Tempur Sealy International Inc (TPX) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2006 Tempur-Pedic International Conference Call.

My name is Tonya and I'll be your coordinator for today. [Operator Instructions.] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. Barry Hytinen, Tempur-Pedic Investor Relations.

Please--I'm sorry.

Please proceed.

Thank you for joining us.

We are originating today's call from our new manufacturing facility in Albuquerque, New Mexico.

Tomorrow we will host the official dedication ceremony for what we believe is the world's largest mattress factory.

Joining me are Tom Bryant, President and CEO, and Dale Williams, CFO.

After prepared remarks, we will open the call for Q&A.

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

Investors are cautioned that forward looking statements, including the Company's expectations regarding sales, earnings, and business trends, involve uncertainties.

Actual results may differ due to a variety of factors that could adversely affect the Company's business.

The factors that could cause actual results to differ materially from those identified include economic, competitive, operating, and other factors discussed in the press release issued today.

These factors are also discussed in the Company's SEC filings, including the Company's Annual Report on Form 10-K under the headings "Special Note Regarding Forward Looking Statements" and "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 will reference non-GAAP financial measures.

A reconciliation to the most directly comparable GAAP financial measure is contained in this afternoon's press release.

It is posted on the Company's website at TempurPedic.com, and has been furnished to the SEC on Form 8-K.

Now with that introduction, I will turn the call over to Tom.

Thanks, Barry.

And to our listeners, thank you for joining us this evening.

Tempur-Pedic delivered a great year during what has been a challenging environment for our industry.

For the quarter, pro forma EPS was up 29% to $0.40.

And full year pro forma EPS was $1.32, which is about the range of our guidance, reflecting strong performance across our business.

For the quarter, sales were up 19% as we continued to see the momentum increase all year.

Fourth quarter sales rose to a record $257 million, which brings full year sales to $945 million, in line with our expectations.

The fourth quarter results represent continued progress on several of the key initiatives we put in place to accelerate growth, expand market share, and improve productivity.

In our retail channel, this focus extends to both established and new accounts.

Our investors are aware that during 2006 we expanded our sales force and will continue to add additional reps as needed to ensure we spend enough time with our retail partners.

Our call frequency is up.

Slots per store are up.

And retail account productivity is up.

Largely as a result, mattress units are up 16% for the full Company, and especially impressive, in the U.S., up 23%.

As we approach our long-term target of 7,000 to 8,000 furniture and bedding stores in the U.S., we recognize our existing accounts become even more important to our long-term growth.

Therefore, our sales personnel now have fewer stores to call on and can spend more time with each customer.

Improving merchandising, more frequent training and education, focused on the benefit of Tempur-Pedic, has helped improve account productivity.

And with more time in the stores, our sales personnel have the opportunity to spend time highlighting the benefits of a complete Tempur-Pedic sleep system, which includes pillows.

Attach rates when our pillows are sold with a mattress are up sharply, as are domestic pillow units.

In fact, domestic pillow units and sales revenue represent new all-time quarterly records.

As we mentioned last quarter, we have been testing new pillow programs.

In 2007, we are rolling out these successful initiatives Company-wide, and we expect to see continued pillow growth.

While we have seen our performance improve, there are segments of our business where we want to see more progress.

U.S. specialty retail, while still down, is starting to see signs of stabilizing.

We do this as a good first step as we seek to minimize the headwind from this segment.

Internationally, Japan continued to underperform, yet we are very pleased that our third-party business bounced back following the actions we discussed last quarter.

As noted on our last call, part of our strategy for Japan is to extend into furniture and bedding stores.

So we are in the process of expanding our retail sales force and developing a new mattress line to meet the unique consumer demand.

Our operation team has seen significant improvement in a variety of areas helping to offset margin declines related to channel and product mix.

Yields at our factories are up substantially.

Cost savings from sourcing and distribution are also having a positive impact on the bottom line.

R&D and product development is engrained in our culture, so our investors will not be surprised to hear we are rolling out some new products in 2007.

Domestically, we will roll out two new pillows and one--I'm sorry--two new mattresses and one new pillow at the Bedding Trade Show next week in Las Vegas.

The Bellasonna Bed by Tempur-Pedic features two thick layers of Tempur material to provide consumers the famous sleep experience that they have come to expect from Tempur-Pedic.

However, beneath the revolutionary sleep surface, there's a core made from a new patented technology we call the T-Flex Support System.

It's a matrix of individually adjusting cylinders made from a new form of latex.

Early consumer testing for this product has been very favorable.

The queen mattress suggested retail price will be $4,099.

Also, following on the huge success of the Symphony Pillow, we will be rolling out the Symphony Bed by Tempur-Pedic at a suggested retail price of $1,399 for a queen size mattress.

This product has been in development for some time as we have searched for a new way to explore the lower end of the premium segment.

After a thorough review of our sales by price point, we believe we have an opportunity to take additional market share in the important $1,000 to $2,000 price point.

Therefore, we will push the limits of the high end.

We will still look to gain market share across the entire premium price spectrum.

Lastly, next week we will introduce the Rhapsody Pillow, which is our first pillow to feature Tempur HD.

We believe this pillow will be quite popular as a standalone product, while also being a key component of the complete Rhapsody Sleep System.

