Tempur Sealy International Inc (TPX) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for your patience, and welcome to the Tempur-Pedic First Quarter Earnings Conference Call.

My name is Bill, and I will be your conference coordinator for today.

[OPERATOR INSTRUCTIONS.]

I would now like to turn the call over to your host for today's presentation, Mr.Barry Hytinen with Tempur-Pedic investor relations.

Please proceed, sir.

Thank you, and thank you for participating in today's call.

Joining me in our Lexington headquarters 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 and earnings, 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 issued in the press release today.

These factors are also discussed in the Company's SEC filings including the Company's annual report on Form 10-K under the heading Special Note Regarding Forward-Looking Statements and Risk Factors.

Any forward-looking statements speak only as of the date on which it is made.

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

The press release is posted on the Company's website at tempurpedic.com and filed with the SEC.

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 another solid quarter during what has been a challenging environment for our industry.

For the quarter, sales were up 16% to $266 million as we continue to see strong consumer demand for our products.

EPS was up 21% to $0.35, although our earnings were restrained by non-reoccurring charges, which now Dale will address.

During the first quarter, we achieved a significant milestone in our corporate history.

We successfully opened our third manufacturing site in Albuquerque, New Mexico.

I am pleased to report the startup has been smooth and production is ramping up well ahead of our original expectations.

The new plant is essential to support the current business and our future growth plans.

During the quarter, we experienced shortages across or mattress line.

These shortages resulted from strong consumer demand, low levels of inventory at the beginning of the year, and capacity constraints.

As our investors are aware, our Virginia facility has been operating at maximum capacity for an extended period of time, which meant that as we sold down inventory we could not replenish fast enough to keep up with demand.

However, late in the first quarter, the Albuquerque plant significantly expanded its throughput, which allowed us to build inventory and eliminate backorders.

As of this point, we believe we have ample levels of mattress inventory and capacity to meet U.S.

demand going forward.

Consistent with our strategy, we elected to focus on established accounts during the first quarter.

We significantly limited the opening of new U.S.

accounts so we could ensure the inventory we had was available for our existing customers.

In fact, our net U.S.

retail door account was unchanged from year-end.

Last year we opened approximately 300 net new doors in the first quarter.

We also delayed the launch of our new Symphony bed due to capacity constraints and strong demand for our existing product line.

In the second quarter we will roll out the Symphony bed and progress with our strategy of selectively opening new accounts.

We are pleased to see mattress sales up sharply driven by solid unit growth of 13% in the U.S.

Account productivity continues to improve as our sales force focuses attention on established accounts and expands Tempur-Pedic's floor space.

With more time in stores, our sales personnel continues to highlight the benefits of a complete Tempur-Pedic sleep system, including pillows.

Attach rates are up sharply, as are pillow units.

As we mentioned before, we are rolling out programs Company-wide and expect to see continued improvement.

The first quarter results represent a great progress with 20% and 19% unit volume growth in domestic and international segments.

We have identified and are working on additional pillow opportunities.

We want to see continued improvement in Japan, as well, yet we are pleased with recent trends in this key market.

As noticed previously, part of our strategy for Japan is to extend into furniture and bedding stores.

We are in the process of developing a new mattress line to meet the unique customer demand and expand our retail sales force.

If Japan returns to consistent growth, it will be an important milestone for our international business.

In addition to the successes I mentioned earlier, our operations team has seen significant improvements in a variety of areas.

Cost savings from sourcing and distribution are having a positive impact, and productivity is improving at our manufacturing sites.

We also continue to expect improved efficiencies and distribution savings coming from our new manufacturing plant in Albuquerque.

Turning to our medical division, we recently announced our intention to market a joint product line with Hill-Rom for the acute care market.

As our investors are aware, our strategy for the U.S.

medical industry is to utilize partnerships with deep industry expertise and selling capabilities, and we are thrilled to be working with a strong company like Hill-Rom.

I would now like to address the results from an annual brand awareness study.

We are very pleased to report that our advertising and branding efforts are paying off.

As of year-end, our total U.S.

brand awareness had risen to 86%, up from 78% last year and 60% three years ago.

While we view this progress as very positive, we recognize our advertising strategy needs to continue evolving to meet our expanding demographic markets.

Over the next several months, we have been -- over the last several months I should say -- we have been evaluating our advertising campaign.

As a result, over the next few months consumers will begin to see a new marketing message.

Preliminary testing of this campaign indicates it will be persuasive and help expand our region awareness.

In summary, we had a solid quarter.

Our brand awareness is expanding, and we are continuing to grow market share.

At this point, I will turn the call over to Dale to review the financial results in more detail.

Dale?

Thanks, Tom.

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

Our growth continues to be led by retail.

