Tempur Sealy International Inc (TPX) 2007 Q3 法說會逐字稿

Good day, everyone.

Thank you for holding and welcome to the Tempur Pedic Third Quarter 2007 Earnings Results Conference Call.

Today's call is being recorded.

And at this time, I'd like to turn the conference over to Barry A.

Hytinen, Vice President, Investor Relations and Financial Planning and Analysis.

Please go ahead, sir.

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 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 of the date on which it is made.

The Company takes no obligation to update any forward-looking statement.

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

And 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 an outstanding quarter with sales up 22% to 294 million, and EPS was up 44% to $0.49.

While Tempur Pedic is already the industry leader in terms of profitability, we believe these results are consistent with our goal of also becoming the worldwide leader in sales.

As we previously discussed, a new U.S.

advertising campaign began airing in the third quarter.

Early indications are very positive and we expect the campaign will enhance our brand image, expand awareness, and appeal to key consumer demographics.

The new ads appear to be resonating exceptionally well with our target consumer, especially affluent baby boomers.

In fact, the campaign is doing so well that we are in the process of evaluating its use throughout many of our international markets.

We anticipate rolling the campaign into Europe in the first quarter.

Turning to products, we are pleased to report strong growth across our mattress line.

As we continue to take market share, mattress sales were up 22%, driven by unit growth of 17%.

Pillow sales were up 15% in total, led by strong domestic performance, up 21%.

Domestic pillow sales continue to perform well as attach rates are increasing.

We define attach rates as when pillows are sold with a mattress as part of a complete sleep system.

Consistent with our [previously] discussed strategy, we are also beginning to see substantial growth in pillow sales at specialty stores.

We believe it speaks to increasing brand awareness and our focus on pillow R&D.

Turning to channels, retail continues to drive the business.

Retail was up an outstanding 27%.

Our retail business is largely driven by increasing brand awareness, established account productivity, fab expansion, and modest new door growth.

Throughout the year, we have expanded distribution for our existing mattress line within our established and new accounts.

We believe our year-to-date results reflect our ability to expand store slots and capture market share at the expense of inner springs as well as all other forms of bedding.

Additionally, we see robust opportunities for continued distribution expansion, both within established accounts and by selectively adding new doors.

In the third quarter, established account productivity continued to grow while adding new doors.

Reflecting market share gain, the U.S.

furniture and bedding channel was up 28% in the quarter, while doors in this channel were up only 6% year-on-year.

In the U.S., we opened approximately 120 net new furniture and bedding stores.

This brings the U.S.

furniture and bedding door counts to 6,270 versus our long-term goal of 7,000 to 8,000.

The other part of our U.S.

retail business is what we refer to as specialty retail, which includes pillows-only stores in U.S.

department store channels among others.

Specialty was up 20%, or $3.5 million.

While we do not anticipate reporting results for the U.S.

department store channels separately going forward, let me take a moment to provide some additional information on this channel.

As you will recall, we opened our first U.S.

department store account late in the second quarter.

While it's still early in the rollout process and on balance, it's growing a bit slower than initially anticipated.

In total, U.S.

department stores contributed less than $1 million to our net sales, therefore, our space specialty channel, excluding department stores was up 14%.

This speaks to the improving trends we are seeing in this channel, especially in pillows as I mentioned earlier.

Internationally, we added approximately 250 net new retail doors bringing the international door count to 4,920.

200 of these doors are related to the recent conversion of Australia from a third party to a subsidiary.

As a reminder, we report doors in countries in which we have a subsidiary.

Therefore, third party countries are not included in our door counts.

Turning to the direct sales channel, as we have noted on previous calls, we anticipated direct sales would be down as retail distribution expands.

In the U.S., direct sales were down about $3 million year-over-year.

While retail was exceptionally strong in the quarter, we also saw nice growth from our healthcare channel.

Reflecting early successes from our strategy within this channel, U.S.

healthcare was up 36%.

While the base is still small, we believe there is a significant long-term opportunity in this channel.

We're thrilled to be working with companies of the quality and scale of HillRom.

