior quarter and 73% in prior year.

In addition, our provision for sales returns increased due to the seasonal nature of our business.

The second factor affecting gross margin on a year-over-year, quarter-over-quarter comparison, is the new product introduction.

Tom discussed we started shipping 2 new products in the quarter.

The first time we have ever introduced a product at the same time.

The Eurobed and the OriginalBed and we have succeeded in getting significant placements of these new products.

However, showroom floor models for our retail accounts are deeply discounted and have the impact of temporarily reducing our average selling pricing and more importantly the gross margin.

As we have stated previously, the OriginalBed will have similar margin rates as our other mattress products once it is produced in volume.

However, our new products always have a higher cost during the initial rollout.

The third factor affecting gross margin is the increase in market prices for heat chemicals and fuel.

In the third quarter, we experienced an increase in chemical prices and we are no longer able to offset the [inaudible] volume rebate.

In addition, fuel surcharges on transportation negatively impacted gross margin.

The combination negatively impacted gross margin by approximately 100 basis points in the quarter compared to the second quarter of 2005.

As we look to the fourth quarter, we expect to see increased chemical prices.

However, price increases are in relation to previously negotiated discounts which resulted from our productivity initiatives which should mitigate the impact of these price increases.

These productivity initiatives include reverse auctions on certain material purchases, obtaining purchasing leverage to consolidate a global buy, gaining production efficiency, significant effort in our distribution network related to warehousing and full truckload shipping among others.

We are confirming the full-year guidance we provided on September 19, 2005, for net sales and pro forma earnings.

Continue to expect net sales for 2005 to range from $845 million to $855 million.

We expect pro forma diluted net income per share to range between $1.05 to $1.07.

We are updating our guidance for GAAP diluted earnings per share taking into account the one-time charges associated with the repatriation and the non-cash write-off of the deferred financing fees resulting from our credit refinancing and expect GAAP diluted earnings per share to range between $0.94 and $0.96.

This guidance assumes no benefit from a potential reduction in shares outstanding related to the share repurchase plan that we announced today.

The Company is not prepared to address 2006 guidance at this time because we need to further evaluate the [inaudible] market conditions regarding raw materials and consumer sentiment prior to determining our 2006 outlook.

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.

These changing conditions include the current industry wide pressures on chemical pricing.

I now want to address a couple of other key accomplishments that we have been working on that have recently come to fruition or are near completion.

The Company closed on a new global senior credit facility with Bank of America as lead agent.

The Third Bank and [Nordea] ph] Bank served as co-leads and SunTrust has joined our banking group.

We are very pleased with the terms and structure of our new credit facility.

The facility is $340 million and is comprised of a $200 million U.S. revolver, a $30 million European revolver, and a 5-year European term loan for $110 million.

The new agreement provides a significant improvement in terms and conditions for the Company including an approximately 100 basis point reduction in interest margins charged on outstanding borrowing as well as favorable changes in covenant structures.

As I mentioned when discussing our GAAP diluted earnings per share guidance, the Company will take a one-time non-cash charge of approximately $3.5 million in the fourth quarter related to writing off the deferred financing fees of the old credit facility which was replaced.

In addition to the new credit facility, the Company expects to complete its permanent financing of the new senior credit facility to be official industrial revenue bonds through Bernalillo County, New Mexico.

Industrial revenue bonds will be supported by another credit issued under the U.S. revolver, a component of our new senior credit facility.

We expect this financing to be complete by the end of October.

Additional benefit of the new credit facility is that it has enabled the Company to declare and initiate the repatriation of approximately $115 million in foreign earnings under the American Jobs Creation Act of 2004.

Subject to obtaining certain foreign tax rulings, we expects to repatriate up to an additional $55 million for a total $170 million repatriation.

Proceeds will be reinvested in our U.S. operations consistent with the objectives of the act.

Uses include, among other things, investment in our new Albuquerque manufacturing facility, advertising, hiring and training of employees, and other capital investments.

