Tempur Sealy International Inc (TPX) 2008 Q4 法說會逐字稿

Good day.

Welcome to Tempur-Pedic's fourth-quarter 2008 earnings conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr.

Barry Hytinen.

Thank you for participating in today's call.

Joining me in our Lexington headquarters are Mark Sarvary, President and CEO, and Dale Williams, CFO.

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

Forward-looking statements that we make during this call 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 as of the date on which is made, and the Company undertakes no obligation to update any forward-looking statements.

The press release, which contains a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures, is posted on the Company's website at tempurpedic.com and filed with the SEC.

With that introduction, it is my pleasure to turn the call over to Mark.

To our listeners, thank you for joining us this evening.

During the fourth quarter, we executed well.

Though consumer spending worsened, we responded quickly to improve earnings.

We took steps to improve productivity, lower expenses, and substantially improve our financial flexibility.

As the market continues to be tough, we will continue to tightly managed the business to ensure we maintain our financial flexibility.

On today's call, we will provide our view on our performance in the fourth quarter, and we will outline our key strategic initiatives and later, Dale will provide a detailed review of our 2009 guidance.

In the fourth quarter, sales were slightly below our expectations, particularly in our domestic market.

As we saw this slowdown deepening, we took actions to improve profitability.

As a result, we delivered EPS in line with our expectations, despite the sales shortfall.

Gross margins were down year over year, but thanks in part to cost-savings initiatives, we managed to improve gross margin on a sequential basis.

As discussed on our last call, we significantly reduced debt in the quarter.

Our repatriation initiative, coupled with our focus on cash flow, yielded nearly $100 million of debt reduction.

Our tight fiscal discipline and focus on cash continues in 2009.

We're managing the business closely as sales visibility continues to be low.

Our assumption is things will not get better in the near term, and we are projecting a continuation of Q4 sales levels throughout 2009.

However, we have reduced our debt and our expenses so that we can remain safely above our covenant levels, even if sales levels fall significantly further.

Dale will give you more detail in a moment.

At the same time, we're working on a series of initiatives that should further strengthen our competitive position when the economic environment improves.

Now, while all of these initiatives will have long-term value, they will also contribute during 2009.

Firstly, we intend to improve our gross margins.

In 2008, we lost 500 basis points of gross margin.

Now, obviously, that was a major setback and we do not expect to get it all back in one year.

In 2009, our aim is to get back a couple of hundred of those basis points.

Beyond 2009, we expect to drive gross margins back to 2007 levels, if not better.

Across our operations, we have initiatives under way to improve margins, including projects to improve utilization rates, a redesign of our transportation network, and a range of sourcing opportunities.

And in 2009, we expect to benefit from an easing outlook for commodity costs, which will benefit our product costs and transportation expenses.

Number two, we will improve our effectiveness with retail customers.

As I mentioned on our last call, historically we were a direct-response Company and today, we predominantly sell through retail.

There are several things we're doing to perform better in this area.

A simple but compelling example is the way we're helping our retail customers to advertise our brand and promote our products.

We are arming our retailers with copy, messaging, and commercial-ready video footage to utilize in their print and TV advertising.

This ties our messaging and retail advertising together for a consistent presentation to consumers.

We have already seen retailers integrate this material into their advertising, effectively multiplying the consumer impressions for the Tempur-Pedic brand.

Number three, we will continue to improve the quality and range of products that we offer.

We have a compelling product set, but as we grow, our products need to be even more differentiated and tailored to specific consumer needs.

As a result, we've kicked off an important consumer research study that will give us a unique and in-depth understanding of consumer needs and preferences in the sleep category.

We will use this knowledge to help us design new products, improve existing ones, and optimize our effectiveness at communicating the benefits of our entire product line to consumers.

We'll also share this information with our retail customers as a part of our effort to improve how we support them.

For competitive reasons, I'm not going to go into detail on our R&D pipeline.

But we have several new products in design and testing, and I can say that we anticipate rolling out some very compelling new products during 2009.

Also during 2009, we will continue to invest in advertising to communicate the benefits of our products to consumers.

Our advertising spending as a percentage of sales is planned to be consistent with 2008.

Fourthly, we will improve the performance in our direct channel.

Most consumers use the Internet to research their mattress purchases before they buy.

And not surprisingly, the majority of Tempur-Pedic consumers interact with our websites during the course of their research.

In 2009, we will be improving our website to be more informative and shopper friendly, and at the same time, we will be investing in and strengthening our online marketing.

Fifth and lastly, we see a substantial opportunity to improve our household penetration across our international markets.

Our international business has experienced excellent growth over the past several years, yet our household penetration is far lower than it is in the U.S..