Our joint product offering with HillRom continues to be evaluated across the country and we are pleased with the progress.

Throughout operations, we have seen significant improvement, such as cost savings from sourcing and improving manufacturing productivity.

As we previously discussed, we did experience some sporadic mattress shortages during the quarter.

With sales in the U.S.

retail channel outpacing expectation, some of our raw material suppliers were not able to keep up with the up tick in demand.

We took several actions, such as qualifying new suppliers and expanding raw materials in order to expedite--I'm sorry, raw materials in order to minimize customer impact.

At this point, the majority of the problem is behind us, but we still have some back orders on a couple of high end models.

In summary, we had another outstanding quarter and believe we are well on our way to becoming the worldwide bedding leader.

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 third quarter in a bit more detail.

Sales grew 22% with approximately 2.5 points attributable to foreign exchange.

From a channel perspective, our growth continues to be led by retail.

Domestic retail was up 27% and international retail grew 26%.

On the products side, mattress sales grew 22% in total, which is quite strong, especially considering the 22% mattress sales comp last year.

Domestic mattress sales and units were both up 22%.

As Tom discussed, direct sales were down, which has the effect of muting our blended average unit selling price.

When we look at average selling price in our retail channel, we are pleased to see continued increases, which is consistent with the pricing actions we've taken this year.

International mattress sales were up 23%, driven by 10 points of unit growth.

Pillow sales were up 15% led by continued strong domestic pillow unit growth of 23%.

Other products, which typically go along with the sale of a mattress, grew 26% in the quarter.

Gross margin for the quarter was 48.2%, flat to the prior year.

On a year-over-year comparison, this includes approximately $2.5 million of depreciation costs related to our new manufacturing facility.

In addition, gross margin was negatively impacted by expediting certain raw materials to address product shortages.

On a year-over-year basis, expediting costs amounted to slightly more than an incremental $1 million.

Operating income was $67.5 million, or 23% of net sales.

Operating income was positively impacted by leverage of SG&A expenses, despite continued expansion of our investment in R&D.

In addition, given the year-to-date performance, many of our bonus plans are now being accrued for at the maximum potential payout.

A portion of the G&A growth sequentially reflects this up tick in bonus accrual.

Reflecting margin expansion, net income grew faster than sales, up 34.5% to $38.8 million, an increase of nearly 10 million for the third quarter of 2006.

Fully diluted earnings per share was $0.49, compared to $0.34.

During the quarter, we purchased 6.6 million shares of common stock at an average price of $30.48, completing the $200 million authorization we announced in July.

Year-to-date we have purchased 10.4 million shares for a total cost of $300 million.

Given the pace and timing of repurchase activity in the quarter, interest expense was $8.3 million.

The strength of Tempur Pedic's cash flow generation capabilities has been proven over a long period of time.

And we expect strong cash flow growth going forward.

With this backdrop, and consistent with our beliefs that share repurchases remain an excellent means to return value to shareholders over the long-term, we are pleased that our Board has authorized a new repurchase program in the amount of $300 million.

Currently, we anticipate executing our new buyback at a more modest pace.

We view this buyback as a multi-year authorization to be funded primarily from cash flow.

While we reserve the right to use debt or accelerate this plan at any time, I would point out that our existing credit facility would govern how quickly we could execute on this buyback.

In total, our global revolver had $75 million of availability as of the end of the third quarter.

I would now like to address our financial guidance.

Given the Company's performance through the first three quarters and our continued positive outlook for the rest of the year, the Company is increasing its financial guidance for 2007.

Earlier in the year, we discussed that our guidance assumed gross margins would be down as much as 100 basis points, while operating margins would be down zero to 50 basis points.

As Tom discussed earlier, our productivity continues to improve with sales growth and operating leverage.

Based on our year-to-date performance and our current outlook, we are updating these assumptions.

Our updated guidance assumes full year gross margin will be down slightly, perhaps 30 to 50 basis points despite the incremental depreciation and startup costs related to our new manufacturing facility.