Domestic retail was up 20% and furniture and bedding retail was up a strong 25%.

Likewise, international retail was up 19%.

Domestic and international direct sales were essentially flat for the quarter, which is a big improvement as we work to manage the declines in this channel.

On the product side, we delivered growth across all products in both geographic segments.

Mattress sales in total were up 16%.

Domestic mattress sales were also up 16%.

This growth was attributable to 13 points of unit growth in the balance on price and mix.

Pillow sales rose sharply up 23%.

Domestic pillow sales and units were up an impressive 20%, while international pillow sales were up 25% on a strong 19% unit comp.

Other products which typically go along with the sale of the mattress were up 15% in total driven by 13% domestic and 18% international growth.

Gross margin for the quarter was 48% down 70 basis points from the prior year.

This performance includes an incremental $2.5 million of depreciation costs largely related to our new manufacturing facility, as well as startup costs associated with the initiation of its product in January.

Consistent with our prior expectations, we anticipate some incremental startup costs into the second quarter.

We continue to anticipate 2007 will be the [twelfth] year for gross margin.

We expect to see improving gross margins in 2008 as incremental unit volume will leverage fixed costs in our plants and capacity utilization rates improve.

Operating income was $54 million or 20.2% of net sales.

Operating income was positively impacted by continued leverage of selling and marketing expenses.

However, operating income was negatively impacted by certain significant non-recurring charges.

During the quarter, certain executive officers exercised all of their vested stock options to take advantage of our new dividends.

These actions resulted in a large non-recurring payroll tax obligation for the Company primarily related to an officer subject to foreign taxes.

We view this as particularly abnormal as the officers exercised all of their vested options, which represented 1.3 million shares that vested over several years.

This activity generated a $1.8 million payroll tax obligation for the Company.

In addition, first quarter results include our decision to reserve $1.3 million of receivables related to a U.S.

customer bankruptcy filing subsequent to quarter end.

Due to the bankruptcy, we have recently completed a thorough review of customer credit worthiness, receivables and payment terms, among other items.

The Company found no noteworthy issues in this review and noted a general improvement in its receivable aging over prior year.

The Company believes this improvement is largely the result of its increased focus on collections and active credit management.

Turning back to first quarter performance, net income was $29.8 million, up about $3 million from the first quarter of 2006.

Interest expense includes a one-time charge related to the accelerated amortization of an interest rate edging instrument.

Regarding our corporate tax rate, we are pleased to announce this light improvement.

We now expect a 36% tax rate for 2007, which is lower based on recent reductions in certain statutory rates and updated expectations for geographic mix.

Over the long term, we anticipate the tax rate will gradually decline.

We are monitoring developments in several foreign markets, which if adopted could result in further improvement this year.

EPS increased to $0.35 from $0.29 last year, an increase of 21%.

Capital expenditures were $2.4 million in the quarter, down from $9.3 million last year.

The Company paid its first cash dividend of $0.06 per share in the first quarter and the Company repurchased 1.5 million shares of its common stock.

As of March 31, 2007, the Company had $60.8 million remaining on its existing share repurchase authorization.

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

For sales, the Company continues to expect full year net sales to range from $1.04 billion to $1.07 billion.

For earnings, the Company is increasing its earnings per share guidance for 2007 to range from $1.54 to $1.58, as compared to its prior guidance of $1.50 to $1.54.

An increase in EPS guidance solely reflects shares repurchased in the quarter, additional interest expense resulting from nearly $40 million of share repurchases and a slightly lower tax rate as compared to prior expectations.

We are using a full-year share count of 85.5 million shares.

To date in the second quarter, which is traditionally a seasonally slower quarter, we are pleased with strong order momentum, especially in our U.S.

retail furniture business.

However, the broader bedding industry continues to experience softness and it is still early in the year.

At this point, we believe it is prudent to adjust our guidance only for share count, interest implications, and tax rates.

Turning to the long-term for a moment into 2008 and beyond, we continue to anticipate significant operating margin expansion, incremental to improving gross margin driven by SG&A leverage.

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.

Thank you very much, sir.

[OPERATOR INSTRUCTIONS.]

And our first question comes from the line of Edward Yruma of J.P.

Morgan.

Please proceed, sir.

Thank you very much for taking my question.

Can you give us a quick update on the roll out of Bella Sona?

Is that still on track, or is has that been delayed as well?

No, the Bella Sona is still on track.

It wasn't impacted by the manufacturing operation in the first quarter, so we're still looking at late May/June for the roll out of that product.

Gotcha.

And can you talk about some of the trends you're noticing in third party?

It looked a little weak for the quarter.

It was in the U.S.

and the North American operation.

It was driven primarily by our distributor in Canada.

