Tempur Sealy International Inc (TPX) 2005 Q4 法說會逐字稿

Welcome to the Tempur-Pedic fourth quarter year-end earnings conference call.

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

Following management’s prepared remarks, we will hold a Q&A session.

As a reminder, this conference is being recorded on January 26, 2006.

I would now like to turn the conference over to Barry Hytinen with Tempur-Pedic investor relations.

Please go ahead, sir.

Thank you, Janice.

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

Joining me today 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 any statements made by Tempur-Pedic International during this call that are forward-looking statements are made pursuant to the Safe Harbor provision 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 involve risks and uncertainties and 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.

These factors are also discussed in the Company’s SEC filings [inaudible] press release, including the Company’s annual report on Form 10-K under the headings “special note regarding forward-looking statements and business risk factors.” Any forward-looking statement speaks only as of the date on which it is made.

The Company undertakes no obligations to update any forward-looking statements.

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

For reconciliation of the most directly comparable GAAP measure and other associated disclosures is contained in this afternoon’s release.

The release is posted on the Company’s website and has been furnished to the SEC on Form 8-K.

With that introduction, I would like to turn the call over to Bob.

Good evening, everyone, and thanks for joining us for a review of Tempur-Pedic’s fourth quarter and full-year 2005 results. 2005 was a solid year with continued growth in net sales and earnings.

For the full year, our sales totaled $837 million, up 22% from the prior year.

Full year pro forma earnings per share were $1.07, up 30% from the prior year.

Our sales for the fourth quarter totaled $216 million, representing approximately a 9% increase over 2004 fourth quarter.

While we were disappointed that sales did not reach our guidance, we are pleased that our cost and productivity initiatives enabled us to deliver pro forma earnings per share at the high end of our expectations totalling $0.32 per diluted share, compared to $0.25 last year.

Our fourth quarter performance demonstrates Tempur-Pedic’s ability to deliver strong earnings growth, even in the face of a more challenging sales environment.

Sharp increases in raw material prices in our industry and increased transportation costs, our focus on delivering effective, low-cost operations was very successful and continues to generate productivity and cost reductions throughout the Company’s manufacturing and supply chain operation.

This afternoon we announced that during the fourth quarter we repurchased 6.8 million shares of Tempur-Pedic common stock at a total cost of $76 million.

In addition, our board of directors has increased our share repurchase program by an additional 100 million of common stocks for a total of $180 million pursuant to the share repurchase program described in our press release.

We are very pleased to expand this program and we believe the share repurchase program was a very attractive vehicle to significantly increase shareholder value over the long term, particularly in light of the strong cash generated by the Company’s business.

We remain very confident in the Company’s future and in our ability to drive growth through Tempur-Pedic’s expanding ray of superior products, our powerful distribution model, and our extensive and effective advertising campaign.

At this point, I’d like to ask Tom Bryant to review our operations during the quarter in more detail for you.

Tom?

Thanks, Bob.

Total sales for the quarter grew 9%, while internationally they grew 16%.

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

Let’s take a look at sales by channel.

During the quarter, sales in our retail channel overall rose by 15%, reflecting our focus on penetrating furniture in specialty stores.

In the U.S., total retail sales increased 7%, led by furniture retail, which was up 14%.

However, as we noted earlier, our specialty channel was considerably weaker than expected.

In fact, the specialty retail channel decreased 12% versus fourth quarter 2004.

I’ll discuss some of the reasons for this and the actions we’re taking to address them in a minute.

Overall our U.S. established accounts grew approximately 22% for the full year.

However, this four-year growth rate reflects very strong growth in the first half coupled with deceleration in the third quarter and flat growth in the fourth quarter.

Over the long term, we anticipate U.S. established accounts will grow in the vicinity of 10 to 15% annually.

Internationally, retail sales rose 30%.

The increases reflect a continuing distribution market share gains being made around the world for the Tempur-Pedic brand.

Despite a challenging furniture retail environment in the U.S. during the second half, we continue to expand our distribution in furniture and retail channels.

During the fourth quarter, we added approximately 210 net furniture stores in the U.S.

Exceeding our target for the quarter of 150 to 180 stores.

In total, we were in approximately 5300 doors in the U.S. as of December 31.

For the full year, we added over 1200 net new stores well ahead of our expectations.

During the second half, we analyzed our count in store penetration levels across various demographic and buying group [inaudible] metrics to identify specific regions where we are underpenetrating.

As part of this review, we identified a number of key accounts who would complement our product line and help expand our market share.

We have been very pleased with the quality and the size of new accounts added both in the fourth quarter and in January.

We believe this target account penetration initiative will help us selectively expand distribution in specific markets and improve new store productivity.

Also, as a result of better market data, and an evaluation of customer buying power, we now plan to open fewer accounts in the future.

This will allow our sales force and retail trainers to concentrate more on expanding our business and establish accounts.

Therefore, in 2006, we expect to open an average of 50 to 60 net new stores in the U.S. per month.

Internationally, the expansion of our furniture retail channel continued at an accelerated rate as we opened approximately 260 new doors.

In total, we were in approximately 4100 doors internationally as of December 31, which represents 800 net new doors added in the full year.