Regarding operating margins, our updated guidance assumes full year operating margins will be flat to slightly up versus prior year.

As we've discussed, we are very focused on expanding margins over the long-term, and we are pleased with recent trends in this area.

Regarding sales, the Company currently expects full year net sales to range from 1.105 billion to 1.115 billion, an increase of 17 to 18% as compared to 2006.

Regarding recent order trends, orders to date in October are meeting our expectations and these trends are reflected in our guidance.

For earnings, the Company currently expects full year fully diluted earnings per share to range from $1.74 to $1.76.

Year-to-date EPS equals $1.22, so for the fourth quarter this would imply $0.52 to $0.54 per fully diluted share.

This EPS guidance would reflect an increase of 36% to 38% as compared to 2006.

The increase in EPS guidance reflects higher net sales and corresponding earnings, as well as shares repurchased in the third quarter, and additional interest expense resulting from share repurchases.

We are using a fourth quarter share count of 76.9 million shares for this guidance.

Full year, weighted average share count is assumed to be 81.4 million shares.

Based on our current debt levels and timing of debt in the third quarter, we would expect interest expense to be up slightly in the fourth quarter from the third quarter run rate.

For this expectation, we are not assuming additional debt.

Consistent with our earlier practice, this guidance does not take into account the anticipated effect of any additional share repurchases.

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.

(Operator Instructions.) First up from J.P.

Morgan, this is Edward Yruma.

Hi.

Congratulations on a fantastic quarter.

Given the strength that you guys are seeing now, I think you have historically talked about 25% operating margin target kind of in a three to five-year timeframe.

[Inaudible - audio glitch.]

Ed, we have talked about targeting 25% operating margin in three to five years.

We don't base that long range target based on one quarter's results.

We have had very good single quarter operating margins and our operating margins tend to be a little bit higher in the second half of the year than in the first half of the year historically.

So we still hold to that--we do firmly believe we'll hit 25% operating margins in the intermediate to longer term.

We don't really have a gauge as to how quickly that's possible.

But we also don't want to shirk on investment in the business just to hit that kind of a target.

Got you.

And then, in your prepared remarks, you commented that the department store channel had started a bit softer than maybe you had planned.

Can you talk about how you are refining the way that you approach that channel and maybe some other causes for some of that initial weakness.

Sure.

This is Tom.

Basically, it has to do with our anticipated rollout in terms of how quickly we would get the floor models out there and how many stores we would get into.

So our expectations were a little higher than reality as it turns out.

It just took longer to get those floor models into the stores and also for the individual stores to make room.

A lot of times the larger stores usually do a new planogram, if you will, for their floor space on an annual basis, so it's a little bit more difficult to work it in the off season, if you will.

Got you.

And my final question, I noticed the accounts payable leverage increased meaningfully both year over year and sequentially.

Is there something in particular about the quarter that makes that payable number tick up or is that a pretty sustainable run rate?

No.

This is Dale.

Payables can fluctuate a little bit quarter to quarter.

Certainly, I think what we have here is a little bit of--we were a little bit down last quarter, a little bit up this quarter.

Nothing structurally different, just some timing.

Got you.

Thanks, again.

We will continue now with a question from Tony Gikas at Piper Jaffray.

Hi, guys.

My congratulations as well on another terrific quarter.

A couple of questions and a couple of housekeeping ones.

First of all, did you see as you took pricing up on a couple of SKUs during the quarter, did you see some retail orders by--in advance of that, or were you really not seeing that sales shift as a material issue?

Also, some new competition came in during the quarter.

Although it's early, did you see any impact for the Simmons ComforPedic product?

And then, two housekeeping questions.

FX during the quarter and the other category for international was up about 35% while that category was up about 22.

What was in that?

What was the driver of that?

Okay.

I'll take the first couple questions as to price increases.

Since we started our strategy of doing selective increases, you may recall, for example, in March we had done the Rhapsody and Grand, in September we did the Classic and Deluxe.

And we have not seen that pull forward.

It doesn't appear that that happened from all of our data, so we haven't seen that.