The Rhapsody Pillow will be available in two sizes, queen and king, with SRPs of $199 and $239.

We are also leveraging our R&D internationally.

Last week, we introduced the Tempur Scandinavia Supreme line of mattresses at a European trade show.

This new line features three distinct models with significantly higher price points than our current average in Europe.

It will be offered across all countries in Europe.

And similar to our refresh of the Classic in the U.S. last year, in the U.K. we are upgrading two mattress models to include Tempur HD, offering consumers a new level of luxury.

We expect to leverage Tempur HD globally over the next few product cycles.

Turning to our plants, we look forward to improved efficiencies and distribution savings coming from our new manufacturing site here in Albuquerque.

Tomorrow we will host the official dedication ceremony of what we believe is the world's largest mattress factory.

Consistent with our plans, we successfully completed qualifying and testing last year, and again, mattress production at the start of this year.

While it's still early in the process, we are pleased to report a relatively problem-free startup.

Given the levels of consumer demand we have seen over the last few months, we are happy to have Albuquerque up and running.

In fact, due to a successful startup and current demand trends, we have recently accelerated our production plans for Albuquerque.

I would like to take a moment to thank our employees, suppliers, contractors, government agencies, and public servants, all of whom assisted in making this plant a reality.

We are well on our way to seeing this plant become our most efficient operation in the world.

In summary, our brand awareness and global footprint are expanding.

We are growing market share and we are successfully scaling our operations to meet future demand.

At this point, I will turn the call over to Dale.

Dale?

Thanks, Tom.

Let's take a look at the fourth quarter in a bit more detail.

Our growth continues to be led by retail.

Domestic retail was up 29% and furniture and bedding retail was up a very strong 39%.

Domestic direct sales were down 7% for the quarter, which is an improvement from the declines in the first half of the year as we worked to stabilize this channel.

International retail was up 12%.

International direct was down about $800,000, reflecting retail growth and our decision earlier this year to exit the direct business in certain European countries.

As Tom mentioned earlier, international third-party was up $2 million year-on-year, representing a nice recovery following the actions we took last quarter.

Turning to products, mattress sales were up 21%, or $30 million.

This growth was driven by 16 points of unit growth and the balance on price and mix.

Domestic mattress sales were up 24%, or $22 million.

This growth was attributable to exceptionally robust unit growth of 23% and the balance on price and mix.

Domestic average selling price continues to be negatively impacted by channel mix.

However, we are pleased with the improving ASP trend.

Pillows were up 17%, or $6 million.

Domestic pillow sales were up 28%, driven by 25% unit growth.

Domestic pillow sales performance represents an all-time quarterly high.

Importantly, our international pillow segment may have turned the corner with 7% dollar growth and 1.5% unit growth.

This represents the first positive unit comp in international pillows in about two years, so we are pleased with this performance.

We believe there are significant opportunities for further improvement in this area.

Our products, which typically go along with the sale of a mattress, were up 13% in total, led by 20% domestic growth.

Gross margin for the quarter was 49.4%, up 120 basis points from the prior quarter, and down 100 basis points from the prior year.

For the full year, gross margin was 48.7%, in line with our expectations as detailed on our last call when we guided for gross margin to be down about 200 basis points year-on-year.

Operating income was $61 million, or 23.9%, up 160 basis points sequentially.

Sequentially, operating margin expanded with gross margin improvement as well as operating leverage.

GAAP net income was basically flat at $30.5 million.

Pro forma net income was $34 million, up 10%.

Pro forma adjustments include the one-time costs associated with the early redemption of our high yield bonds, partially offset by a favorable tax ruling.

GAAP EPS increased to $0.36 from $0.30 last year.

Pro forma EPS was $0.40, up from $0.31 last year.

Full year pro forma EPS was $1.32, one penny above the high end of our guidance, reflecting productivity across the business.

GAAP EPS was $1.28.

Capital expenditures were $13 million, of which approximately $4 million was related to the completion of our Albuquerque facility.

For the year, CapEx was $37 million, consistent with our guidance.

Cash flow from operations was $33 million for the fourth quarter.

Cash flow from operations for the full year was $166 million, an increase of 62%.

Reflecting this improved cash flow, we lowered total debt by nearly $56 million in the second half, even though we incurred a sizeable call premium paid in connection with the redemption of our senior subordinated debt.

Based on our strong cash flow and the completion of the Albuquerque investment, we are very pleased to announce our Board's decision to initiate a dividend and a $100 million share repurchase authorization.

The Board has approved a $0.24 per share annual dividend, which is anticipated to be paid quarterly.

For the first quarter, the Board has declared a $0.06 dividend.

We firmly believe initiating a dividend and a share repurchase program are excellent ways to leverage the business' strong cash flow dynamics as we seek to maximize shareholder value.

Now I would like to address our guidance for the full year 2007.

For sales, the Company expects full year net sales to range from $1.04 billion to 1.07 billion, an increase of between 10 and 13%.

For earnings, the Company currently expects GAAP earnings per share for 2007 to range from $1.50 to $1.54, an increase of 14 to 17%, compared to 2006 pro forma EPS.

This guidance assumes an incremental $2 million of stock-based compensation expense, as compared to the full year 2006.

This assumes an average of 87 million shares outstanding.

However, this guidance does not assume any benefit from potential share repurchases.