It was actually the first time we'd seen a decline, and we're in the process of looking into that to understand it a little better.

It was down about $700,000 for the quarter.

Great, and my final question, I think you previously guided to gross margin compression for the year of up to 100 basis points, and you did a little bit better this quarter.

Is there something that we should consider for the back half of the year that should cause that gross margin compression to increase or are you just tracking it a little bit ahead of where you thought you'd be?

Thank you.

Thanks, Ed.

We are tracking a little bit ahead of where we expected to be.

We had a very smooth startup at Albuquerque.

There will be continued startup costs in Albuquerque in the second quarter as we now transition the plant.

We got it up to volume.

Now we want to, as we've talked publicly before, we had Albuquerque building the more basic, simpler mattresses.

Now we need to transition the production to the more complex mattresses.

So, there's still some learning to do there and some startup related activity in Albuquerque in the second quarter, but for the year we said we'd be down as much as a hundred basis points.

We're down 70 in the first quarter.

I think we're very pleased with that result and we still have a long way to go.

Edward Yruma.

Great.

Thank you very much.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Mark [Ruppey] of Needham & Company.

Please proceed.

Thanks.

Great quarter, guys.

On Albuquerque, as far as where you are now on mattress production per month, is that 20,000 to 30,000 per month?

Are you going to share with us where you're at now and where you're going?

Yeah.

We had talked about -- in February we are going to ramp it to 10,000 and in March we did ramp it to almost 20,000 units, which was how we were able to get caught up on orders by late in the quarter, as well as build some inventory back because our inventories were way too low as we talked on our year-end call.

We are operating two shifts there now.

So, things are going very well.

Perfect.

Okay.

And then on the pillow business, obviously you've been moving the pillows into the furniture channel in the U.S.

for some time.

You mentioned marketing initiatives in the press release.

Is there anything more on the marketing side than just doing that, bringing the pillows into the furniture stores?

One of the things that we have been doing and will continue to do because it seems to be paying dividends for us is that we have been advertising quite aggressively in all the trade publications and then also our training process where we've been training store personnel how to sell pillows and how to basically focus on the catch rates when they sell a mattress, so those types of marketing efforts, some of our POP materials that we're using, we'll continue to do so.

Okay.

Perfect.

And then lastly, you've always talked about how the productivity of the Tempur bed on the retail sales floor clearly outweighs your slot penetration.

Do you think that the launch of the Bella Sona and the Symphony bed and the incremental slot gains that you'll get with those two beds, will that bring the gap a lot closer or is there still a lot of room to go?

Well, that, at this point, is yet to be seen.

I mean, we certainly hope that it will and that's one of the intentions of continuing to expand the line is not only to increase the revenues, but also to expand the floor space, so that's the objective going forward.

Perfect.

Great quarter.

Thanks.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Tony Gikas of Piper Jaffray.

Please proceed.

Hi.

Good afternoon, guys, and congratulations on a nice start to the year.

Couple questions.

Could you characterize for us the gross margin opportunity in 2008, if you don't mind?

And then also, will you be providing, you know, the unit information specifically during the quarter?

I think you've done that in the past, and then I have a couple of follow-ups.

Yeah.

First question was related to gross margin.

You know, we haven't given guidance for 2008 yet.

What we have said is we do expect in 2008 for gross margin to start turning back north and start improving again after a couple year slide related to changing mix in the business, both from a channel and a product standpoint, adding a substantial new factory.

That will -- particularly, the factory will be leveragable next year.

From a mix standpoint, you know, we're already 91% wholesale, so that mix shift is largely behind us at this point in time.

So, we would expect to see improvement in gross margin next year at this stage of the game.

I'm not going to quantify what that might be, but it should start to turn back.

Longer term, we expect gross margins to approach 50% again as a business.

The second part of your question was the --

Unit information?

We gave unit growth.

We're continually looking at the information that we provide and we're the only -- we have been historically the only company in the industry to provide units.

So, it's something that we've decided to get in line with the industry norm, and we will provide growth in units, but not put that level of detail out anymore.

Okay.

Couple additionals.

Just looking at the balance sheet, the prepaids were up by a little over 11 million and inventories were also up by a similar amount.

Could you comment on that?

Sure.

Last question would be what line did the 1.3 million for bad debt items, where did that get charged to?

I'll take it in reverse order.

The bad debt was charged to G&A expense as bad debt is always charged to G&A expense.

Okay.

In terms of the balance sheet, yeah, if you look at -- inventories were up.

We said we wanted them to be up.

At year-end we said they're way too low, but actually they're still down on a year-over-year basis from the first quarter of last year.

From a day's of supply standpoint, we have 12 days left supply of inventory than we had in the first quarter of last year.