In 2006, we expect to open an average of 25 to 35 new stores internationally per month.

We would like to remind the investment community that our store count reflects stores opened in our own subsidiary only and does not reflect stores in the 45 countries where our products are sold via third party distributors.

For example, we service Canada via third party distributor where we opened the number one retailer in that country during the fourth quarter.

However, Canadian stores are not reflected in our store count or in our estimates for future new doors.

Sales from our direct channel decreased 9% from the fourth quarter of 2004.

We believe primarily because of the timing of key promotions in the U.S. and our decision to de-emphasize the direct model in certain international markets.

After testing our U.S. style direct model in a few European countries, we have decided to focus the direct initiative internationally solely in the U.K.

Sales from our third-party channel, while down 5% for the full company, were strong in the Americans where third-party sales were up 22%, reflecting our continued expansion in Canada and South America.

We recently undertook a thorough review of all the metrics we provide [inaudible].

After considering the very sensitive nature of many of these metrics, we have decided for competitive reasons to cease providing updates on the following -- model penetration, sales per store, slots per store, mattress sales by price point, and U.S. established account growth.

For the fourth quarter, we will provide a final review but going forward we will not disclose this information.

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

We began shipping the EuroBed in July and it is now in approximately 30% of our retail accounts.

We began shipping the OriginalBed in late August and it was in about 28% of our accounts as of September 30.

As expected, retailers’ acceptance of the Original continues at a fast pace, with the model now in approximately 54% of our retail accounts at year-end.

We will continue expanding the distribution of both of these new models throughout 2006 and also look forward to showing them to a wider audience next week at the trade show in Las Vegas.

Both the Euro and Original, while still early in the rollout, continued to help drive incremental floor slots.

We finished the year at approximately 3.1 slots per store as compared to approximately 2.8 slots last quarter and approximately 2.2 slots at the end of 2004.

Regarding mattress sales by model, we have reported sales as a percentage of total mattress sales by queen size mattress price points.

Less than $2000 and greater than $2000.

We ended the year with approximately 71% of our mattress sales coming from models priced greater than $2000.

This is up from the third quarter when above 2000 represented about 68% of U.S. mattress sales.

These percentages represent dollars per each price point, not units as a percentage of our total U.S. mattress sales and reflects a continued growth of our high-end premium priced models.

Additionally, we believe it shows that the time has come for us to revamp and upgrade our classic model.

With respect to competition as we said before, we monitor sales of our products in stores and also carry competitive visco-elastic offering and compared those sales with sales from stores that carry our products but do not carry competitive visco.

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

Compared to our expectations for the quarter, there were a few factors that resulted in our sales being lower than our guidance.

Our specialty channel in the U.S. was weaker than anticipated were pillows and mattresses.

With respect to pillows, we anticipated a significantly higher level of sales around the holiday shopping period and last year’s -- in 2004 fourth quarter we had very strong sell-in and sell-through on our newly launched Supreme Pillow.

While we launched the new Supreme Neck Pillow in the fourth quarter of 2005, it did not receive the same outstanding reception.

Additionally, we opened or expanded distribution in several large U.S. retail accounts later in the quarter than we had originally expected, which impacted the level of sell-through.

The delays were caused by retailer specific issues.

For example, the retailers inability to sell through their existing inventory as quickly as planned in order to make room for our products.

While we are disappointed by the delays versus our forecast, I am pleased to report the accounts are now open and performing as expected.

Another challenging area for us in the fourth quarter was our international pillow business.

While this business continues to recover and there are some countries that perform better than anticipated, on the whole the business was not at the levels we had expected for the quarter.

We also continued to deal with the legacy gray market issues in Japan.

Let’s talk for a moment about the industry’s performance during the period.

As you may be aware, the international sleep products association recently released wholesale shipment which represent sell [inaudible] to retailers for November.

While the industry reported a strong November, we expect the industry results for December to be below the first 10 months of 2005.

In October, several large mattress manufactures and now its wide ranging and very significant price increases.

This usually generates a big sell [inaudible] as retailers buy ahead of the price increase.

We expect this situation to normalize in December as retailers work through the inventory.

When fourth quarter and full year industry results are released, we expect to see market share growth for Tempur-Pedic for both the quarter and the year.

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

As Dale will discuss in more detail, these included a rise in raw material prices and fuel surcharges for the transportation and delivery of our products.

However, unlike some of our peers, Tempur-Pedic was able to offset a large portion of these costs.

The fourth quarter demonstrated our ability to deliver strong earnings even in the face of sharp cost increases to the industry.

We began to see great results from our efforts to generate productivity improvement and cost reductions throughout the manufacturing and supply chain operations in the fourth quarter and we are continuing these initiatives in 2006.

I would like now to turn to some upcoming events.

We are undertaking several initiatives to accelerate U.S. sales growth and otherwise strengthen our business in 2005.

We are expanding our retail sales force both in the U.S. and internationally.

To continue building brand awareness, we are increasing our marketing investment around the world.

We are also focusing on our commitment to be the leader in innovation and new product development by doubling our investment in R&D.