Now I would like to comment on recent trends.

To date in 2007, we are very pleased with the continued strong U.S. order momentum.

Therefore, we expect our U.S. business will grow at a faster rate than our international business this year.

As we have mentioned previously, due to the ramp-up of our new facility here in Albuquerque, as well as some minor impact related to channel and product mix, we anticipate continued margin erosion, moderated by ongoing productivity initiatives.

In total for the year, we should anticipate gross margins to be slightly down, perhaps as much as 100 basis points.

From an operating margin perspective, the Company anticipates continued operating leverage.

We currently anticipate operating margins to be flat to down slightly, perhaps as much as 50 basis points for the full year.

This expectation includes the negative impact of higher stock-based compensation expense related to FAS-123R.

Regarding interest expense, our average interest rate is variable at approximately LIBOR plus 125 basis points.

The Company anticipates it will have no debt internationally by the end of the second quarter, and from that point forward would anticipate building cash internationally.

The Company's EPS guidance does not assume that the Company would repatriate cash from its international subsidiaries to repay U.S. debt.

The Company would like the investment community to be mindful of this fact as it relates to interest expense.

We anticipate a tax rate of 37% for 2007.

Regarding CapEx, the Company expects full year CapEx of $20 million, down from $37 million in 2006.

We anticipate depreciation to be up about $10 million from 2006, as we begin to depreciate Albuquerque.

It is the Company's practice to only provide annual guidance, and we are not deviating from that practice.

However, we remind the investment community that it is the Company's traditional practice of incurring heavier marketing expenditures as a percentage of sales in the first quarter of each year.

Additionally, the Company anticipates the impact from its Albuquerque startup to be greater early in the year.

Now I would like to spend just a few moments discussing our long-term view.

We are very confident in our long-term prospects, and expect to gain significant share across our global markets.

As it relates to gross margin, we anticipate 2007 will be the trough year.

We expect to see improving gross margin in 2008 as incremental unit volume will leverage fixed costs, and capacity utilization improves.

Also into 2008 and beyond, we expect to see SG&A leverage such that operating margins expand incremental to gross margin improvements.

Over the long-term, we fully expect this business should deliver operating margins of 25% or more.

We are very focused on improving operating performance and maximizing shareholder value.

As noted in our press release, our guidance and 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.] And your first question comes from the line of Mark Rupe from Ryan Beck.

Please proceed.

Hey, guys.

Great quarter.

Congratulations.

Thanks, Mark.

A couple of quick questions here.

On the Symphony Bed, how important is that price point?

I know there's a gap between the Original and the Classic.

But are you losing a significant amount of sales in that price point right now?

No.

We think that the pricing of that product has more to do with we think is the appropriate number for the market itself and the consumer testing that we did.

So we think that 4,099 is certainly at the high end of the premium market.

But as past history has shown, consumers are willing to pay that higher price for our brand.

Okay.

And then, the ramp on the new production facility--manufacturing facility, I know it's going to occur throughout this year.

I mean, as far as the increased demand, it seems like the product is selling obviously very well here in the U.S. right now.

Is there any chance that you'll move that ramp-up a little faster?

Well, as we mentioned, the facility here--we have already done that.

We're in the process, as a matter of fact, of bringing on a second shift here in Albuquerque.

We will continue to ramp-up, obviously, based on how the demand for the products come in down the road.

But right now, we are certainly in the ramp-up mode.

Okay.

And lastly, on the inventory levels, they continue to be very lean.

With the new facility, obviously, you're going to have better levels of inventory already.

I mean, should we expect kind of an inventory day level going forward?

We shouldn't expect inventory declines for some period of time, if ever, at this point.

Given the growth of the business, Albuquerque will allow us to have a faster turn time out of the factories to keep the supply going.

We are pretty lean right now though.

Second quarter, third quarter we had a lot of stocked outs.

We were pretty close to having some stock out issues at the end of the year, but we were able to meet the demand that was required.

So inventory is pretty lean right now.

It may go up a little bit.

But certainly, having Albuquerque online and ramping up the production here will help us operate the business at a leaner level of inventory.

Perfect.

Thanks.

Great quarter, again.

Thanks.

Thank you.

Your next question comes from the line of Stephen Kim of Citigroup.

Please proceed.

Great.

Thanks.

Good quarter, guys.

Thank you.

I had some technical difficulties, so I hope you guys didn't already answer this question.

But did you guys have specific unit targets for production out of the Albuquerque facility in the first quarter and the second quarter of this year?

No.

We haven't disclosed any unit targets.

I think it would be fair to say that based on the demand that we've seen we have accelerated the production out here.

And I mentioned that we're in the process of hiring a second shift.

Just to put a little additional color around that, we would expect, for example, in February, that we'll be making probably a little over 10,000 mattresses here at this new facility.

And is that going to be encompassing both the HD, as well as the Original Tempur material?

Eventually, when this facility is completely up and running, it will be making all of the models here.

So--because obviously one of the benefits to having the two factories is being able to ship from the West Coast all of our products out of this facility here in Albuquerque.

Okay.

But not right away though, right?

Right.

Correct.

Can you give us some color on the breakdown of the sales growth in maybe U.S. versus international, or mattress versus pillows?

For next year?

Yes.