Now, at the first quarter last year we said inventories were a little high.

But, certainly by the end of the year they were too low.

We feel pretty good about our inventory position at this point in time.

Now, on a go-forward basis, I would expect inventory to tweak up a little bit.

We are adding two new products that we'll have to put a stocking level into our warehouses.

And also, you know, given the shortage issues that we had in the first quarter, we want to make sure that we don't run into that again.

So we're, you know, trying to make sure that we have adequate inventory, and as we progress with Albuquerque, we'll evaluate that and tweak it as we go.

The second part of your question was related to prepaid.

Our prepaids are significantly different year over year, but prepaids are just that.

A lot of timing related things.

We had predominantly related to taxes and insurance payments made in the first quarter this year that were made in the second quarter last year, so that's just a timing thing.

Thanks a lot, guys.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Monica Aggarwal of Chapdelaine Equities.

Please proceed.

Good evening.

Could you give us a sense of the missed sales opportunity due to the supply bottlenecks you would've had on placed orders?

It's very difficult for us to do that only because, you know, when you're running backorders across the product line and trying to quantify that, we haven't been able to do that.

We know that from the feedback that we got during that period from our customers that it was certainly causing a lot of issues with them and one of the reasons why -- to Dale's point -- that we've been trying to get that inventory level up, the only number that we have that we've been able to calculate is on the cost of that and it is because we did have to expedite [inaudible] orders.

We had to expedite raw materials to try and catch up as quickly as possible, so we do know we spent a little over a million dollars in the first quarter related to the backorders in terms of that cost.

Okay.

Fair enough.

And then on the total cost of the plant besides the $2.5 million in the depreciation -- in terms of start-up costs in the first quarter related to the New Mexico plant?

Yes, I mean, there was startup costs in addition to G&A in terms of training time with employees.

We were adding new employees throughout the quarter having to go through training.

[Inaudible] in the second quarter we'll be training and some inefficiency in learning how to make the more complex mattresses.

You know, it's not something that I think is --

Quantifiable.

-- meaningful in terms of quantifying it --

Sure.

-- [inaudible] but certainly any time you bring up a new plant there are startup costs particularly related around training employees that we've just dealt with.

Okay.

And then just a final question.

Can you give us some metrics around your recent partnership with Hill-Rom to understand the scope of that relationship going forward?

Well, as we said in the press release, we have been working on a number of different products for Hill-Rom and mattresses that will fit their particular applications, and going forward, what we are very excited about in this relationship is their positioning in the marketplace the number of field personnel that they have.

They have almost 300 people out on the street throughout the country and certainly they have, you know, excellent awareness and penetration.

So, it's a market that we, as most of our investors who have been with us for a while know, that we haven't been that successful at in the U.S.

penetrating for a variety of reasons.

We think that this is a great way of getting better representation into that marketplace and so how we'll develop over time, we'll have to wait and see, but certainly we're very encouraged by that and it fits into our long-term strategy of maintaining our medical business and also utilizing that medical positioning on the consumer side, which has always helped us since we have that heritage as a company.

Okay.

Thank you very much.

Thank you very much, ma'am.

Ladies and gentlemen, your next question comes from the line of Stephen Kim of Citigroup.

Please proceed.

Thanks very much.

Can you hear me?

Yes.

Okay.

Great.

I just wanted to understand a little bit better, if I could, what is happening with respect to the retailers experiencing, you know, on the short end of your inventory situation.

So, if a customer walks into the store and, you know, they would like to buy, you know, one of your beds, let's say, whichever one it actually -- because you said you're experiencing shortages across the line, what is the retailer telling them, and are they -- do you get the sense that those people are then being incentivized to buy another, let's see, a competing product at this time, or can you just give us a sense of what is actually being said to those customers?

Well, I think the feedback that we got during that period was that if they were out of a particular model, then, of course, they would talk to the customers about a different model, Tempur-Pedic model that they might have in their warehouse.

Also, we got feedback from customers that, you know, they're backup inventory would be very low, so that was creating additional problems for them, as well.

So, we also got some feedback that if a customer wanted a particular model, and in some cases they were willing to wait for that, you know, given their desire to have a, say, a Celebrity and that particular store didn't have a Celebrity.

In some cases the store felt that, you know, they could've lost a customer, customer went to another store maybe that did not have that particular model, so it was sort of across the board in terms of that period.

And do you get the sense that the retailers on the other end of this, let's say, you know, in a couple of quarters' time, do you think there will be any move towards having more inventory held beyond your factory?

No, I don't.

I think that, you know, the majority of our retailers, they truly work in a JIT environment.

We have traditionally been good at delivering the product, especially when we have capacity.