Next week, our industry will turn its focus to the Las Vegas World Market Trade Show.

Tempur-Pedic will be launching two brand new mattress models in the U.S.

While we will provide more details during the formal launch, we have named these two beds the GrandBed by Tempur-Pedic and the RhapsodyBed by Tempur-Pedic.

They’re queen-sized mattresses only.

Suggested retail prices will be $5499 and $2399, respectively.

The Grandbed will offer a new level of luxury not previously seen in the mattress industry.

The RhapsodyBed is another masterful combination of technology and comfort from Tempur-Pedic.

It features a cover with stylish microfiber suede sides and stretchable [inaudible] which is a proprietary woven textile.

Both beds will feature the totally new denser Tempur HD comfort layer.

The Tempur-HD provides even greater comfort and support, underscoring the competitive advantage Tempur-Pedic has in the marketplace.

This additional denser material creates the most supportive body and contouring sleep surface available.

Also in Las Vegas we will launch a redesigned Classic as a means to accelerate unit growth.

We have recently completed consumer research including a thorough evaluation of the Classics positioning.

It has been six years since we upgraded this model.

The upgraded classic will have a higher profile and a new cover.

We are very excited about this upgrade and believe it will be compelling to both the dealers and consumers.

Regarding pricing, we have evaluated the pricing and demographics of our typical buyers across all models and have decided to take price on the Celebrity, effective February 1.

The Celebrity mattress will increase approximately 7% making a queen mattress suggested retail price of about $3199.

Additionally, due to rising costs for certain commodities like steel, we are also increasing the prices of our adjustable bed frames.

At this point, I’ll turn the call over to Dale Williams to go over our financial results in more detail and share repurchase program and our 2006 guidance amongst other topics.

Dale?

Thanks, Tom.

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

As Bob mentioned earlier, for the three-months ended December 31, 2005, the Company achieved net sales of $215.6 million compared to $198.4 million for the same period last year.

This represents an increase of $17 million, or 9%.

For the year, our net sales were $836.7 million, a 22% increase over 2004.

We experience growth in both our domestic and international businesses as we continue to execute on our core worldwide strategy of penetrating existing channels and investing to build our global brand awareness.

Domestics net sales grew to $132 million in the fourth quarter as compared to $126.5 million for the same period in 2004, an increase of $5.5 million, or 4%.

Domestic sales accounted for 61% of our total net sales as compared to 64% in last year’s fourth quarter.

International net sales grew to $83.6 million in the fourth quarter, as compared to $71.9 million for 2004, an increase of $11.7 million, or 16%.

Our growth in net sales was attributable to an increase in the U.S. retail channel of $7 million and $14.2 million growth in the international retail channel.

Foreign exchange impact for the quarter was negative 3.3%, or $7.4 million on a quarter-over-quarter basis.

A negative 1%, or approximately $2.2 million, compared to the third quarter of 2005.

Regarding profitability, as noted in the press release, GAAP net income for the three months ended December 31, 2005, was $30.4 million, or $0.30 per diluted share, compared to $23.9 million, or $0.23 for the same period in 2004, an increase of 30%.

Pro forma net income was 31.5 million, or $0.32 per fully diluted share, compared with $25.7 million, or $0.25 per fully diluted share, representing a growth in pro forma net income of $5.8 million or 23%, and a 28% growth in EPS.

Pro forma net income excludes the previously disclosed stock-based compensation expense, the loss on debt extinguishment related to our new credit agreement that was completed in October and a one-time tax benefit from a favorable state tax ruling.

Fully diluted share count was 99.6 million shares in the fourth quarter of 2005, compared with 103.2 million shares in 2004, reflecting the weighted-average impact of our repurchase activities.

The share repurchase contributed $0.01 of fully diluted earnings per share for the quarter and the year.

GAAP operating income was $54.1 million, or 25.1% of revenue, up $9.4 million compared to the same period in 2004.

Gross profit for the quarter was 50.4% compared to 51.8% in the prior year and 49.7% in the prior quarter.

On a quarter-to-quarter comparison from the third quarter, gross profit improved due to the lack of importing and productivity initiatives helping offset higher chemical costs.

On a year-over-year comparison, the gross profit rate decreased mainly to 3 factors.

As we previously discussed, channel mix and product mix changes contributed to the lower gross margin.

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

The retail segment represented 77% of our business in the fourth quarter and 73% in the prior year.

Our product mix continues to shift more toward other products rather than pillows, as the other products like foundations and frames tend to be sold with a mattress.

Other represented 18.5% of our business in the fourth quarter compared to just 16.9% in the prior year.

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

In the third and fourth quarter, we experienced increases in chemical prices and were no longer able to offset them with volume rebates.

As expected, chemical prices increased further in November; however, as we discussed previously, the price increases were in relation to previously negotiated discounts which partially mitigate the impact of these price increases.

Although we are still experiencing higher chemical prices than ever before, and will see ongoing margin pressure until prices improve.

Within the fourth quarter, gross margin pressures were partially offset by improved manufacturing efficiencies and we no longer incurred the cost of importing mattresses from our European factory.