As I previously mentioned, we have taken a $6.5 million charge in our third quarter results to the one-time tax associated with the repatriation.

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

[CALLER INSTRUCTIONS]

We’ll take our first question from the line of Robert Drbrul.

Two questions.

With – when you look closely at the rest of this year and the plan for next year, what exactly is the current plan for doors per month that you’re going to open, and can you just elaborate a little bit more on productivity and some of the newer doors that you’re seeing right now?

From the standpoint of this year, Bob, we are projecting for the full year that we will average around 111 in the U.S., but as I said in my prepared remarks that, obviously, means that the fourth quarter will be seasonal as were opening doors at a higher rate early in the year.

So [inaudible] as what we expect to see going forward, that will be part of what we will be working on for our 2006 budget looking at the environment and the market and coming up with a new goal for the sales organization.

In terms of our productivity of the new doors, we look at it in terms by store.

The productivity by store is up the same as what we have seen from our well-established stores, but in terms of account, the accounts are not quite as productive because on average they will not have many stores as some of the accounts that we opened in the past, meaning that they have fewer doors per account.

Okay.

And just a quick question for Dale.

In ’06, how much more will depreciation increase with the new plant?

The annual depreciation on Albuquerque is about $10 million so that depreciates to about $750,000 a month.

That will start depreciating once the factory is turned on from a production standpoint.

Okay.

Great.

Thank you.

Mark Rupe, Adams Harkness

Nice quarter.

Just a couple of questions here.

The futon overseas, international other revenue was up 47%.

Is that where the futon is being inserted into the line item?

No.

The futon will be in mattresses.

Okay.

International mattress sales were up [inaudible].

Okay.

And then as far – in the U.S. the ASP for the mattress, it appeared to be up 8% which is a little bit down than obviously historically.

Is that likely because of the original slash in the quarter?

Well, it’s because of the floor model.

With 28% account penetration on the Original and 24% account penetration on the EuroBed, that’s a lot of floor models that are being shipped at significant discounts.

Got it.

Which can affect your average selling price [inaudible] even though it’s significantly discounted.

I see.

Okay.

And your overall gross margins.

And just to follow up on your questions [inaudible], basically the big growth in other [inaudible] is related to the Scandinavian Bed.

It’s a full bed system.

Those sales are split.

Part of the system is in mattressing but then the Scandinavian Bed as it’s rolling out through Europe and getting very good traction, included in the Scandinavian Bed is a base, a frame, and in most cases an adjustable bed as well.

Some pieces are – the non-mattress pieces are in other.

Okay.

Did you – I’m not sure if you gave out the U.S. furniture sales number?

I don’t believe we did but it was $81.2 million in the quarter.

Okay.

And then U.S. advertising –

85.2.

85.2.

Okay.

And then U.S. advertising dollars by chance?

Globally our advertising was 11.5% in the quarter and the U.S. piece of that was 15 million.

And then lastly, just on the U.S. specialty stores, are you still pleased with [inaudible] House?

Have they been picking up the slack lately or is there still some I don’t weakness there?

Well we make the point of not commenting on individual accounts but overall in terms of our specialty business we’re pleased [inaudible].

All right.

Thank you.

Michael Cox, Piper Jaffray.

My first question relates to inventory.

First I’d like to say thank you for including the balance sheet and cash flow at this time.

But on the inventory line item, pretty significant year-over-year growth, I was wondering if you could break that down between domestic versus international or between raw materials and finished goods?

The bulk of the – I don’t have that level of detail in front of me Mike.

The bulk of the inventory increase as it was in the second quarter is in the U.S.

We continue – the launch of the Eurobed we did continue, as we said on September 19, we did continue to import products in the – from Denmark.

Basically what we imported in the third quarter was only Eurobeds.

We did not have the capability of making the Eurobed in the United States until the last couple of weeks.