They are aware that we have this huge new factory in Albuquerque and that, you know, we are now in a position to keep up with the demand, so there's really no reason for them to take on that extra burden and tie up their cash.

And when are you going to begin actually shipping units from the Albuquerque facility of the higher end beds?

Well, that -- we've already started, you know, ramping that up.

So, for example, if you look at the original, the Classic, we're making the Deluxe out there.

Now we're into working in those other larger models, so we haven't defined a specific time for each model, but the goal is that we're balanced, you know, that they're able to make everything that we can make in Virginia.

Okay, so you don't have a specific time table?

I guess I'm just trying to get a sense is there any -- I guess, is there any chance that we wouldn't for some reason see you guys shipping mattresses, you know, at the Celebrity end of the line by, you know, another three to six months?

No, and we do -- I don't want to -- let me just clarify it, is that we do have a specific timeline, but those are internal.

We're just not --

Right.

-- in a position to talk about those, but the bottom line is that that plant will be in pretty short order -- will be making all of the [skus] that we offer.

Okay.

Great.

Thanks very much.

Thank you very much sir.

[OPERATOR INSTRUCTIONS.] Our next question comes from the line of Bob Drbul of Lehman Brothers.

Please proceed.

Hi, guys.

Hi, Bob.

Two questions.

The first one is can you just give us an update on the international door count [inaudible] no domestic door growth of international?

Well, we ended the quarter a little over 4,600.

We were up 169, but I would point out that 106 of those doors came as a result of us converting Austria from a third party to our own sub.

So, if you, you know, you back -- you back out the 106 from that 169 and that's about where we've been running.

Okay.

And then the other question is in the U.S.

business when you're talking about the whole slots per door discussion, can you just talk a little bit about, you know, how you're placing the slots in terms of your product line, you know, given the various number of [skus] that you have at this point and the success that you're having to, you know, using just the opening price for the higher end and moving them around?

Well, it varies according to customer, and then we have certain customers that are operating in obviously different demographic groups, and so for example you will have stores operating in higher income areas, and they will want to make sure that they're carrying the more expensive products.

So, basically what we're doing with our product line is we're giving those choices to the retailer.

We're working with them based on the market research that we've done about their individual markets and the demographics surrounding that door.

So, it does vary substantially, but at the end of the day, the objective is to continue to expand slots in all of those doors.

And can you just talk a little bit about, you know, what you've seen out of the Classic since the re-launch of the summer versus the expectations?

Yeah, we've been very pleased with the continued performance of that particular model.

Okay.

Thank you very much.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Joe Altobello, CIBC World Markets.

Please proceed.

Thanks.

Good afternoon, guys.

First question, in terms of the competitive environment, it looks like Sealy reduced some prices on two form early in the quarter.

Does it appear to have impacted you guys meaningfully, but I was curious if you saw anything in the marketplace from that price reduction?

Well, you know, we continue to track, as we've said on previous calls.

We continue to track our accounts who are stocking competitive products, including Sealy's [Visto].

We continue to perform better in those stores where we have competition, and I think, you know, given our growth in the first quarter, we obviously are continuing to take market share.

Okay.

And then secondly, in terms of the Rockaway Bedding bankruptcy, how are they operating, I guess, now in Chapter 11?

Is it business as usual?

Have they cut back at all?

Can you just give us a little more color there?

Well, it's still fairly early days in the process.

They spent a few days getting a number of legal things worked out and in place, but essentially, at this stage of the game, they're getting back to -- I would say they're getting back to business as usual and, you know, just putting together their plan in terms of how they want to restructure their business to keep it [going] concern and successful.

Okay, so in terms of how they interact with you guys, you haven't noticed anything different thus far?

No.

Okay.

And then their doors are still in your door count, right?

Yes.

Okay.

Now, for year-end, do you have a door count number you want to share with us?

For year-end?

Yes.

For year-end '07.

Where you want to be in terms of U.S.

No.

We just said that, you know, in terms of this year, we're going to continue to add doors, but we'll add at a little bit slower pace and rather than putting a specific target out there, we just report as we go in terms of what we did.

Adding new doors is not a key component of growth for us.

We have markets where we -- that we're looking at much more analytically in terms of where we want more coverage, where we need more coverage.

But, you know, we're not adding a hundred a month anymore.

So, it's something that at this point, you know, we said on the last call --

Right.

-- that we're just going to tell you where it's as we go.

Okay.

And then lastly, on the international pillow front, it looks like you've obviously fixed things there.

Is it fair to say the issues you've seen over the past 18 months are now behind you officially?

You know, it's hard to ever know exactly that, you know, the problems are completely over.

You know, we thought they were fixed and it reared up again, but certainly we're pleased with how things are going right now internationally and specifically in Japan and, you know, we still have a lot of ways to go, though, to get Japan back to what it used to be.