We have ongoing productivity initiatives including reverse auctions on certain material purchases, obtaining purchasing leverage through consolidated global buys, gaining production efficiencies and significant efforts in our distribution network related to warehousing and full truckload shipping among other items that we expect to help mitigate the chemical pricing issue on a go-forward basis.

Operating costs decline $3.5 million for the three months ended December 31, 2005, compared to the same period in the prior year.

The improvement was principally within G&A costs.

On a year-over-year basis, G&A costs were lower due to three primary factors.

First, the Company incurred significantly less expense in 2005 related to SOX 404.

Second, in the fourth quarter of 2004, the Company incurred approximately $1 million in expenses associated with our secondary offering.

And third, Company-wide bonus plans were cut substantially in the fourth quarter of 2005 due to the business not achieving its desired results.

While selling and marketing costs were flat year-over-year, I wanted to point out that our average size in spend was higher in absolute and relative terms as we continue to drive growth in our brand awareness.

Now, I would like to address our guidance for 2006.

As noted in the press release, the Company expects net sales for 2006 to range from $940 million to $970 million, an increase of 12 to 16%.

We anticipate an improving retail environment for Tempur-Pedic products based on new and upgraded product offerings, more targeted distribution expansion, and a better ratio of salespeople per store so we are able to work more closely with our retail partners.

In that regard, while it is still early in the year, we are encouraged by our order volume for January to date in the retail furniture channel which has been very strong.

For earnings, the Company currently expects pro forma earnings per share for 2006 to range from $1.20 to $1.25, an increase of 12% to 17%.

GAAP earnings per share are expected to be in the range of $1.18 to $1.23, a growth of 22% to 27%.

This guidance assumes a $0.02 pro forma adjustment for stock option expense with the adoption of FAS 123-R in 2006 and average fully diluted shares outstanding of 96.6 million shares.

The earnings guidance does not consider the impact of potential further share repurchases under the updated board authorization.

As I mentioned earlier in my discussion of financial results, we anticipate continued gross margin erosion due to channel mix, product mix, and higher chemical prices on a year-over-year basis, moderated by our ongoing productivity initiatives.

In addition, we have thoroughly analyzed our models and have made the decision to slowdown the completion of the Albuquerque facility and we will delay its opening for approximately six months to the end of 2006.

In addition, the Company expects to have capital expenditures in 2006 of approximately $35 million, down from $85 million in 2005, as the spend on the Albuquerque facility is substantially behind us which will free up more cash to support the repurchase program and reduce debt.

It is the Company’s practice to only provide annual guidance and we are not deviating from that at this time.

However, I feel it’s important to remind you that as we’ve discussed extensively throughout the prior year, in the first quarter of 2005 the Company experienced a surge in business surrounding the price increase which provided a higher level of sales and operating leverage than we would normally experience and our 2006 growth expectations will not be linear in comparison to 2005 due to that impact.

Our earnings guidance reflects the Company’s traditional practice of incurring heavy marketing expenditures as a percent of sales in the first quarter of each year.

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

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

[OPERATOR INSTRUCTIONS]

Mark Rupe, Adams Harkness

Hi, guys.

Nice quarter.

Any ramifications from the bond that you received from New Mexico by slowing it down at all?

No, there’s not, Mark.

There’s no tie in the bonds to a start date.

Okay.

Okay and on the U.S. furniture stores, did you break out the sales for kind of the U.S. furniture and bedding stores on the call?

I don’t know if I missed it or not because looking at the map it looks like it was actually a decent number.

U.S. furniture for the quarter was up 14%.

Okay.

And then on the specialty weakness, is it something that you expect to continue as there’s been more doors out there [inaudible] some of that growth or was it, you know, kind of one time in the Q4 do you think?

[Inaudible] as a point that we’ve often said that we think the driver of our business in the U.S. going forward will be furniture and bedding which is where the majority of Americans shop for mattresses.

However, we will still continue to focus attention on specialties as a very important class of trade for us.

One of the reasons why we are doubling our investment in R&D this year is to put more focus behind pillows because pillows are a big percentage of our specialty business, and we will continue to do everything possible to drive that business as well.

And then just lastly, on the adding of mattress salespeople per store, were you materially below the industry rate kind of or is that something that you just needed to do?

No.

We were below.

We made some significant gains last year in terms of expanding the sales force, especially in the U.S., but we’ve also put into our budget this year that we want to continue expanding that to have a typical territory with fewer stores so that they can increase the frequency of their visits, and we think that strategy will pay dividend down the road.

Okay.

And just real fast.

On international growth when unit volume was really strong for the third and fourth quarter in a row, was that something in a particular market or is it across the board?

Very strong all across Europe.

You know, obviously Japan has continued to struggle but Europe has been extraordinarily strong especially when you’re taking in consideration the FX impact, you know, $7 million of revenue difference year-over-year just on that fact, where this year it was 7 million lower.

Right.

Perfect.

Great job.

Thanks.

Michael Cox, Piper Jaffray

Good afternoon.

Thanks a lot for taking my question.

The first question I have is on any thoughts you might have on co-op advertising, selling incentives, any change to the thinking there as we approach 2006?

No.