If you look at this year, the U.S. growth was about double the international growth.

For 2007, we would continue to expect the U.S. to grow faster than the international business, but not at quite the disconnect we had this year.

So I--we would look for the international business to do a little bit better next year and the U.S. business to moderate just a bit, just because there are a lot of large numbers.

But we--.

--In growth rates?

I'm sorry?

You mean the growth rates?

Yes.

But the--we do expect U.S. to still grow faster than the international business.

In terms of mattresses versus pillows, again, the key just as it has been historically is the mattresses are going to have a faster growth rate.

Okay.

And the dividend - any rules of thumb on--in terms of what your long-term goals would be to sort of grow the dividend?

Any--should we just assume the typical payout, that that would be represented by the initial dividend here?

Well, no, the initial dividend is approximately about a 1% yield.

We'll just have to play that by ear as time goes on.

Obviously, the business has very strong cash flow dynamics.

We just completed a major investment in Albuquerque and we don't foresee that kind of an investment required in the business for some time.

This is not a business that requires a lot of ongoing capital infusion.

So over time, the dividend may go up.

But I don't want to speculate on that right now because we just have to see how things play out and whatever uses we ultimately have for the cash.

But we feel like at this point in time it's a good thing to initiate to help maximize shareholder value.

Okay, great.

Congratulations on a good quarter.

Thanks.

Thank you.

Your next question comes from the line of Steve Colbert of Canaccord Adams.

Please proceed.

Hey, guys.

Congratulations on a good quarter.

Thank you.

Mattress units are quite strong domestically.

Is there strength in any particular price point and have you seen any trends different from what you've seen in the past?

Well, one of the things we've been very pleased with is that we've seen good performance across the product line.

Our--as we've introduced new products, we've been able to get incremental floor space with the retail partners.

And because we put all of our advertising dollars behind the brand--behind the mattress overall compared to a particular model, we also think that's a benefit for us.

So right now, they all are doing very well for us.

Okay.

And looking at your recently expanded U.S. sales force, how far long in the account productivity improvement cycle do you think you are at this point?

Well, certainly from a standpoint of structure, we believe we now have the right structure.

We have the right number of stores per rep.

The call cycles and the classifications of the customer base, all of that is done.

And we've been at this now for quite a while, starting at the beginning of last year.

So we think that the training has been done, the call cycles are in place, and that productivity at the door level should continue.

Okay.

As we build up [indiscernible].

Great.

And then, can you talk a little bit more about the new bed offering, specifically the use of latex in the support base of the Bellasonna?

Is that just replacing sort of a standard polyurethane foam base?

And how do you market it effectively without sort of touting any benefit of latex?

Well, one of the things to point out is that the latex cylinders are something unique.

And we mentioned that there's a patent surrounding the technology.

The cylinders themselves--I know, for example, there are over 200 of those in a queen size mattress--will certainly provide a different feel for a Tempur-Pedic product.

But in terms of the material that comes in contact with the consumer's body, that will continue to be Tempur material.

We--with all of the testing that we've done, we firmly believe that latex can be a good support space in this type of construction, but it's not something for the top layer of a mattress.

Okay.

Are you purchasing those latex cores?

Is that kind of how this works out?

Yes.

We have entered into an exclusive worldwide arrangement with a third-party source to manufacture these.

They will be injected--injection molding is the way that they will be made.

So it's quite a unique process--manufacturing process.

But we do have an exclusive on a worldwide basis for that particular technology.

Okay.

And then, final question, the price points that you gave for the beds, do those include the foundation or is that without?

No.

Those are only mattress price points.

Okay.

And we expect for the Symphony Bed roughly 300 for a queen foundation?

Is that fair to--?

--That's fair.

Yes.

Okay.

All right.

That's it for me.

Thanks, guys.

Congratulations, again.

Thank you.

Thanks, Steve.

Your next question comes from the line of Edward Yruma of JPMorgan.

Please proceed.

Hi.

Thank you very much for taking my question.

And congratulations on a very nice quarter.

Can you talk a little bit about how you've moved the factory timing up a little bit, or I guess the ramp?

I think you had previously guided to a $7 to $8 million impact or a negative impact for '07, due to the factory opening.

Has that changed now that you've ramped a little bit faster than you had previously expected?

No, not at this point.

We are trying to pick up the pace of the ramp here at Albuquerque.

To the extent that we are successful and continue to have the kind of unit growth that would drive that even faster, then it might improve.

But our guidance for '07 contemplated a range of revenue that called for us to push the factory a little bit faster.

Great.

And then, can you talk a little bit about what's going in Japan?

I know you've seen some stabilization there in the business and you've taken some key steps to improve that.

Do you view that you need to take incremental steps to kind of further stabilize that business, or do you view it as a situation that will kind of play itself out?

I was actually in Asia last week.

And looking at our market there, we think that this is a process, as I mentioned, that we think one of the keys will be the mattress market compared to historically that being a pillow market for us.

And the key there will be introducing some new mattress models specifically designed for the Japanese consumer, as well as getting those mattresses into retail and bedding.

Where we've traditionally sold the majority of our pillows have been through department stores in Japan.

So there are significant opportunities we think in terms of expanding mattress distribution in the traditional furniture and bedding shops.

But it will be a process.

Obviously, it's not going to happen overnight.