Okay.

Ideally, we want to change the mix in Japan to make it more similar to the rest of our business internationally.

Gotcha.

Okay.

Thank you.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Randy Scherago of First Albany.

Please proceed.

Hi, guys.

A couple of just follow-up questions.

One, regarding the Hill-Rom deal, the timing for beds going in, is their marketplace -- is it -- we're going to see mostly effect start to ramp in the September quarter?

The second part of that is are you displacing a bed that Hill-Rom manufactures themselves or something that's made by one of your competitors?

Well, these are new models that we are working on and have been working on for them.

And I would point out that, you know, what we're bringing to the table is something unique from the standpoint of our brand, as well as our comfort and the therapeutic benefit in terms of being able to prevent pressure sores/bed sores.

As to the product and when we expect it, we're expecting that to start shipping this summer.

This summer being sometime between July and September?

Yep.

That would be it.

And at this time you're not displacing anybody who's already supplying beds to them?

I'm not in a position to know their suppliers.

Okay.

You know, who they were buying from, but we actually, you know, didn't take a look at that all.

We were more interested in what's going to happen in the future than what's happened in the past with their suppliers.

Okay.

In the hospitality market, do you think we'll see any major wins from a chain this year, or as I've noticed, sort of, you're going to find a lot of smaller independents making decisions individually?

Certainly when we have Albuquerque fully ramped and making a full line of products and we have that capacity, you know, we will step up how aggressive we're being in that hospitality market.

Right now, you know, as you said, we're taking it a little bit slower looking at smaller opportunities because we don't want to bite off more than we can chew at this point, if you will.

Okay.

In the imaging market, you supply GE with some beds for like their MRIs and also for their cat scan machines.

Pads.

What's that?

Pads.

[Inaudible] with a pad.

Oh, okay, pads.

Do you supply the Siemens or Phillips in addition to, or is that an opportunity in the future?

No.

No, we don't.

It may be an opportunity.

We don't have, you know, any type of an exclusive arrangement that would keep us from doing that.

How many pads would GE consume in any given year from you?

We don't give out those individual numbers.

Okay.

It's something that we're still pursuing on the medical side, similar to the wheelchair business with Roho.

Okay.

Thank you, guys.

Thanks, Randy.

Thank you very much sir.

Ladies and gentlemen, your next question comes from the line of Al Kabili of Goldman Sachs.

Please proceed.

Thanks.

Good afternoon.

Good afternoon

Can you talk about sales trends throughout the quarter, how they varied, if at all?

Yeah, this is Dale.

We had actually, you know, pretty good order demand throughout the quarter.

We got into -- there in February when we got into significant shortages, things slowed down a little bit because we couldn't meet the demand, but we're very pleased with a pretty strong across the board quarter.

Certainly, we had limitations on delivery, which, you know, probably impacted to some degree some orders through the later part of February into the early part of March.

As Albuquerque really ramped up, we were able to get caught up and be able to produce late in the quarter extra to build the inventory levels.

Okay, so it sounds like March might have even been a little bit better than February just given the no stock out issue.

Well, you know, the stock outs continued into March.

Okay.

But, you know, we, you know, as we've gotten out of that issue, we've seen good order trends, as I said earlier.

You know, we've seen very good demand in April.

Okay.

Great.

And then any concerns of pre-buy in the quarter ahead of the price increases for the Grand and Rhapsody beds?

No.

We couldn't do that because we couldn't ship it.

Okay.

And, you know, some of the retailers were a little concerned that they didn't have that opportunity, but we couldn't ship it.

Okay.

Gotcha.

And then on the G&A side, even with the -- it sounds like that included both the bad debt expenses, as well as the payroll taxes that was a one-time option.

It's pretty good operating leverage there.

Is that something we ought to be looking for going forward in terms of the G&A?

Well, you know, what we said in the guidance for this year was that we expected gross margin to be down as much as 100 basis points.

We expected overall operating margins to be flat to slightly down indicating that we would get SG&A leverage to at least partially offset the gross margin erosion across the course of the year.

Certainly, we had a couple unusual expenses in the first quarter that provided -- so we only got leverage in selling and marketing in the first quarter, but through the rest of the year we would expect to continue to see, you know, some reasonable SG&A leverage across the total operating costs.

Okay.

And then advertising expense in the quarter?

It was right around -- a little over 10% sales, so over $27 million.

Okay.

And I didn't catch the interest expense.

There was something with the hedging that was unusually higher this quarter.

Could you quantify what the amount was?

Yeah, we had an interest rate hedge in place on our international business.

Given the pace at which we have been reducing the debt internationally, we decided that we should accelerate that amortization of the hedge cost, so we took it out in the first quarter.