So with the launch of Eurobed we had to import Eurobed and had to bring in stocking levels for our warehouse system.

So we did continue to see a rise in inventory in the U.S., principally finished goods inventory, and part of that again is sales did not materialize as we expected in the third quarter.

We will on a go-forward basis when we’ve ratcheted back production plans to start turning that inventory situation around.

On the raw material side – there is certainly a lot of talk in the industry about significant price increases on chemicals – I was wonder if you could give us anymore color as to the length of the contract you have, the ability for you to hedge again this type of price increase, or is it simply that you will be able to offset through your own efficiency gains?

Our contracts with our chemical companies tend to be annual contracts.

However, when we initiated some of the costs programs earlier this year, we did simply go after some of those type of materials, we did some reverse auctions, we had on purchase order significant price reductions that were coming into effect in the fourth quarter.

Because of the overall market change, those suppliers that we had the contracts with did come back and change the prices but the price increases that we saw were off of the lower negotiated base.

So all in right now we’re looking for the fourth quarter for chemical prices or a price 35 to 50% increase that is generally discussed in the industry to have a marginal impact based on our current information.

Because of the significant improvement that we had already previously negotiated.

Okay.

That’s helpful.

Then 1 last quick question, as you look at the OriginalBed, I was wondering if there are any stipulations for retailers taking on this additional slot, and is there a minimum number of beds that you already need to have in the store or is there a requirement to maintain the existing slot?

No.

The account will make their decision individually and independently.

So there are no strings attached.

Okay.

Thank you very much.

Keith Hughes, Robinson Humphrey

Thank you.

I have 2 questions.

First, Dale, have you specifically had [inaudible]?

Well, I guess technically we have negotiated agreement on price and then come back and say our pricing are changing but that is a situation [inaudible] but as I said earlier, the good thing is we had from that standpoint price increases that have been quoted to us have been off of the negotiated starting point as opposed to going back to the old price and increasing it from there.

So we have seen price increases but those price increases have been off of significantly lower prices that were negotiated for purchases starting in the fourth quarter.

Okay.

And on the [inaudible] what do you plan to do on pricing for your products near term?

At the current time we don’t have any plans to change our mattress pricing.

We have heard price increases from some of the other companies.

I believe one was announced today, but as of this moment, we do not have plans to change our prices.

Okay.

And just finally on the newest mattress as it goes into retail stores, are they typically replacing the mattress for that or adding there will be a fourth to their lineup?

What’s – I know it’s probably all over the board in terms of [inaudible] but what’s the common way that retailers [inaudible]?

Well it’s still early in the rollout but at this point, as indicated by our increased number of slots, what we’re finding is that we’re getting incremental floor space.

We’re not losing a model as a purchase say the Original.

We’re not losing the classic. [Inaudible] and also is reflected, as I said, in the expansion of our number of slots.

[Inaudible] if the store has gone from 2 to 3 slots, [inaudible]?

It will vary now that we have a variety of models that they can choose from.

So depending on their location, their demographics, and you’ll see someone carrying the Celebrity, Deluxe, and Classic and then you’ll see some carrying the Original and the Classic and Deluxe and not just [inaudible].

It depends on their individual market.

[Inaudible] in January will you be launching a new product?

We’re looking at that now.

We are always testing new concepts and it depends on what develops between now and January with some of the few models that appropriate [inaudible].

[Inaudible].

And finally [inaudible]?

The last 30 days is half in the third quarter.

I’m sorry.

I mean for October.

The last [inaudible] October. [Inaudible] changed at all?

I assume that’s coming out of the [inaudible] call this morning.

I believe [inaudible] is flat [inaudible] their seeing their business pick up a little bit.

We’re tracking where we thought we would track when we gave the guidance.

Okay.

Thank you.

Jonathan Shapiro, Goldman Sachs

Question on the retail growth in the U.S., revenue growth in furniture stores was up 20% and doors were up 30.