Great.

And my final question, I think you had previously guided--and I think you have done in a previous quarter--you have added about a third more sales professionals.

Have you increased that number and is that part of why your results have been so strong?

Thank you.

We haven't increased it from--substantially from that 33% factor that we gave out last quarter.

We have added a couple of additional people.

As we indicated on our last call, our objective is to continue to expand the sales force as we expand our net doors.

So we'll try and keep that ratio going in the future as we open additional doors.

But I think, as most realize, that the new door count has slowed down.

So we wouldn't expect that ramp-up of the sales force to really accelerate.

Great.

Thank you very much.

[Operator Instructions.] And your next question comes from the line of Joe Altobello from CIBC World Markets.

Please proceed.

Hey, guys.

Good afternoon.

Hi, Joe.

First question on the guidance for '07, Dale, in terms of the gross margin being down slightly.

That's obviously unchanged from what you said previously.

But I was curious what you're seeing in terms of trends in commodity costs, transportation, raw materials, and what you're baking in for next year--for '07.

Yes.

From a commodity cost standpoint, on the U.S. side, the quantities that we buy we're not seeing in change in pricing.

And we've been told that the price is the price at this point in time.

However, we do see some of the feedstock materials starting to decline a little bit.

Our assumption is that the price is the price.

And we've been told it's not changing.

So that's what we've got in the guidance.

If things were to change there, we would get some benefit.

On the European side, the price of those chemicals did go up a little bit in the latter part of last year.

And we expect those prices to be fairly stable throughout the year.

In terms of transportation, some of the--one of the key cost adders that we've been dealing with has been fuel surcharges.

Diesel still remains fairly high relative to other gasoline products that have dropped some.

I guess it's down a little bit.

We do have some expectation of some improvement on that side built into this guidance.

But not a dramatic turnaround in terms of fuel surcharges on our transportation side.

We do continue to work on the productivity standpoint - improving our routes and getting cost improvements in transportation.

Obviously, Albuquerque, as it gets up and running, will provide us the opportunity to get more efficient distribution costs.

Were those the key elements that you had mentioned, Joe?

Yes.

Yes, perfect.

And then, if I could, in terms of just some housekeeping.

The ending number of retail doors - furniture and bedding?

In the U.S., it was 6,053.

And internationally, it was 4,450.

Okay.

And then, lastly, the foreign exchange impact on sales, both for the entire Company and for the international business in the quarter.

For the year, FX was about 2 million, and that's all on the international side of the business - positive.

And for the quarter?

I'm sorry.

I don't have the quarter impact right in front of me.

I think it was probably around 5 million or so - positive.

Okay, great.

Thanks a lot.

I'm sorry?

Thanks.

Yes.

Your next question comes from the line of Al Kabili from Goldman Sachs.

Please proceed.

Hi.

Good afternoon, guys.

Congratulations.

Thank you.

I guess the first question is if you could just help me walk through the sort of puts and takes on the gross margin on a year-over-year basis.

Down 100 basis points.

I assume just looking at the percentage of pillows as a percentage of total revenues it's about sort of where it was last year.

So I assume pillows at this point wasn't a contributor to the decline in gross margins.

So I just want to get the run-through there.

Are you talking about 2006 gross margins?

Yes.

So the fourth quarter of 2006 versus the fourth quarter of 2005, kind of what were the puts and takes to get to that down 100 basis points?

Pillows were about the same.

Basically, in terms of year-over-year, you've got mix differences.

In terms of where channel retail is up as a percent of the business, direct is down actually more than retail is up because some of the other channels third-party--healthcare [should grow].

So the channel mix was a big driver.

Certainly, you had the year-over-year comparison basis, a little bit of chemical cost increase--a lot of chemical costs went up.

I guess we had two or three price increases in 2005.

The last one was about November.

So we did have some additional there.

We also did have some chemical-- a chemical price increase in Europe in the fourth quarter of this.

Beyond that, it's really a function of mix by country and a lot of different factors going into gross margin being down a little bit on a year-over-year basis.

Okay.

And anything positively impacting it--leverage?

How much did leverage boost the gross margin this year?

Well, the positive impact, we had a great year in 2006 in terms of the whole operations team in terms of getting productivity.

Yields in the factories up significantly last year.

Sourcing prices for different components of the product getting improvement there.

So we certainly have a lot of positives going on in the operations team in terms of the overall productivity that they're trying to drive to offset the changing mix of the business and the commodity--year-over-year commodity change that occurred late in 2005.

Okay.

And then, just a clarification on the outlook for '07.

Could you tell us what you are assuming in terms of door growth, both internationally and U.S.?

Well, as we said, we expect and have expected, just to clarify, in '06 that our new store growth would slow and of course it did.

And moving forward, while we're not going to--because of the fact that our established accounts are such a large percentage of our retail business and that's where our focus is going to be.

And we're coming pretty close to the low end of our target on 7,000 to 8,000 retail stores.

We're not going to be giving out a specific goal around new doors.

But what we will do is we will certainly provide the count at the end of each quarter.

But overall, we don't expect a lot of new store growth coming in 2007.

We think as we progress toward that target that we're looking at a two to three-year buildup to get to that 7,000 to 8,000.

Okay.

And then, how about in Europe?