I think we have -- still have the right mix and the feedback that we get from our dealers in terms of our advertising which you may know is more of a pull model than a push model, that that advertising strategy is working.

As a matter of fact there was an independent study that was done in December where the survey of our dealers and they pointed out that the brand continued to be the most asked for product in their store.

So that is a result of the advertising so at this point we have no [inaudible] to change that overall approach.

Okay.

Great.

And my last question here on the new facility, delaying that the opening does that then push out the depreciation expense to 2007, and is it fair to say that we will see very little importing of product here in 2006?

Certainly, Mike, the first part of your question.

Delaying the facility will delay the start up of the facility and therefore delay the depreciation.

Depreciation on the facility as we currently have it planned will start to pick up in the fourth quarter 2006 as we complete testing and get it ready to start production in 2007.

The second part of your question in terms of importing is it is really a function of volumes.

We have a lot of productivity initiatives still underway at [inaudible] that we think at this time we can get through the year without it.

Of course, if we get surprised to the upside in terms of volumes, that can be a GAAP measure and then we would try to then reaccelerate Albuquerque.

Okay.

Great.

Thank you very much.

Joe Altobello, CIBC

Thanks.

I want to go back to the [inaudible] for a second.

Shouldn’t that lower your [inaudible]?

I’m sorry?

Does that lower your transportation costs?

No.

Albuquerque would improve our transportation cost but we have to look at the whole financial equation and at this point where we have the opportunity to slow down the completion a little bit and delay having that factory come online for about six months we think that financially that’s the right answer.

In terms of you [inaudible].

At the end of the year?

No.

In terms of your long term [inaudible].

Yes.

I think as we indicated, our refocus on individual market and penetration levels we think that the numbers are going to be closer to 7 or 8,000 target.

And then in terms of foreign exchange, obviously a drag on everybody this quarter.

What was the foreign exchange drag in all of ’05? [Inaudible]?

For the entire year, foreign exchange almost was neutral.

It was a benefit in the first half.

It was a drag in the second half.

The full year was negative about 0.2%.

So almost neutral.

Okay. [Inaudible]?

Essentially for ’06 we are expecting a foreign exchange environment similar to 2005, maybe the inverse.

But essentially from an average exchange rate are about the same.

Anthony [inaudible], Morning Star, Inc.

Good afternoon.

Yes.

I had a couple of questions just in terms of the [inaudible] OriginalBed.

I mean, how much in terms of your sales of that model were by your expectations [inaudible] higher price point models.

For example, the Classic [inaudible].

Well, as we indicated, our rollout is still ongoing where in about 30% of our accounts.

So it’s a little early for us internally – oh, I’m sorry the Original, 54, sorry, 54.

So it’s still a little early for us to determine that exactly from our internal data.

However, I would add that the study that I referred to that was conducted in December at the end of the year, the accounts that were contacted indicated that the original that they felt that it was generating [incremental] sale.

So that’s some of early third-party research data but in terms of our internal numbers, we'll certainly have a much better handle on that at the end of the first quarter.

Okay.

Thank you.

Stephen Kim, Citigroup

Hi.

This is actually an issue for Steve.

The first question is regarding the marketing of sales expenditures.

Dale, you mentioned that the ad spending was up in the fourth quarter despite the fact that the gross dollar figure was flat year over year and kind of down from what you spent earlier this year.

So can you let us know what was it that fell so much in terms of that line item, and what can we expect going forward?

The sales and marketing costs?

Yes.

Well, basically, if you look at sales and marketing costs where cost was removed there was some discretionary programs that were delayed.

Certainly, though, versus run rates and accrual rates, the commissions and bonuses affected not just G&A but also sales and marketing for the people in that cost category?

Right.

So should we expect kind of a lower level kind of sustainable going forward here?

I would not look at the fourth quarter as a -- this is the ongoing, the same grade of sales and marketing.

I think if you look at the whole year of 2005, we would expect in 2006 to have some leverage in sales and marketing just as we’ve had each of the last couple of years.

We continue to get a little bit of leverage each year in sales and marketing as we get topline growth.

Okay.

And the second question, on your share repurchases, you burned through the $80 million pretty quickly in the fourth quarter and I’m sure it benefitted from some of the temporary things like the [inaudible] repatriation internationally and working down some of that –

Real quickly, just let me interrupt.

The repatriation did not go to the share repurchase.

Okay.

Well, I mean, you know, from working down your working capital for example.

Looking at your more cash for cash flow in the next quarter or two, would it even be possible to sustain the rate of share repurchases that we saw in the fourth quarter or are you going to have to slow them down just given your forecast for cash flow?

Well, I mean, to your point, we spent 76 of the 80 very quickly.

We had the capacity to do it within our credit facilities.

We are as mentioned in the press release amending – making another amendment to our credit facilities to give us more capacity.

So how quickly it will happen depends on a number of factors, and we won’t address those at this time.

Okay.

Thanks.

Jonathan Shapiro, Goldman Sachs

Hi.

Thank you.

I asked this on the third quarter call too, so I apologize if I sound like a broken record but I’m still trying to understand the same account growth, just how you -- how it would get defined.