As far as the competition, I would just say that we haven't seen any impact.

Of course, some of the companies in question have been out there for a long time.

They just changed names.

And products have been around for a while.

But--in terms of acquisitions that have taken place in the industry.

But obviously, from our performance, we certainly didn't see any negative impact of the competition out there.

And this is Dale on the housekeeping questions.

FX, as I mentioned in my comments, we saw about 2.5 points of growth from FX.

It's been actually fairly consistent all year on a quarterly basis about that same level.

On the--your last question was on other products in international.

Essentially, other is frames, bed bases, adjustable beds.

International, we've talked a lot about the success of the Scandinavian bed system.

We introduced a couple of new variants of the Scandinavian bed system in Europe this year.

So when we sell those systems, you're selling a mattress, but then essentially all the framing and everything--and the adjustable that goes with that.

So essentially that reflects the success of the Scandinavian system.

Okay.

Great job.

Thanks, guys.

A question now from Bob Drbul at Lehman Brothers.

Hi.

Good evening.

Hi, Bob.

Hi, Bob.

Just a quick question.

Can you just give us any guidance on the impact of the Australian third party distributor acquisition this quarter?

Yes.

We don't give detail [on them] by country basis.

You can see in the cash flow that the cost of it was about $4 million to us.

So it's fairly insignificant in terms of the cost of the acquisition.

Obviously, that would indicate that if you compare that to the Austria acquisition we did earlier this year, it's a little bit bigger business.

Why we would take over a third party like that, as we've talked before, it's a country where we think we have the opportunity to take the business a lot further than our partner was taking it.

We'll put more investment into the business than our partner was putting into it.

So it's a nice business, but we think it's--under our control it has the potential to grow a lot faster and become much larger than it would have had we left it as a third party.

And was it--how accretive was it during the quarter?

Well, we completed the acquisition right in the first week of September, so it really had no impact on the quarter.

Okay, great.

Thank you very much.

Continuing now with a question from Joe Altobello at CIBC World Markets.

Hey, guys.

Good afternoon.

First question, in terms of the supply issues you guys saw on the covers and netting in the quarter, is there any way to quantify how much in terms of sales might have gotten pushed into 4Q because of that?

No, we haven't been able to do that.

We were continually filling the backorders and the timing on those varied by model.

But at this point we don't have any additional color around that.

Is it meaningful can you tell or--?

No.

No?

Okay.

We don't think so just given the size of the backorder going into the fourth quarter.

As we said, we have really worked hard during the third quarter to reduce the problem and to take the backorder numbers down.

And so, at this point, as I said in my opening remarks, we still have some back orders on a couple of SKUs, but we're filling those pretty quickly.

Okay.

And then, secondly, on the commodity cost side, oil I think was around $90 today.

Clearly, much higher than when we entered this year and this quarter.

So I'm curious, are you seeing that translate into higher raw materials costs for you guys at this point?

And it sounds like you guys are going to do better than you expected on the gross margin side despite that.

Can you talk about what's going on there?

No, we're not.

One of the things that we have discussed in the past is that the price of some of the key components really has a lot more to do with capacity in terms of the chemicals and refining those than it does crude, and also the fact that a lot of those products can be made from natural gas compared to crude.

So generally, if you look back over many, many years, even though we've seen the price of crude go up and down, the biggest impact on the price of our raw materials continues to be how much capacity there is out there.

And that's what we continue to see.

Okay.

And then, lastly, if I could, it sounded like you guys in your prepared remarks said that trends in October were as anticipated in terms of top line.

Are you guys seeing any sort of slowdown from a consumer perspective or a retail perspective?

Because we're hearing from retailers in and out of your industry that they're starting to see some softness, particularly post-Labor Day in September and into October.

No, we saw--this is Dale.

We saw a very strong third quarter, obviously, based on the results.

And the strength was throughout the quarter.

We've--as we've said, October is meeting our expectations.

We hear from various sources that retail is a little bit slow, but we've been hearing all year that retail is slow.