Now I know what you guys were talking about as the same account growth of 20% to 25% that’s for the year, do you think that that spread rate that would sort of imply a negative same store sales – I put that in quotes – do you think that’s a trend that sort of reversing itself in the fourth quarter or is the revenue growth [inaudible] the revenue growth just because you’ve opened a lot of these doors for the fourth quarter?

Well number one, it does not imply a negative same store sales growth.

Just because the retail channel furniture was up 20% and door count was up 30%.

What it implies is macro-economic factors impact all stores, both established that have been selling our products for more than a year and newer stores that have been selling our products for less than a year.

So it’s not, okay, well, you got 30% more stores, so you’re established stores were negative.

That’s not the case.

Okay.

Do you – so do you think – you know, you haven’t given a quarterly number – but do you think same account sales in the third quarter were positive?

Yes, they were.

Okay.

And then on the new doors you’re going into.

Have you guys been thinking anymore about maybe going into some new channels like the department stores or does the Original Bed open up any new distribution channels for you as opposed to just additional income – you know, an additional income bracket within existing stores you’d be in already?

No.

We don’t plan to change our distribution strategy.

We look at the [inaudible] where we’re selling our products.

We still think we have significant opportunity to continue to expand in that based business.

Okay.

Thank you very much.

Joseph Altobello, CIBC World Markets.

Thanks.

Good afternoon.

I want to go back to something that you said earlier on and I may have heard this wrong.

You said you’re going to have 50 to 60 doors in the fourth quarter or [inaudible]?

I’m sorry.

Would you repeat the question?

The number of door adds in the fourth quarter, is 50 to 60 for the entire quarter or just 50 per month?

No.

I was talking about for a month.

Joe, if you look at our historic pattern in terms of [inaudible] because of the holidays.

Exactly.

I assumed it was per month [inaudible].

In terms of the [inaudible] do you guys think that you saw some pick up in demand [inaudible]?

It’s really difficult to say because at this point we saw the report but knowing exactly what the shortages were and how extensive and widespread they were and how that impacted our business at the retail level it is difficult to speculate.

Okay.

And most of the supply disruptions were affecting October and we’re not talking about the fourth quarter today.

Okay.

Fair enough.

And in terms of the productivity improvement [inaudible] have you guys quantified that at all [inaudible]?

We haven’t specifically quantified it externally.

Obviously, we have quantified [inaudible] internally, but we’re talking about millions of dollars of savings, multi-millions of dollars of savings within our cost of business and specifically within our operations group, which is manufacturing, sourcing, and distribution.

Okay. [Inaudible]?

You’re phasing in and out a little bit.

Let me see if I got just – you’re asking about exposures on chemical pricing?

You got it.

Well basically in terms if were done, confident, whatever, our outlook includes our best view of what chemical pricing is going to be.

The chemical pricing situation throughout the industry has been extremely dynamic and fluent and changing regularly.

There were extensive phone shortages that had everybody on significant allocations reported throughout the industry.

We were not being negatively impacted by that, but the underlying issue that continues in the industry as that has improved is price changes.

We have had price changes.

We have had a couple of rounds of price change discussions where we were notified of a price increase and then later notified of another price increase.

Those negotiations and discussions, to the best of my knowledge, as of today, are concluded and are factored into our outlook but you never know.

I guess the question I want to ask is how much of [inaudible] chemical needs are on your contract and how much [inaudible]?

I would say basically all of those [inaudible] is under contract but it is also influx given that everyone, you know, all the chemical companies just all together raised price and said we don’t care what your contract says.

The fortunate thing, as I mentioned, was the price increase was relative to a negotiated lower price that was in effect, so we did get price increases, but they were coming off the lower base where we were starting to pay a lower price in October.

Okay.

Great.

Thanks.

Todd Schwartzmann, Sidoti & Co.

[Inaudible]?

Actually it is.

We were expecting, you know, quick acceptance in the marketplace for a variety of reasons.

So I would say yes.