If retail growth was 14%, U.S. retail, I think I got that right. [Inaudible] were up 29.5% year-over-year.

I’m still trying to -- I know this isn’t an exact math but I’m still trying to figure out how you get a same account number of 0.

Well, as we’ve said, if you look at -- if you recall when we gave some guidance around this number and we originally were looking at 30 to 35, we then brought it down to 20 to 25 for the full year because we did expect the slowing in the fourth quarter and the way that it’s calculated is that we look at accounts that have been open for 12 months or longer and we look at their performance each month and each quarter compared to the previous year and the growth that takes place within that group of accounts.

So if you look at it in terms as we said the full year, we had a very high growth in the first half.

We saw it slowing in the second half and actually flattening out for the fourth quarter but it’s just the way the math worked.

Okay, and then, Dale, on the operating margin -- on the margins -- so I guess just to recap what you said to other people.

So the gross margin should still be under pressure from the various things that you’ve -- you know, the channel mix, the product mix, all that, you should get some of it back on the selling and marketing just through leverage and then on the G&A as well.

Is that the way to think about it?

Yes.

And do you think operating margins end up up or down year over year in your mind as you sort of work through it or flattish?

I think operating margins year to year are going to be flattish to maybe very modest decrease.

Okay.

Great.

Thanks very much.

Jonathan, it’s Bob.

I think going back to your point.

I think I understand your thinking.

Just because we open up 1200 stores in 2005 doesn’t mean they’ll all open up in January.

They will open up through the course of the year, so it’s really like opening up 600.

I understand.

That’s about 15%, not 30.

Understood.

Thank you.

[OPERATOR INSTRUCTIONS]

Keith Hughes, SunTrust Robinson Humphrey

Thank you.

Dale, for a couple of numbers I’ve been a little confused.

Just yes or no on advertising spending, what was it the third quarter and what was it in the fourth quarter?

U.S. advertising expense?

Yes, U.S.

U.S. advertising in the third quarter was --

Totally.

Give me total.

Total for the company was 23.6 million.

23.6.

That was in which quarter?

The third.

Third quarter.

And then what was in the fourth.

Fourth quarter 21.3 million.

And do you have an ending share count?

I have the ending average for the quarter, which is in the press release.

Right.

But your buyback shares are in the quarter so --

Well, basically the ending share count is reflected in my guidance of 96.6 million for next year.

Okay.

And final question.

It looks like today we’re going to see another introduction below your last mattress in price.

Is that something you’re looking to address?

Do you think you’re going to hold up steadily well with that?

What’s your view on that right now?

Well I think as indicated by our plans, you know, we’re continuing to fill our price gaps as we see them based off of our target markets and our demographic group.

So obviously we’re still going higher.

We think that the introduction that we made last year with the original provides us with that entry level that we can get people the spread between some of the products that we’ve seen and some of the products that we expect to see.

We don’t think that spread is significant enough to overcome the massive amount of advertising and brands, of course, that we put behind our product compared to some of our competitors.

So right now we’re very pleased with our product line and we think the new introductions should actually help us quite a bit in terms of expanded distribution as well as brand building and the image of our product with this new GrandBed.

You’ve got a fair number of different models out now with the [inaudible] that we’re going to see next week.

You have a number you’re looking to hit, plateau at or [inaudible]?

Well I think what we’ve done is we’ve identified particular price points throughout the range and we tried to fill in where we think we had vacancies and opportunities within the market place.

As to what we have in the future, a lot of that will depend on what type of new concepts and new products as the R&D comes up with as well as what feedback we get from the consumer as well as our dealers in terms of asking for new products and what type of products they would like to see and what price point.

So right now I think with all of the new products that we’ve introduced, if you looked at the fact that we had the Original and the Euro and now we’re coming out with these two new ones.

If you look at the price points where we are in terms of our queen size 1199 up to the $5500.

We feel pretty good about the spread right now.

All right.

Thank you.

Robert Straus, Merriman Curhan Ford

Hi, guys.

Just a few questions.

First of all, the redesigned Classic that you’re talking about, will the price of that product change at all?

No.

We’ll maintain the current price.

Okay.

And the second question.

Is there any additional information you can give us regarding your plans for expanding on sales force.

Is there a goal that you’re eventually looking to get to for salespeople per store?

We have some internal numbers but we aren’t planning to give those out for competitive reasons.

But I would say that the way that we have evaluated the marketplace is going back to the individual markets and the buying power indexes and the sales per capita through furniture stores and we’ve looked at that and we have a number in which we think would be ideal, be competitive, that would allow our salespeople to get into the stores on a regular basis, especially the stores with the higher potential getting in there at least once or twice a month.

So that type of strategy will be somewhat dictated by the individual market and the size of the stores in that market.

But it certainly is going to be a more concentrated effort as we expand the sales force.

Another question.

Regarding your product lineup that continues to expand with the Rhapsody and Grand in the mattress area and of course your redesign of our Classic.

Can you talk a little bit about your strategy of how you’re introducing and expanding the number of products at the retail level and what that pitch looks like in terms of maybe your goal is to have all of your products in a single store but maybe you also have a strategy where because of demographics surrounding a store you will market a number of those products, maybe two, three, or four to particular stores.