So I think our results are speaking for themselves.

Okay, thanks.

(Operator Instructions.) And we will move on to John Baugh at Stifel Nicolaus.

Hello?

Hi, John.

Hey, most of my questions have been answered.

But could you do the [homework] for me and the implied restrictions on share repurchase going forward?

What are the key constraints there and kind of what is implied going forward?

Sure.

The credit agreement essentially has one covenant in it associated with a restricted payments test.

That restricted payments test compares--has a leverage ratio that we are able to--have to maintain related to restricted payments.

And so, that does put some short-term limitation on how much we could buy and how quickly we could buy.

The other key limitation is we just announced a $300 million repurchase authorization, but we only have globally $75 million of borrowing capacity at the moment.

So the idea of this buyback is to be a little bit more measured and more cash flow based.

Okay.

And then, could you comment on shipping - Virginia versus Albuquerque in terms of shipping to the West Coast.

I know that's been the plan.

Is that starting to transition now?

Where are we with that and do we anticipate savings?

The first hurdle that we had to overcome was making sure that Albuquerque was able to make all of the models.

And so, we have that now.

They're basically making everything that Virginia is making.

However, during the quarter, we had to--because of the backorders, we had to do a lot of shifting of product from warehouse to warehouse in order to try and take care of our customers.

So we didn't see the benefit of that at this point.

But as our backorders come down and we move forward, we should be in a position to start seeing some of that.

Thank you.

Congratulations.

Great quarter.

Thanks.

Moving on now to Stephen Kim at Citigroup.

Hi.

This is [Mark Montanen] on behalf of Stephen.

Great job.

Just want to know with respect to the new share repurchase authorization, I knew you mentioned that this is a multiyear authorization financed primarily with free cash flow.

I'm wondering if there's also the possibility of a plan to reduce debt levels or if you're pretty comfortable with the current leverage levels.

Oh, we're very comfortable with our current leverage level.

As of September, we're about 2x debt-to-EBITDA.

Is there the potential to even increase that, given the chance for accelerating the repurchase?

Anything's possible.

We've been as high as 4x debt-to-EBITDA in the past.

Okay.

Today's credit environment, which could change tomorrow, isn't the best pricing in the world that you might want to go change significantly your credit packages.

However, these circumstances tend to be a little bit short lived and we've seen some flexibility and some improvement in the credit markets just in the last couple of weeks.

And we'll evaluate it.

Okay.

But at this point the intent is to make the repurchase more of a cash flow based repurchase.

Okay, great.

Additionally, I know before you had mentioned a full year target of around $15 million in CapEx for '07.

Given the first three quarters of '07 CapEx, I guess it would imply a pretty significant ramp in 4Q.

Do you still expect this $15 million for the full year, and if so, is the 4Q run rate something to be expected maybe throughout '08?

Two different questions there.

In terms of expectations for this year, yes, the number is still $15 million.

We have some projects that are getting to the point where they're going to be wrapped up by year-end, but a lot of the spend is occurring right now.

Would we spend exactly 15?

Maybe not, but it will be in that ballpark.

Beyond this year, the expectation that we've talked about frequently is that we will spend about $20 million a year--.

--Okay--.

--In CapEx.

Great.

Thank you very much.

Next from Goldman Sachs, this is Albert Kabili.

Hi.

It's [Peter Walstrom] on behalf of Al.

Would you--you've broken out the FX contribution from the revenue line.

Are you able to provide that from an operating line as well?

We've never done that.

Okay.

But your costs get increased just like your revenue does.

So the relationship tends to be down.

The operation is not quite as good as it is on the revenue side.

Okay.

And you said that you'd be selective in entering new doors.

How does the Rockaway closure and spot shortages during 2007 position you for a potential acceleration in door count in '08?

Well, we factored the--all of the Rockaway doors into our numbers as we looked at how many of those closed as well as how many converted over.

So they were actually already in the numbers at the end of last quarter and they're factored into our overall number now, that 6,270.

So--because of the fact that some of those doors remain open through that period, but other ones closed.