Acceptance, though, is that – I assume that 28% figure is somewhat intentional that you’re taking [inaudible] approach.

Can you walk through the rationale for the speed with which you’re penetrating the stores?

It’s only deliberate from the standpoint that that’s what the numbers tell us based on our account base how many of those accounts [inaudible] product.

The rollout in terms of our timing, keeping in mind two things, one is the product hasn’t been on the market that long, and secondly, we’re providing information through September.

So I’m not sure what else outside of that your question was implying?

Can you – for the 20 days of August, could you give us any update as to how that 28% may have risen.

No.

We’re not prepared to talk about the next quarter.

I would add that that’s the fastest rollout that we have ever had in mattress products.

Okay.

And how long does mattress products typically take to penetrate 75% [inaudible] accounts?

It varies depending on – obviously when we rolled out our second product it took longer.

We’d have to go back and look at the details of the Deluxe but each time we’ve introduced a new product we’ve been able to get the product out there faster because of success of the previous launches.

So we’d have to go back and do some research because we don’t have that type of information at our fingertips here.

Okay.

Could you give some highlights of the new sourcing initiative [inaudible]?

Reverse auctions.

Consolidated global purchasing.

We never had consolidated global purchasing before.

The U.S. business bought separately from the European factory.

Certain items are bought by the factory but then also purchased – some of the other products are purchased by the factory.

Some are also purchased by some of the sales subsidiaries trying to get a consolidated agreement to give us bigger volume leverage with suppliers.

Those are the types of things that we’re doing from a purchasing standpoint.

On an internal efficiency standpoint, factory operations is continuing to drive, in addition to [inaudible] the next product.

Then our distribution system working on ensuring full truckload shipments so that we’re not getting a big difference in price between LPL shipments and full truckload shipments and so working to ensure that we have the best and most efficient distribution patterns [inaudible] possible.

A lot of blocking and more tackling.

And finally, Dale, you ran through the productivity initiatives that you expect will offset the raw material increases.

Is there 1 that you would highlight as being most meaningful in terms of an offset?

Yes, the biggest one I did highlight which is reverse auctions that we had already done that had already given us significant price reduction that were going into effect in October.

So the price increasing are coming off of the already significantly lower price.

So to get a price increase off a significantly lowered price, you’re essentially back where you started, give or take [inaudible].

Okay.

Thanks.

Stephen Kim, Citigroup.

Hi.

This is actually an issue for Steve.

Just a few quick questions here.

First question on the share repurchase, what is the time frame for spending that $80 million on the share purchase?

There is no a set time frame and we will not disclose specific details of the repurchase just that we have been authorized the repurchase of the $80 million [inaudible] stocks.

Okay.

So maybe just if you can tell us what the general philosophy behind it or the reason for your timing?

The reason for the timing right now is the Company needs the stock at a value.

We just completed a new credit facility which changes our capital structure and gives us the flexibility that we did not have before that enables this from an economic evaluation standpoint is the breed of proposition for the Company.

So that’s why the decision was made.

Okay.

Next question on your receivables.

Your sales sequentially jumped to about 7% I think for the second quarter or third quarter your receivables were up much more than about 20% I think.

What is the reason for your receivable to jumping that much in the third quarter?

Some of it is seasonal [inaudible].

Also certainly if you look at the business mix it is much higher international contents in the business [inaudible] runny on for the last year.

The international business did very well.

The international business [inaudible] in Europe.

Payment terms in Europe are generally significantly longer than they are in the United States.

Great.

Okay.

So then just final quick question.

I know we’ve talked a lot about these raw materials costs already.

Let me just try to ask a question a little bit differently.

When you provided the guidance for ’05, 1/05 to 1/07 on a pro forma basis, the cost savings initiatives like reverse auctions were something you told us about back then.

Since then, you know, we’ve had the hurricanes [inaudible] –

The hurricanes occurred before we changed the guidance.