What is your strategy to market the whole product line now?

Well your point that you made at the end of your question certainly looking at the individual markets and the demographics.

For example, the GrandBed, there will be certain markets and certain stores where that product will be much more applicable compared to other markets.

So we will look at that.

We will look at the typical consumer who is coming into those stores.

But in terms of trying to segment and allocate and restrict our product line on an overall strategy, we’re not planning to do that.

We think that right now we’re giving our dealers a number of choices.

If you look at our product line compared to major competitors we’re still very small in terms of how many models that we offer but we think that we can justify expanding floor space on the success that they’ve had with the existing product line.

And the last question.

It was mentioned on the call about the legacy issues in Japan, specifically.

Is there anymore information you can give us regarding that market and those legacy issues?

And thank you very much.

Well, they continue to get better.

That’s the good news for us and the fact that we have been able to dry up a lot of the gray market products coming in through the backdoor.

The fact that we have re-launched a whole new pillow line with different packaging and actually a different pillow into Japan through our own operation.

So if you look at our direct customers there, they now have a completely different product line.

So we’re expecting that to pay off even if some of the gray market products continue to trickle in, but they will have a point of difference and they will be able to say this is new and improved and what’s available at the down market stores is something that is old.

We’re hoping that that type of strategy will help us rebuild that business.

Thank you.

Good luck.

[Chris Perry, First Vallus Securities]

Thanks for taking the question.

What was the reasoning for the delay in opening the new facility again?

Basically, based on our guidance, we felt that we could delay the opening of the facilities so we took steps to do that.

Is there a volume issue?

It’s a [inaudible] if you look at the second half our volume growth was lower.

In fact, unit volume for the fourth quarter was flat year over year.

We expect that to turn around but at this point we have the ability to postpone for a period of 6 months opening the Albuquerque facility and we feel that is the best financial results for the business to do that.

If you look at your [inaudible] guidance on the [inaudible] increase, can you break that down into volume and prices?

Well the only -- we’re only increasing price on one model, [Liberty], a 6% price increase on that one model.

So the bulk of the growth is expected to be from a volume standpoint and mix.

All right.

Thank you very much.

Todd Sportsman, Sidoti & Co.

Good evening.

Can you guys talk about – a little bit about what your consumers were telling you they wanted, that [inaudible] new design of the Classic.

Yes.

It was a combination of things and keep in mind this was feedback from potential consumers and existing consumers and also very importantly from our dealer networker, our retail customers and the feedback certainly from our dealers was that, you know, they’ve had this product on the floor for a very long time without any changes, cosmetic changes, aesthetic changes, or structural changes and that it was signed to put some energy from an R&D standpoint behind that.

From a consumer standpoint what we were looking at was looking at potential consumers for that product and comparing our current classic to this new concept in getting feedback so certainly that was very favorable.

And even our existing customers who had previously bought that Classic, finding out what percent of those customers would have bought given this new product.

And so all of those things sort of went into the decision that it was time and the fact that that was our original product that the Company used to only have one model and it was just time to do that for a variety of reasons.

What specifically was on the wish list of the would-be consumer and of those people who already owned one and what would they have changed, what would they have--

Well, basically if they looked at this product when they looked at this product and they compared it to our existing products and they are able to ask questions about intent along the lines of price and in this case we were planning all along the whole price and what percent of those potential customers would have bought this product compared to the original classic and those are the kind of things that you do with focus groups.

And then like I said, in terms of the dealer network, finding out not only from customers who are currently carrying the Classic but even customers who don’t carry the Classic what would it take for them to consider it?

So all of those things went in to some of the testing.

So, in essence here, you’re holding a line on prices, so in essence you are holding this out as a better value proposition for the consumer, is that fair to say?

Yes, because if you look at this product compared to the original classic that has the higher profile, meaning it’s thicker, the cover has a much higher appeal to the demographic group that we’re going after.

So a lot of it is the aesthetics of it and how it looks on the floor compared to our current product, compared to our competition.

And my last question, could you describe the global marketing initiative that you’ve got planned for the year, what they are and how much of this expense is incremental over 2005?

In terms of our overall marketing dollars, our intent is to maintain looking at the business as percent -- or I should say the expense as a percent of revenue.

As we increase our revenue we obviously are continuing to increase our marketing.

In terms of our global approach, we are maintaining a global initiative around marketing but we also rely heavily on local approaches and local market.

Because what we found is that even in Europe people look at the EU but the fact is that how you market a product in Germany is not the same way that you can be successful in Italy and other countries.

So each of the larger companies where we have our own operations besides having their managing director who is responsible for the business, they each have marketing people and they work with a central marketing group out of our Denmark office who then coordinates it with our global marketing department here in the U.S.

Okay.

Thank you.

Getting back for a second to the redesign on the classics, with the higher profile, if you could somehow quantify the difference the percentage of the GAAP, if you will, that it closed between the Classic and one step up.

I mean, if you look at it in terms of just the profile, it is approximately an inch.

Meaning that the original has been sold at approximately 8 inches.

The new one is going to be approximately 9 inches and then the next step up, which is the Deluxe, is approximately 10.