We will initially focus on growing penetration in our larger European markets, including the UK, Germany, and France.

We will be strengthening our product innovation, working more closely with our retail partners, and increasing our marketing investment.

So, we enter 2009 in a strong financial position.

While we expect that the category will continue to be weak, and we project that our sales will decline, we also project that we will generate significant cash flow and remain comfortably within our covenants.

And at the same time, we have a strong brand and a strong business, and we're working on a series of cost and growth initiatives that will position us well when we come out of this period.

I'll now hand over to Dale.

I'm going to focus my discussion on the financials, the repatriation, and our 2009 guidance.

Fourth quarter adjusted EPS and net income were $0.17 and $12.7 million, which compares to GAAP EPS and net income of $0.52 and $39.9 million, respectively, in the fourth quarter of 2007.

In total, Tempur-Pedic achieved net sales of $189 million, a decline of 35% over the same period last year.

Domestic sales were down 39%.

During the quarter, when we saw it start to weaken further, we implemented cost actions which I will discuss in a moment.

International sales were down 27%.

Foreign exchange rates were unfavorable during the quarter.

On a constant currency basis, our international sales declined 19%.

Our international business weakened, as expected, and was generally in line with our expectations, while currency was worse than expected.

By channel, our U.S.

direct business was most impacted, down 47%.

The U.S.

direct channel generally serves the lower consumer demographics and our retail channel, so direct can be more affected by economic slowdown.

Turning to the retail channel, we posted domestic net sales of $93 million, a decline of 39%.

Internationally, retail sales were down 24% to $64 million.

On a product basis, mattresses were down 37% in total, driven by a 31% decline in units.

Domestic mattress sales declined 41% on a 39% decline in units.

Declines in the direct business negatively impacted domestic blended average selling price, while pricing was generally flat.

In the international segment, mattress sales declined 27%, on a 21% unit decline.

This sales decline reflects the negative impact of foreign exchange rates.

On a constant currency basis, international average selling prices were up slightly.

In total, pillows were down 37%, driven by a 37% decline in units.

Domestic pillow sales declined 47%, on a 48% volume decline.

International pillow sales were down 27%, on a 24% decline in unit volumes.

Gross margin for the quarter was 43%.

Compared to the prior year, gross margin weakened, primarily related to three factors.

Despite oil prices continuing their downward trend, the cost for the raw materials we use were up substantially versus last year, on a percentage basis, in the vicinity of mid-20s, though, by the end of the quarter, costs for these raw materials were trending lower.

Next, fixed cost deleverage was a significant headwind, given the decline in sales and our efforts to lower inventory levels.

And the sales decline in our high-margin direct business was also a factor.

These factors were partially offset by improved manufacturing efficiencies in our operations.

On a sequential basis, though, gross margin was up 130 basis points.

This improvement was driven by factory productivity projects and helped to modestly lower transportation costs.

As sales trends weakened bring the quarter, we implemented contingency plans to lower spending.

We cut spending across the business and reduced headcount.

Our headcount is now at 2005 levels, appropriate given the level of unit volumes we are seeing.

As a reminder, our factories are highly automated and require minimal labor, therefore we can respond quickly when conditions improve.

We lowered selling and marketing expenses $6 million sequentially.

These reductions were balanced between advertising and non-advertising expenses.

In fact, on a percentage of sales basis, we deliberately increased our advertising spend rate sequentially.

We also lowered G&A expenses by $1 million on a sequential basis.

This represents our lowest level of quarterly G&A since 2006, despite incurring in excess of $2 million of bad debt expense.

Turning to the balance sheet, we continued to improve our financial flexibility.

Accounts receivable were down $37 million sequentially and $64 million year over year, consistent with sales declines.

Importantly, our accounts receivable continues to improve as DSOs are down four days compared to prior year.

And the current portion of our receivables aging has improved on a year-over-year basis for the past three years.

A key is to be mindful of terms and be diligent on collections.

We are doing both, but we can't provide assurances that we won't get some unexpected bankruptcies in our retailer base.

We lowered inventories by $9 million sequentially to $60 million.

This represents a $46 million reduction year over year.

Turning to debt, during the quarter we implemented the first phase of our repatriation of foreign earnings.

We used the proceeds to reduce debt.

Currently, we anticipate the entire initiative will be $150 million, up from the previously announced $140 million.

In the fourth quarter, we recorded a tax provision of $12 million related to the entire repatriation.

The exact and final amount of tax will be determined in 2009; however, this is our current estimate for the tax charge.

For purposes of estimating our cash flow, investors should note that we will pay this tax in the first quarter of 2009.