But I’m just saying some of the price jumps and the components like [inaudible] occurred subsequent to –

We were told about them prior to changing the guidance because the hurricanes had already happened.

Okay.

So when you gave that guidance you were taking into the account the cost increases that have occurred in those raw materials?

Hurricane Katrina happened in August.

Right.

I’m talking about all the Gulf Coast facilities going off line during Hurricane Rita and the price increase related to that.

[Inaudible] occurred immediately after our guidance changed, although it was off the coast of Texas. [Inaudible] at the time of our guidance call.

Okay.

Well, I guess just what I’m asking is are those – are the cost increases that we’ve seen, so those aren’t incremental – those aren’t new after your guidance?

No.

Some of those are incremental but we continue to have [inaudible].

We have certain initiatives underway, some of them that we’re already in the bank, if you will.

Others that we’re continuing to progress and looking to continue to improve the cost performance of the business.

Items that were not closed in the bank have closed since then.

We have been able to mitigate the impact of additional chemical price increases that have occurred subsequently.

Okay.

So it’s going better than expected.

Okay.

That’s it for me.

Thanks.

[Chris O’Donnell, Kaskin Associates]

Good afternoon.

My question is also on the share repurchase – 80 million, it looks like it was done a lot more than that given the [inaudible] generation of your business.

The increased leverage from credit facilities and the industrial development bonds, the tax – or the [inaudible] repatriation from overseas.

Why didn’t you guys look for a bigger authorization [inaudible]?

80 million is what we’re allowed under our current credit facility at the current time.

Very good.

Thank you.

Steven McMillan, KBSH Capital Management

Hi, guys.

Glad to see things are looking solid.

Questions for you on the Original Bed.

There has been a lot of concern about cannibalization what not, what have you been seeing in the accounts so far that have had it and what are you kind of seeing in sales per slot as you increase slot?

Yes.

It’s really too early to determine if and how much cannibalization will take place.

As we’ve said, this focus of sales organization to gain the distribution and to get it out there, we have been pleased with the speed of the rollout with some of the individual accounts success, but we need a little bit more time to answer those particular questions.

And I apologize if you already mentioned this but are we going to have to wait until the fourth quarter conference call [inaudible]?

We haven’t determined when we’ll do that yet.

We’re working through our 2006 budget process at this time.

The thing we wanted to do see a little bit more time in terms of the current macro conditions and how things that allow and we’re ready to – feel like we’ve got enough stability in terms of what’s happening and we’re ready to disclose our outlook for 2006.

We will do that and not necessarily have to wait for 4Q call, but it’s also not out of the question.

Okay.

Thanks a lot, guys.

[CALLER INSTRUCTIONS]

[Daniello Santiago, Basswood Partners]

Hi.

Just have a quick question more on the long term.

Can you talk a little more of competition and how do you see – how strongly it could be in a few years?

I’m not talking about this quarter.

What’s your view on that?

Well we expect that the category, meaning the visco-elastic category will continue to take market share away from the inner springs business.

How large does that get down the road, you know, we have not put out any numbers around that. [Inaudible] simply be that since it is such an improved technology over a 100 year old technology that that should continue in the future.

And have you seen so far anything that makes you worried about the quality of the [inaudible] products that are being launched?

Quality?

Quality meaning they can replicate very closely [inaudible] of your product?

No.

We haven’t seen anything that worries us in terms of quality of the competing visco that we see.

How do you measure that?

What’s your parameters?

We have a variety of internal measurements of course anytime a competing product hits the market we acquire samples of those products for a variety of testing.

So we’ve got our internal testing process to determine exactly how good the [inaudible] is out there on the market is.

And do you have a scale for [inaudible] 0-10?

Where are they now?

Where were they let’s say a year ago?

Do you measure this way?

Nothing that we make public.

Okay.

And just one final question on the [inaudible].

What is your worst case scenario?

Can someone replicate in terms of [inaudible] of your product?