Where do you see--I don't know if you've ever sort of given a targeted max of where you could--think you could get internationally.

Yes.

Well, in 2006, we opened--on the international front we opened an average of--the goal was to open an average of 25 to 35.

And we fell right within that high end of that target.

So we think we will continue to open doors in Europe.

We still have opportunities in certain markets.

As I mentioned earlier, we are going to focus on opening some additional doors - furniture and bedding stores - in Japan.

So the target there will still be an important one.

But it will be lower in terms of our expectations going forward than it has been in the past just because we are getting into a larger percent of the base.

Got you.

And then, final question.

If you could just kind of give us some color on sort of what are sort of the key differences between international and U.S. that--where international growth lately has been kind of lagging the U.S. growth.

Well, we have continued to see good progress in Europe.

I think as we have indicated on previous calls during 2006, the Japan situation with the third-party distributors that we have previously discussed, some of those issues combined to really hurt the international business.

And that's the reason why we were so pleased during the fourth quarter to see some of the third-party business turn around and actually have a very positive growth year-on-year.

So we think that most of those issues as it relates to a great market in Japan are behind us.

We've taken the right corrective actions and we bit the bullet in terms of some slowing sales and making changes in distributors.

But we think we're in good shape heading into a new year now.

Okay, great.

Thanks, guys.

Your next question comes from the line of Robert Straus of Merriman Curhan Ford.

Please proceed.

Thanks.

Congratulations on the quarter, guys.

Thanks.

Thanks.

A few questions have been already asked.

But let me at least focus a little bit on your product lineups, because you're clearly adding a number of new mattresses.

From the standpoint of the U.S. and the Symphony Bed specifically, Tom, can you give us a little bit of color of how you see that fitting in with the Original Bed and Classic Bed that you have currently on the marketplace?

Sure.

One of the things that we felt very strongly about as we evaluated--during the year 2006 as we evaluated the market, we looked at the premium sector of the market, which obviously has been the fastest growing segment of the U.S. mattress market.

And the $1,000 to $2,000 price point, which is a key market dynamic for the Company, we felt that we still had opportunities within certain price points if we could introduce a product that had a point of difference and also a product that could give our retail partners excellent margins.

So if you look at the Original--just the mattress where we've got it priced at 1,199--and you look at the Classic price at 1,599, we felt that there was enough gap there that we could introduce this new Symphony product at 1,399.

And that by upgrading that particular product--whereas there are some bells and whistles in there, if you will, from the standpoint of construction.

It has a different look.

But that price point is an important one.

It gives us another model to introduce and focus--continue to focus on building our market share in that $1,000 to $2,000 category.

In Japan, from a product standpoint, is the only type of mattress you have there the Japanese futon that you introduced some time ago?

Well, that is the primary product we have because of the large percentage of Japanese who continue to sleep on traditional futons.

However, we do sell our European line in Japan.

But what we've been doing there is simply taking the models that were originally designed for Europeans and introduced them into Japan.

But again, I think the--what it needed that we've indicated and seen in that market is a product specifically designed for the Japanese consumer.

So that's what we're working on and plan to introduce this year.

And how many products--and I don't know if you'll comment on this at all, but how many products are you looking to introduce in Japan at some point this year?

Well, it's still in development.

I wouldn't want to throw out a number because of the fact that ultimately how many models and which models the launch in Japan will be dictated by the research that we're doing currently.

In Europe, you are clearly introducing a few different mattresses.

How do you see that fitting in your existing lineup there?

Well, we're very excited about that because one of the benefits of building this new R&D center in the U.S. to focus on North and South America is that it's allowed our R&D folks in Denmark to really develop products at an accelerated rate for a year.

And as I mentioned, hopefully, Japan later.

But those particular models, this is the first time where we've entered that many models into Europe.

And as I said in my prepared remarks, we were at a trade show in Germany, actually, just recently, and that's where we launched them.

They've gotten excellent reviews.

It is also a product line that will give us a little bit higher price points in Europe.

So it's a little--positioned a little higher for the European market.

So we're excited by it, and we're anxious to see how well the consumer will accept these new products.

Last question.

Just some recent channel checks that I've done in the U.S. seems to indicate that you may have instituted small price increases on the Rhapsody Bed and Grand Bed in the marketplace.

Any comments that you could make regarding that?

Yes, that's correct.

We did announce price increases on those two specific models that will be effective the first of March.

And we chose those products--we routinely in all of our markets around the world we evaluate our price points, we look at the takeaway at the consumer level in impressions.

We also get feedback from our retail partners as to some of our price points.

And we felt after looking at all of that, that we had an opportunity on those particular premium priced products to raise the price a little bit, and also take the opportunity at the same time to provide higher margins for our retail partners, which was something that they were asking for as well.

So we get a little bit higher margins and the retailers get a little bit higher margins.

So we view that as a very selective process, but one that we can take at this point.

Thank you very much.

Congrats, again.

Thank you.

Your next question comes from the line of Joel Havard from BB&T Capital Markets.

Please proceed.

Thank you.

Congratulations, guys.

Thank you.

Again, most questions have been asked, but a couple of things warrant exploration here.

Dale, first of all, I guess it's just more housekeeping.

But do you have Q4 advertising-specific dollars?

Advertising in Q4 was 26 million--26.1 to be exact.