Okay, and that was, what, 1.4, 1.5 for the quarter?

That was about a million.

Okay.

And then the last question would be on the new doors.

Could we expect a catch-up in the second quarter given the delays or how should we think about that?

Well, as Dale had mentioned, you know, the focus for us this year is on growing our business and servicing our existing accounts.

We will continue, and we have targeted different markets where we think we're still under-penetrated in terms of the number of doors.

But, you know, I'm not -- I wouldn't say to expect us to run out and be catching up because in reality we were looking at smaller numbers in the beginning.

Okay.

Fine.

And I actually did have one last question.

It was on the international.

How much was currency adding to the quarter?

Currency helped the international business by a couple points, between two and three.

About two and three points of help.

Okay.

Great.

Thank you very much.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Joe Feshbach of Joe Feshbach Partners.

Please proceed.

Hi.

Nice quarter.

Let's see, just a couple of quick financial questions for Dale and then the follow-up on Hill-Rom.

On stock based comp, you guys had guided towards $6 million for the year, I believe, and this quarter came in about, what, 1.8 or 1.9, and I'm wondering if it will actually be closer to 8 or is it not linear, and if not, kind of, how does it look?

The stock based comp in the quarter -- good question.

Let me look at --

I believe it's in the press release at 1.8 or something.

Yeah, it was up about 1.8 compared to the prior year.

Was it 1.8 compared to the prior year or was it 1.8 for the quarter?

1.8 in the quarter.

1.8 in the quarter?

Yeah.

So, should we expect lower stock based comp in the following three quarters?

No, it would be about the same.

So, it will actually be running closer to, like, 7.5?

Yes.

For the year?

On the -- I assume that this amortization of your hedging contract was another unusual?

In other words, we wouldn't expect that --

Yeah, that won't repeat.

That won't repeat?

So, it's more like a run rate before the new debt added more like $5.8 million from Q1 into Q2?

Yeah.

Got it.

Okay.

And could you -- you know, just to follow up on the Hill-Rom opportunity a bit more, can you talk a little bit about, you know, I believe, as I understand it, one of the lines you guys have an exclusive in and you are providing models along with their traditional offering and a couple of the other lines, how, you know, obviously quality is a big incentive, but what are the other things that incent their 300 salespeople to, you know, to pick up on the Tempur-Pedic opportunity?

Is there any --

You know, from an incentive standpoint, it's probably a question for Hill-Rom to answer as to how they compensate their sales organization.

I think what we would say from Tempur-Pedic's perspective is that, you know, they are picking up a line of products with an extremely high visibility and brand awareness on the consumer side that's associated with comfort.

And I think anyone on the call who's been in the hospital sleeping or trying to sleep on some of the mattresses can understand how that could be viewed as a very positive addition to a salesperson's line of products.

When you think about medical or healthcare going forward, Tom, how, you know -- if we were to look two or three years out, how much bigger as a percentage of overall revenues should it be relative to what you attribute to healthcare today?

Well, as we said in the past, you know, we really haven't worked much upside at all into our projections, and the reason we haven't done that again is that, you know, the federal government continues to reimburse nursing home facilities, for example, and there are 17,000 -- over 17,000 of those in the U.S., but they're being reimbursed with treatment instead of prevention bedsores and until that changes, you know, we don't see a lot of upside in that particular segment of the market, so, for now, you know, we're taking a wait and see attitude and if something like that were to change, if some of our politicians in Washington realize how much money could be saved to the taxpayers and how much suffering could be eliminated, you know, that would change and at that point we would certainly have a different answer.

I'm tracking with you, but I guess I was asking a different question, which is I assume Hill-Rom would fall into this -- this type of relationship would fall into the healthcare channel that you guys report, and I assume it's got the potential to be important if you look at it longer term and left out the nursing home thing, which I understand the problems with.

And that's -- at this point, you know, we're just getting into this agreement, working out the details, and we really don't know how large it can get.

We'll have, you know, as we move forward, we'll have more color around that, but for now, you know, I don't think we can say much else about it.

All right.

Well, very good.

Great quarter, and congratulations on your momentum in the press market.

Thanks.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Jon Christensen of Kayne Anderson Rudnick Investment Management.

Please proceed.

Sealy is introducing a natural latex mattress.

How do you view that competitively?

Well, from a material standpoint, you know, latex has been around for decades, and it's been into our mattresses many times.

It was a pretty large percentage of the bedding market in Europe at one time, and it has come down significantly over the last five to ten years, and you know, how well a particular competitor will do with it this time around I guess we'll have to wait and see.

Do you have thoughts on why it didn't make it last time?