Is there any chance of this happening or even maybe a former employee leaving the Company and selling or starting a new production of [inaudible] products?

How do you see that?

We have a proprietary formula as well as a proprietary manufacturing process.

There are very few people within the Company who actually know the formula for our products.

We keep that limited.

We keep those people tied up, obviously, with confidentiality agreement to keep and other positive benefits.

So that’s how we maintain the secrecy around that.

The product because of the chemical reaction that takes place and the way that we make the product it cannot be reversed [inaudible].

So that’s makes it very difficult for one of the reasons why we’ve seen development [inaudible] viscos with slow development, we should say, over the years.

Thank you.

Kevin [Wink, Palomis Capital Management]

Just a couple of questions.

One comment on the call is that the OriginalBed is at full production levels.

We’ll have similar percentage margins.

How long is it going to take you to get up to [inaudible] levels?

Once just like with any of our new products – once we have gotten the distribution on the floor model, so inventory that goes along with those models are at regular prices.

So just on the timing on additional floor models that we ship out, but we’re, obviously, still relatively low at 28%. [Inaudible] targeted costs by the end of this quarter.

Okay.

Yes, that’s actually what the question was more about.

Another question is – sorry to ask again – about the buyback, but in terms of the overall 80 million authorization, are there any limitations within the covenants as to how quickly you can use up the [inaudible]?

There are no credit agreement restrictions on how that is spent.

Okay.

So effectively if you wanted to you could buy 80 million of the stock tomorrow.

Well no the –

I’m not assuming you will but I just want to clarify that point.

Stock buybacks are volume limited.

Well, yes, other than those SEC restrictions.

So the SEC restrictions are around average daily trading volumes that could use some volume limits on a daily basis.

So that’s really the restriction.

Okay.

And then 1 final question.

For the industrial revenue bond, including the cost of the letter of credit that goes along with it, what are your thoughts at this point as to the effect of interest cost?

I’m sorry.

Could you repeat that?

For the industrial revenue bond, including the cost of the letter of credit that would go along with them, what are your thoughts as to what you think the effective interest cost is going to be on those?

The industrial revenue bonds will be the same as or slightly better than what our senior credit facility cost is which is LIBOR plus 125 basis points, at least today based on our – there are steps in the credit agreement where we’re at today is LIBOR plus 125.

The higher fees will be the same or slightly better.

Okay.

One more general question.

Very early in the call you mentioned industry data of mattress sales rising from 9% in Q3 but projected to only rise 4% in Q4.

Now you probably had those projections when you had the call a few weeks ago, but what are your thoughts on that?

I mean –

I’ll just clarify that.

From the standpoint of the ISPA report that referred to, the report just came out this week and 9% was referring to the full-year growth.

They are now predicting a full-year growth of 9% and if you do the math on that given where ISPA said the industry was in the first 9 months –

First 8 months.

First 8 months then it equates to about a 4% growth for the last 4 months.

Because the reason we’re asking is that your full-year guidance hasn’t change from the fall a few weeks ago which implies that what you were looking for in Q4 hasn’t changed anything but are you thoughts or confidence about that at all changed according to the ISPA data coming out his week?

No.

When we gave the guidance for the balance of the year, September 19, what we were taking into consideration was what we were seeing in July and August and through the first couple of weeks of September our expectation.

So, you know, we have modeled that going forward in terms of the overall industry being at a slightly lower growth rate.

So the date doesn’t surprise us in terms of their projection.

Okay.

Thanks for your help and congratulations on getting the buyback approved so quickly especially when the stock [inaudible].

Steve Springer, Target Capital

Yes.

There seems to be an increasing recognition of the health benefit of the Tempur-Pedic mattress by the medical community.

I’m referring to the dramatic reduction in bedsores at hospitals’ report.

Your endorsement by the arthritis foundation in your new marketing arrangement regarding wheelchair cushions.

I’m wondering will – do you see this continuing to create marketing advantage and what other medical market might represent an opportunity?