So as soon as anything closes, we take it out of the calculation.

Okay.

Thank you.

Thanks.

We'll go to Keith Hughes at SunTrust.

Yes, just quickly.

You highlighted earlier the pillow growth in the specialty source in the quarter.

Has that been the reason that pillow results in the United States have been fairly consistent in the last couple quarters versus the real up and down it would have had a couple of years ago?

Well, certainly, the specialty channel has helped, but I would also point out that the overall strategy that we had talked about on some previous calls focusing on the attachment rates and not only at specialty, but at furniture and bedding, getting sales people at the retail stores to think of selling a system when they sell a mattress and not just selling the mattress, but including the pillows.

So that attachment rate--we've seen that attachment rate go up.

And then, the other factor that we invested more in R&D to introduce some new pillows, some new models and that new product has also helped.

Do you currently sell more pillows in the United States through furniture and bedding or specialty?

We don't break out the pillows by channel.

All right.

Thank you.

And we have a question now from Joel Havard at Hilliard Lyons.

Thank you.

Guys, I'm traveling and sorry I missed your first comments.

Tom, I wanted to back up and get the international store count again, please.

Okay.

Internationally, we ended at 4,920.

Okay, good.

So that was a change of about 250.

We pointed out that 200 of those, however, were simply converting Australia from a third party where we don't calculate the doors in third party countries, but when we convert them over we start counting them.

So 200 of the 250 was actually simply the changeover in Australia.

All right, good.

Thanks.

Secondly, and this one's maybe for you and Dale, not that we want to extrapolate this quarter's top line forever, but does this sort of strength change the timeline by which you think you'll need to add additional lines in New Mexico?

No.

It really doesn't, Joel.

We certainly based on the facility that we have out there have still plenty of capacity in between Albuquerque and Virginia to grow the business fairly significantly before we would need to add the extra lines into Albuquerque that we already have the space for, already have the infrastructure in place for.

I don't think one quarter dramatically changes that outlook.

As we talked at the Analyst Day in September, in terms of our long-term goals, we feel like the capacity that we have today, including ultimately extending the additional lines in Albuquerque, pretty much carries us through the five-year outlook we talked about.

Is that helpful?

Yes, thank you very much.

Next up, we will take a question from [John Christianson] at [Caine Anderson].

(Operator Instructions.)

5% difference between your 22% mattress revenue growth to 17% mattress unit growth.

Could you break that down between mix and price increase?

If you look at it on a domestic versus international basis, the U.S.

business grew revenue 22% and grew units 22%.

So you have basically flat pricing in the U.S.

and that's really driven by--even though we raised the price on a few models this year, a couple of the models it was not until late in the quarter, and also the DR business being off year-over-year has a tendency to mute the overall pricing.

Internationally, we had 23% revenue growth and 10% unit growth.

So we saw price increase--positive mix in the international business, as well as the FX impacts international business as well.

And if we look at that 17% mattress growth, could you help us understand that in terms of new slots within existing stores, increased sales per--and units per slot, and new doors?

How does that break down?

It would be almost impossible to break out the 17% growth across all of those parameters.

All of those parameters obviously contribute.

The key is the account productivity, more sales in the existing accounts, which means higher slot turnover.

Also, we do continue to gain slots and those slots are productive, so they generate additional unit growth and new accounts also helps.

But floor--the one thing I would point out, floor models really does not impact unit growth because what we're talking--the thing that drives unit growth is the turnover within the stores of sell-through, not putting in floor models.

Your average store will carry all of your different models or a fraction of them?

And how has that changed over time?

The average store would not have all of our models.

We've continued to add models each year.

It has changed over time by the average store, the amount of slots in an average store has increased every year and has increased fairly dramatically.

However, the best--a lot of it's a function of how big the store is and how many--how much space they can have and can give us.

Some of our biggest and best stores have all of our models.

Some of them--probably the least amount will have three models.

So we have increased the amount of space in the stores with our growth.

And one of the key things is the retailers continue to report back to us that we represent a larger percentage of their revenues than we represent of their floor space.