26.1.

Up from 21.3 last year.

All right.

Now, that is continuing that little pickup trend.

You all had indicated earlier that you saw that picking up through '07.

At the time I think your comments weren't specific to new products.

But with that being the case, should we look for a point, a point and a half, sort of higher spend rate on advertising-specific expenditures in '07?

Well, we look for advertising to run between 10 and 11% of sales.

It fluctuates a little bit depending on what's going on.

We had some difficulty late in the third quarter, early in the fourth quarter getting ad time due to the contentious mid-term elections.

But availability picked up, our advertising picked up once we got through that.

For next year I would expect advertising to continue to be right in there in the similar kind of levels that we experienced this year.

And the--ex advertising and marketing-related dollars, similar trend, kind of following along?

Well, ex advertising--there are aspects of marketing dollars that are--do kind of go along with advertising - some of the promotional stuff.

But there are elements of marketing and, putting them together, sales and marketing, that we will see some leverage on next year.

We added a lot of new sales people this year.

We'll add a few in '07, but not--as Tom mentioned earlier, not anything like we added this year.

So you'll see sales productivity there.

So we'll see some leverage in the selling and marketing side of the business.

All right.

Now, Tom, that's a great--and Dale, thanks.

That's a great segue to Tom here.

Is the sales structure in Europe similar enough to the U.S. that you could have one of these sort of rep boost efforts implemented over there, or is it just a different kind of cat?

It is somewhat different, although we have a structure in many of the larger countries very similar to what we have here in the U.S., meaning that we have a sales force dedicated to retail furniture and bedding.

We have a sales force dedicated to medical.

So there are some similarities, but in terms of how rapidly we add sales people, that--in Europe, that will continue to be dictated by how many doors we open.

Okay.

So you'll follow with sales support rather than try and lead like you've done more recently in the U.S. then.

Is that a safe--?

--Yes.

Because we--they were already at a better ratio--.

--Okay--.

--Than we were in the U.S.

I see.

And one more follow-up.

Tom, did I catch in your earlier comments a positive comment on the state of the industry right now?

No.

My comment I think was around the fact that we had a good quarter sort of in spite of the market.

Yes.

Okay.

Yes.

Yes.

Well, that makes your alls results shine all the more brightly.

Guys, congratulations and good luck.

Thank you.

Thanks.

[Operator Instructions.] And your next question comes from the line of Bob Drbul of Lehman Brothers.

Please proceed.

Hi.

Good evening, guys.

Hey, Bob.

Just a couple of questions.

Can you provide a little bit more color on the slot improvement, and then the increased sales force impact on that improvement?

And then, the second question would be just can you talk a little bit about the larger sales force and the impact that it's making on the hospitality channel?

Sure.

Well, while we don't give out individual slot information, what we can say is that we are continuing to gain slots on the retail floor.

As we've introduced our new products, we've been fortunate to be able to get incremental slots.

And so, one of the things that we would expect to see with the new products that we're introducing next week in Las Vegas is a similar type of result.

We think we have compelling reasons why a retailer would want to continue to expand their Tempur-Pedic product line.

As to our hospitality strategy, I think we mentioned previously that we had--well, we were going to continue to add salespeople there.

We're up to about 20 independent reps on the hospitality side throughout the country.

We've done all the training of those individuals.

We're in the process of signing up for all of the trade shows within the hospitality segment.

We started our advertising campaign with the trade journals in that business.

And as we ramp-up the plant here in Albuquerque, we will continue to be aggressive as we go out to try and get into more hotels.

As we said previously, we were not that aggressive because, as I think most people know, we were simply out of capacity.

Okay.

And can you just give us an update on the total number of sales reps today?

Well, I don't--Barry, have we been giving that out?

For competitive reasons I know we said we've increased it 33%.

We've said that was in the low to mid-60s.

Okay.

So low to mid-60s in the U.S..

On furniture and bedding retail sales that would be--organization--.

--And Tom, that would be the hospitality reps incremental.

Yes.

So that doesn't include hospitality reps.

Okay, great.

And Dale, just a housekeeping question.

In the '07 guidance, what's the actual interest expense that you guys have expected in FY07 with the debt repayment that you have in the second quarter coming up?

Well, from an interest expense standpoint, we expect it to be down a little bit from this year.

But with doing a dividend and a repurchase and--we'll be lowering our debt and getting out of debt in Europe.

But obviously, on the U.S. side, our debt levels will be fairly stable if not up a little bit, based on our capital deployment decisions that we've made.

So we'll see some improvement.

A little bit cheaper debt because we don't have the high yield anymore, which will yield some improvement, but not a significant change in debt in the business.

Great.

Okay, thank you very much.

Yes.

Your next question comes from the line of Randy Scherago of First Albany.

Please proceed.

Hey, guys.

Just a couple quick questions just to follow-up.

Looking at your healthcare sales number, it's fairly static, actually down a little bit year-over-year.

Is there any strategy to pursue anything in healthcare over the next year or two?

Just a follow-up on your FX impact.

You discussed 2 million.

Was that a negative impact or actually a benefit?

FX was a $2 million benefit for the year.

Okay.

On healthcare, globally healthcare is up 5% for the full year.

And for the quarter, it was up 5% globally as well.

And a little bit more I guess in the fourth quarter.