Well, the only thing we could say is that the material itself, you know, we always look at things through a comparison of our own products, and when you compare Tempur material to latex, Tempur material comes out way ahead, and there are a lot of benefits to Tempur material that you don't find in latex.

So, as to why, obviously the consumer didn't embrace it.

Healthcare, could you talk about the differences between your U.S.

and international healthcare businesses on the basis of products, customers, regulations, and other reasons that might prevent it from being as successful in the U.S.

as it has been internationally?

I think there are a couple of things, and we started in Europe.

We started as a medical company, and we had success there from the beginning with hospitals.

We also, because of the unique properties of the Tempur material and what they can offer in terms of therapeutic benefits, we saw individual countries where a product was reimbursed to the consumer, not only in terms of people who were bedridden, but also people who had back issues or other types of health problems that the Tempur-Pedic mattresses could give them some relief.

So, as a result of that, that reimbursement was certainly part of the growth that we experienced in some of those countries in Europe.

So, those are -- and whereas, you know, here in the U.S., we started the business primarily on the consumer side and formed our medical division and started trying to penetrate the medical market later.

So, the products, are they primarily mattresses in both cases, international and U.S.?

Yes.

They're -- if you look, mattresses make up the bulk of our medical business.

We do have wheelchair cushions which, of course, offer the same pressure relieving benefits, but mattresses are the dominant [skus].

You have a category in revenues besides mattresses and pillows of other, and I assume that's things like seat pads or house slippers, but could you talk to us about how diverse that is and how -- do you have the same growth opportunities and size opportunities there that you do have in pillows, for example?

Well, the other category -- the majority of that is tied in with mattresses because when we sell a mattress and then a foundation, the foundation goes through the other category, or if we sell an adjustable bed for the mattress, that also goes through the other category.

So, when you look at the other category and how it's tied into the growth of mattresses, that [inaudible] connection.

And I was surprised to see a million dollar acquisition on the cash flow statement.

What is that?

That was the acquisition of Austria, which it was a third party business that we acquired in early January, which was disclosed in our 10-K report.

So that is a distributor?

It was a third-party distributor that ran that country for us, and we decided that it was a good investment to buy them out and make that organization a subsidiary.

And so will you go direct there?

Well, we won't have a direct to consumer business like we have in the U.S., but we will have a direct to the retailer business like we have in the U.S.

and the rest of the world.

Thank you very much.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Steve Colbert of Cannacord Adams.

Please proceed.

Hey, guys.

Thanks for taking the call.

Can you talk a bit about commodity costs?

Has there been any recent price changes for the key chemicals you're using, and what are our expectations for those costs going forward?

There has not been any market change in our chemical costs.

We're still seeing roughly flat chemical costs versus when the chemical costs went up in the second half of 2005.

You know, some of the [feeder] stocks, there has been some reduction in pricing, but it hasn't showed up in the products that we buy at this point.

You know, certainly it's something we would like to see.

We continue to try to push for, but it's not something that we count on until we can get it.

Okay.

Fair enough.

And then I believe you also had some stock out issues in Q2 and Q3 of last year.

Were the shortages in Q1 significantly worse this year than the prior stock outs in terms of delay time?

Yes.

Q2 last year, Q3 last year, it was completely related to the new products, the Rhapsody and Grand bed.

In Q1 this year, the problems were a lot worse and it impacted our whole line because we ended the year because of strong demand in the second half of the year.

We ended the year with relatively low inventories.

Strong demand continued into the first quarter and, you know, we've been running Virginia all out for a couple of years now and just starting to ramp up Albuquerque, so it took to the end of the quarter to get Albuquerque producing sufficient volume to relieve the pressure, so that we could have a good flow going again with the retailers and start to rebuild our inventory.

Okay.

And then I don't think I caught this.

What was the effect of foreign exchange in the quarter?

Foreign exchange impacted the business positively by between 2 and 3%.

So international 2 and 3%?

Okay.

And then final question, I just wondered if you could talk a bit more about the new marketing message, kind of the timeline, what the thoughts are behind it?

As I mentioned, we've been working on a new strategy for media.

For quite a while, we've been doing a lot of testing, and at this point we're not in a position to elaborate much beyond that, but I think everyone will start seeing that change as we move into this quarter.

Okay.

That's it for me.

Thanks, guys.

Thank you very much, sir, and that comes to the conclusion of our Q&A session.

We have run out of time.

I'd like to turn the call back over to our speakers for any final comments.

Thank you.

As a reminder, we would like to let everyone know that our shareholders meeting will take place in Boston on May 7, and I'd also like to thank everyone for joining us this evening.

Have a good evening.

Thank you very much, sir, and thank you, ladies and gentlemen, for your participation in today's conference call.

This concludes your presentation and you may now disconnect.

Have a good day.