So there’s about an inch difference between those before you jump up to the some of the larger products -- 12 and 14 inches.

So the difference between the classic and the Deluxe was 2 inches and is now 1 inch?

Am I understanding that correctly, or is that going to be less than that?

[Inaudible]

Robert Drbul, Lehman Brothers

Hi.

Good evening.

Just two questions for you.

The first one is when you look at the industry now and you look at the visco category within the industry, where do you think the visco category ended up in ’05 and what are you expectations for the visco segment in ’06?

Well, Bob, unfortunately, our competitors do not report their business in terms of segmenting.

You know, take some of the S’s who are all in the visco and even have some public debt so they are reporting numbers, but we are not able to find out what percent of their revenue is coming from visco.

So what we have is we have an annual report that is put out by – that provides the non-innerspring.

Visco is part of that but so is air and so is Latex.

But that’s basically the only thing we have outside of the ISPA data overall.

So it’s very hard to look at it and say that the visco market is X or that, you know, one of the other companies have a certain percent of the market and until someone starts reporting visco as a separate category in their numbers than that would help.

Okay.

And then the second question that I have would be, you know, as you look at full-year ’06, what would be the expectation that you have in terms of price point per mattress?

Do you think that you’ll start to move more towards the Original, or do you think you’ll be able to hold your average selling price unit versus units?

What sort of trends would you expect as the year progresses?

Well, if the past is any indicator, you know, we’ve seen our ASPs continually go up as we see more shifts toward higher price point products.

So I would expect that they’ll probably -- we haven’t put any numbers around it but you would expect it to go up some.

Yes, you know, from an experience standpoint, we would expect modest increase, particularly with a $7000 bed out there.

You know, we certainly don’t expect that to be a big volume product, but we think it will sell.

By the same token, we would like to see the ASPs stay fairly stable because that would mean that the refreshed Classic is really hitting the mark, and we’d get a lot more unit growth.

Okay.

Great.

Thank you.

Steve [McMillan], [JBSH Capital Management]

Hi.

Have you seen any of your competitors and visco category rate and prices because of the cost increases?

Yes.

We saw significant price increases by many, in fact, most of the visco competitors in the November time period.

Not all, but most.

All right.

Will that be kind of in the 5 to 10% range?

Yes.

Okay.

And what kind of success have you been seeing the three S’s having in their visco category and kind of getting into stores?

Well certainly they’ve been able to get into stores because of distribution agreements they have where they can dictate that their products [inaudible] and has to go in the store.

From a sales standpoint, as Tom was saying earlier, it’s really difficult for us to gauge what level of success they’re having with their visco products because of none them provide any numbers on that.

For us, again, the thing that we can look at is as we’ve always have, the stores we have that have competition in mix in them compared to the stores that we have do not have visco competition in them and we continue to see the stores that have visco competitors on the same floor with us performing actually a little bit better than the stores that don’t have competition in them.

And do you think the successful distribution of the three S’s and competitors’ products has slowed your ability to rollout new doors at all?

No.

We have -- you know, essentially through 2005 we haven’t seen any slowing of ability to add new doors.

As Tom mentioned earlier, we’ve made a strategic decision based on a number of new data analyses and information that we’ve been able to gather and look at that we’re going to slow it a little bit because we want to be much more strategic and target specific areas based on some new information that we have.

So we’re going to try to slow it just a little bit, but at the same token there’s still a lot of people out there that want our product.

Okay.

And just regarding seasonality, when you look at the first quarter versus the fourth quarter for the mattress industry, which is stronger?

Is there a difference between the two?

Typically, the first quarter is stronger.

Mattresses historically are not a Christmas present.

[Dean Machato], [Akita Capital]

Hi.

I think I missed the CapEx summary.

Did you say 35 million of CapEx in ’06?

Yes.

How much of that --

Approximately.

How much of that is maintenance CapEx and how much of that if any going to the Albuquerque facility and then what’s the balance?

Yes.

We still have about 13 to $15 million to spend on Albuquerque and the balance is maintenance and general growth.

Okay.

And you mentioned earlier that the Albuquerque facility is going to be [inaudible] income statement in the fourth quarter?

Yes.

Is that -- and you said you were going to delay the opening until the end of the year.

Is that -- and you mentioned something about startup.

Yes.

We had -- original plan had been to open the Albuquerque facility some time in the second quarter.

So as we push that out about 6 months we will be looking to have the Albuquerque facility in production at the beginning of the year, meaning in the fourth quarter we’d be in startup mode and therefore starting to incur depreciation and startup costs.

Okay.

Are the lines that you envisioned installing in that facility, are they currently installed or are you still waiting for those lines to either be delivered or actually be installed?

No.

It’s a big facility.

There’s some equipment in.

They’re in the process of being installed.

There is other equipment that is in country but not in Albuquerque yet and so it’s in transit.

It has to get to Albuquerque and be installed and essentially built within the facility, and I believe there’s some equipment that’s probably still on its way from Europe.

There are no further questions at this time.

Please proceed with any closing remarks.

Yes.

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

Thank you again for joining us this evening.

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

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