There was a little bit more growth internationally.

But for the year there's been a little bit more growth in the domestic business.

Healthcare is a--internationally, our healthcare business is one that--it's a little lumpy because it's a large institutional business.

Institutions can--a deal here or there can swing things one way or the other.

Domestically, what we've been doing, we implemented a new strategy in healthcare a little over a year ago.

We're looking at OEM deals where we are trying to--oh, I'm sorry.

I was looking at the wrong data, Randy.

We are down a little bit in healthcare year-over-year.

And then, that's predominantly internationally.

But anyway, to the point that I was making.

Domestically, we've got some OEM deals where we are providing our products to people that are leaders in the market and are able to represent us better than we can ourselves in a very small--with a very small force in a very big and broad healthcare industry.

So that tie-in arrangement that we've had with a few of our OEM deals that we've done in the last year, we're looking to continue to move forward with that strategy in the U.S.

Okay.

Of the inter--the reps that you've hired for the hospitality market, was that to go after the franchisees?

And will you have national sales reps to go after the corporate properties of the major hospitality chains?

Yes.

If you look at our--those reps are spread out throughout the country.

So the facilities that fall within the regions, those would be the ones that they will focus on.

We still have our sales manager in--who heads up that division.

He would make most of the high level presentations at the corporate level for the larger hotel chains.

Okay.

One of your competitors, Sealy, has mentioned that they opened a new latex factory and they're going to be aggressively going after this 500-bed market--specialty bed market.

Do you think they'll be aggressively trying to take slots away from you, or will they be cannibalizing their own slots in the stores?

Well, it's difficult for us to try and guess as to their strategy.

I think the best thing that we can do is continue to do what we've been doing, invest in our brand, expand our footprint in the stores.

We think that we've got a superior product.

We've got the highest level of referrals in the industry.

More than 95% of people who buy our product go out of their way to recommend it.

So we have this passion going for us.

So I think what we'll do is just keep focusing on those factors that have built our business.

And we'll see what happens in the market from a competition standpoint.

Okay.

Thanks, guys.

Your next question comes from the line of John Baugh of Stifel Nicolaus.

Please proceed.

Thank you.

Great numbers.

A quick question.

Just update us on fire retardancy across the product line, please.

Well, some of the listeners may recall that we made a decision to convert our line at the time that we had to be in compliance with the one particular state, which is California.

We did that because we thought that eventually the federal government would file a suit, and of course they have.

So unlike I would say the majority of mattress producers in the U.S. who still will have to convert over and incur that cost, we've passed that bend in the road a long time ago.

So all of our products are compliant.

What do you expect given that '07 where some of your competitors have not done that yet, do you expect you're going to be relatively priced better assuming you don't change prices.

And you mentioned--.

--Yes.

Well, it just depends on what approach that a particular manufacturer takes to compliance.

But we've read in trade publications everything from $50 to $150 for retail impact on a queen.

So where that shakes out, I think we'll just have to wait and see.

But obviously, it could be a benefit for you.

I think it's possible since we don't have to do that.

Great.

Thank you.

Your next question comes from the line of Keith Hughes of Robinson Humphrey.

Please proceed.

Yes.

Thanks, Dale.

In your comments, you had talked about longer term getting the margins--the Company back up to 25% [inaudible] improvement starting in '08.

Yes.

What kind of things are going to--is it going to take to get you up to 25%?

And specifically, do raw materials play a role in that?

Well, my modeling of the Company getting up to 25%, it's never been at 25% except for one quarter when we took some extreme cost actions to get the year back into the position of where we wanted it to be.

But from an ongoing standpoint, we continue to get operating leverage in sales and marketing and G&A.

We believe we will continue to get that as we move forward.

Certainly, there are components of those costs that are variable and move with revenue.

We have always tried to keep advertising basically variable.

But as we get into '08 and we start getting leverage on our gross margin side, factory costs--Albuquerque is a big cost to add.

Basically it's manufacturing efficiencies in the plant--.

--Well, we expect that in '08 gross margins will start to turn positive for us after a three-year or so decline.

From a mix standpoint, we are now roughly 91% wholesale.

So the big mix shift in terms of channel is pretty well behind us.

From a product mix standpoint, the big driver was other overtaking pillows and becoming bigger than pillows.

That's occurred.

It's pretty well behind us.

There is still some marginal mix that will continue in the business.

But the overall impact will become less.

And as we get into next year and start leveraging these costs that we've added here in '07 with the start-up of Albuquerque, if nothing dramatically changes, we'll start seeing gross margin improvement.

Okay.

That makes sense.

All right.

Thank you.

Two quick ones, too.

What are--D&A and CapEx, what are those going to be for '07 again?

CapEx is going to be 20.

Okay.

Depreciation will be up 10 million.

This is--.

--[Inaudible.]

Yes.

Okay.

And--okay, that's it.

Thank you very much.

Okay.

Ladies and gentlemen, this now concludes the Q&A portion.

I would like to turn it back over to Mr. Thomas Bryant for closing remarks.

Thank you.

And thank you for joining us on the call from our new plant in Albuquerque.

We look forward to talking with you again in April when we will review the first quarter results.

Good evening.

Thank you for your participation in today's conference.

This now concludes the presentation.

You may disconnect.

Have a great day.