Well we do feel that that’s one of the key benefits of our products and if you look at the consumer market when you look at the demographics, one big benefit is the baby boomers.

A lot of the research that has been published recently talked about the baby boomers who are willing to spend more money on a better engineered, better designed product, especially if they can reduce a few aches and pains and give them a health benefit.

So the fact that our product is the only mattress in the country with healthcare professionals who recommend the product, over 25,000 healthcare professionals recommending Tempur-Pedic, I think it speaks for itself.

And do you see other medical markets representing any other opportunities there?

We’re continuing our medical position that we have in the U.S.

We’re continuing to look at other opportunities to do similar types of joint marketing ventures.

Nothing to report at this point but it is something that we’ll continue to look at.

And one other question.

Your advertising budget last year was 48 million.

It’s 60 million this year, I believe.

What do you anticipate it being next year?

We haven’t put those numbers together yet.

It will be part of our budgeting process.

You know, one of the goals that we have had with our advertising and our growth rate is to maintain our immediate spending as a percent of our revenue.

So we’ll be evaluating that once we’ve established our [inaudible] numbers.

Okay.

Thank you.

[Corrine Symblus, First View Capital]

Yes.

Just had a quick question about market share implications in the premium category and in the $500 to $1000 category.

I mean, right now in the premium category you guys have 25% market share which, obviously, represents a huge slot to that category, and then I’m assuming that you guys kind of introduced the OriginalBed to maybe convert, you know, consumers that have historically bought beds that cost $500 to $100 maybe convert those to the premium category.

What are kind of your conversion expectations?

I don’t think that we put anything out surrounding expectations where as that demographic group but obviously you’re right.

One of the purposes of introducing the premium Original mattress is to try and pull more of those consumers who traditionally buy between the $500 and $1000 price range and, of course, we think that we have been doing that in the past, even with the plastics, but that the Original at $1200 price point should give us more opportunity to pull those individual consumers up to our superior product.

Do you expect – I mean, like I said, you guys already have 25% of the premium category.

Do you guys expect a little bit more penetration above the 25%?

I’m just curious to where all the volume is going to come from given that you guys have the [inaudible] facility that you’re building in Albuquerque is going to have a lot of capacity.

Where’s the volume going to come from?

One of things if you look at the growth in the premium market, the premium market has been growing significantly and outpacing the other [inaudible] so part of it is the category, meaning the premium category continuing to expand at a faster rate, people are realizing that they should spend more money now on their mattress than they spend on their sofa which in a lot of cases hasn’t always been the case.

So that I think that is one of the ways that we are looking at and we’re also part of the education process between us and some of the trade associations is continuing to educate consumers as to why they should pay more for a quality mattress and the benefit that they get considering they spend a third of their life in bed.

But then you’re also capped by the folks that cannot afford to pay this much money [inaudible] mattress.

There are only so many people that make enough to afford these mattresses.

So what's kind of your target consumer?

You know, people that make over 75k, over 100k, 50k?

If you look at our demographics of our average Tempur-Pedic consumer, they have changed over the past.

We looked at household total income a few years ago it was $75,000.

Today it is $45,000 or recently.

So the fact that people are realizing that they can afford a more expensive mattress from a variety of ways whether it’s financing of that products because all of our retailers have financing programs that allow for very small monthly payments and also the fact that our product has a 20-year warranty.

So if you look at it in terms of cost per night compared to a traditional mattress and how long a traditional mattress lasts, the economics still are very appealing.

Gentlemen, at this time there are no additional questions.

Do you have any closing comments?

Yes.

I just want to say we remain extremely confident in the long-term prospects of Tempur-Pedic and believe we remain the clear leader in the visco-elastic category and maintain our position as the worldwide leader in premium bedding.

Thanks again for joining us this evening.

Ladies and gentlemen, this concludes today’s conference.

Thank you for your participation.

You may now disconnect.

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