Yes.

And that--I would just add to that the reason why we think we continue to have opportunity to expand our footprint in the stores, because of the fact that we continue to add so much more volume, compared to the percent of floor space.

So as we come out with new models historically, we have been able to expand the space in the stores.

Is there an upper limit to what you can get in floor space?

And are you halfway there or more?

And does that mean that your new product introductions will eventually [flow]?

Well, if you look at how many models some of our competitors have, we have a long way to go.

We only have about eight models in the U.S.

The other thing is that I think the stores are very astute.

They make good business decisions based on profitability that each slot can contribute.

So as long as we can continue to add incremental volume, incremental profit to the stores as they give us more space, they're more inclined to continue to do that.

Thank you.

A question now from [Neil McConnell] at [Ramius Capital].

Hi, guys.

A quick question on the expediting cost.

I think you said it was up $1 million over this quarter last year.

Can you give us that in absolute terms?

I'm sorry?

What was that number in absolute terms, if it was up a million over last year [inaudible]--?

--In absolute terms, just pure expediting cost was about $2 million.

Did that continue into the fourth quarter?

Are you all caught up?

There's a little bit in the fourth quarter because as Tom said, we're not completely through the shortages.

But we pretty much were predominantly caught up by the end of September.

Just some of the higher end models we were a little bit behind on.

So there's a little bit of expediting continuing, but it is not anywhere near the dramatic level that we had in the third quarter.

Dale, can you help us with the tax rate for next quarter or next year?

It's jumped around a little bit.

Yes.

As we said on our last call, our expectation was that we would have a tax rate through the second half and ultimately for the year of 34.5%.

And that expectation has not changed.

Okay.

Thanks a lot.

From Rice Voelker, this is [Cory Arman].

Hi.

Can you repeat for us the unit percentage growth in domestic and international mattresses, as well as the unit growth in percentages for the domestic and international pillows?

Sure.

The domestic mattress results are up 22% in units and 23% on pillows.

Internationally, mattress units were up 10% and pillows were up 1%.

Great.

And what do you expect to see with the direct channel over the next year or two now that you've changed your marketing strategy from direct response to a brand building effort?

Well, one of the things that we have said in the past, and we would anticipate same things in the future, and that is that as we have expanded our retail distribution and have made it much easier for consumers to find our product, we expected our direct response business to decline.

And that's what we expect in our models going forward--that they will continue to decline.

Okay.

And the last question is do you expect that the department store channel will be--all the sell-in will be completed and set up for this fourth quarter?

And based on everything that you're seeing, do you think that it holds the promise that you originally expected?

I think we will be through with the--certainly with the rollout into the stores, and then we will keep track of the sell-through and see how it goes.

We certainly anticipate that it will live up to our expectations.

Great.

Thank you.

A question now from--I'm sorry, [Daniel Santiago] at Basswood Capital.

Hi.

Could you give me an idea of your growth in [with a] store that has been selling your products for, let's say, three or four years?

I am aware of the new doors growth and that your--so I'm--but I want to know on a stable region of the country or stable retailer, what has happened recently?

Well, if you look at--as much color that we give around our established accounts compared to new doors, as we said, our furniture and bedding store business, if you look at it in terms of revenue, was up about 28%, but the door count was up about 6%.

So that tells you that our established accounts are doing very well.

And we don't break it out in terms of how long a particular account has been open.

But as we have increased our advertising spend, as we have increased our overall marketing initiatives, and also introduced new models, all of our accounts have benefited from that.

So you're not experiencing a decline in any region of the country and in any type of stores?

No.

Okay, thank you.

Ladies and gentlemen, thank you very much for your participation in the question and answer session.

For any additional or closing remarks, I'll turn things back over to Tom.

In closing, I would just say that we are very pleased with our performance year-to-date, and we believe the long-term outlook is very strong for our brand.

We look forward to talking with you again in January when we review the fourth quarter.

Thank you, again, for joining us.

That will conclude the conference call.

Thank you once more, everyone.

Have a good day.