Also during the quarter, we resolved the escrow agreement related to the TEMPUR acquisition in 2002, when we were a private company.

The Company received $7 million from the release of the escrow account, reflecting final settlement.

Of course, this item had no P&L impact.

On the balance sheet, it was recorded as a reduction to goodwill.

In total for the quarter, we reduced debt by $100 million, to $419 million.

For the full year, we reduced debt by $183 million.

As a result of our cash performance, our funded debt to EBITDA ratio was 2.44 times, unchanged from last quarter and well below our debt covenant of 3 times.

We have taken and will continue to take steps necessary to ensure we will be in compliance with our debt covenants in any realistic scenario for 2009.

Let me pause here and speak briefly about some cash and debt assumptions.

We anticipate working capital should be, at worst, a modest use in 2009.

We expect to continue to aggressively pay down debt this year as well.

A fair estimate of debt reduction would be at least $80 million.

This, coupled with our expectation for earnings before interest, taxes, and depreciation, leads us to believe that, by year end, our debt ratio will be lower than where it stood at the end of 2008.

In fact, based on the way we're modeling the business, we would anticipate this ratio would be approximately 2.2 times by this time next year.

However, should economic conditions deteriorate further, as we look at the business, we estimate that we would be in covenant compliance even if sales in 2009 were to decline to approximately $700 million, with only moderate spending cuts.

Now I would like to address our guidance for full-year 2009.

For sales, the Company currently expects full-year net sales to range from $770 million to $790 million.

For earnings, the Company currently expects diluted earnings per share for 2009 to range from $0.70 to $0.90.

I'd like to note that the economic environment make sales difficult to predict.

Visibility is low.

Our sales guidance assumes unit volumes remain consistent with the fourth quarter, coupled with a modest benefit in seasonality and price increases.

We recently announced price increases on some of our higher-end models around the world.

Our EPS guidance assumes gross margins are up in 2009.

In 2009, we anticipate gross margins will improve by as much as 200 basis points.

Our confidence in this is based on three areas of opportunity.

First, cost-saving projects underway across our operations are yielding significant improvements in utilization rates and other key factory metrics.

Second, the redesign of our transportation network should be completed by year end and we will see escalating benefits from this project across the year.

And lastly, we have a range of sourcing opportunities, which are enhancing margins.

In addition, we will benefit from the reduction in commodity costs in terms of both product costs and transportation.

In our guidance, we assume these factors will be partially offset by reduced volumes and negative channel mix.

Our plan is to continue to invest in advertising at rates consistent to or slightly higher than our full-year average for the full-year 2008.

We know our advertising dollars go further in times like these, and this demonstrates our commitment to our retail customers.

Regarding interest expense, I would like to remind investors that $300 million of our debt is currently swapped to a fixed interest rate.

Therefore, we would recommend investors anticipate interest expense to approximate $22 million for the full year.

We're using a share count of 75 million shares and a full-year tax rate of 34.5%.

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).

Mark Rupe, Longbow Research.

A couple questions here.

As you look at 2009, I know you'd mentioned that you want increase household penetration in some of the European countries.

Is there -- on the R&D pipeline, without getting into specifics, do you anticipate that you'll be able to expand your addressable market opportunity?

Are you talking in Europe or are you talking worldwide?

Worldwide.

I think we do, but -- I clearly think we do because that's a critical component of the focus for the international business.

And I do in the U.S., too.

But I don't want that to be interpreted as to say that that means that we need to go to another price point or (multiple speakers) category of distribution.

We have -- not category of distribution, another level of price point.

We have, we believe, significant opportunity in the ranges that we currently compete.

Okay.

And as far as -- do you ultimately think that could be, at some point in time down the road, maybe expanded on a price point, or is that -- do you want to stay in that premium category for the foreseeable future?

You can never say never, but I've no plans at all to move out of the premium category.

This is where we are, and there is an enormous amount of opportunity still here.

We still have a small proportion of the premium category and we believe we have a lot of opportunity within it.

As far is the UK, Germany, and France, I know there are different implications for each of those countries.

Is it just spending more ads there?

Is there distribution play as far as getting the penetration up there?

It's both.

It is distribution, but it's also getting share of mind of the retailers in those different countries.

And as you know, they are all different, and the structures are different.

But it is a function of more investment in marketing, it is a function of new products that we will be introducing later this year, but it's also a function of working with our retailers to increase our importance to them.

As it relates to February 2 price increases, is there a general rule of thumb net net overall what pricing will be in '09?

It applies primarily to our more expensive items.

So it's not a general one.

It isn't a single simple price and it applies only to the more expensive of our items.

And they range between 3% and 5%.

So, it's on the order of 4%, on average.

We're also raising the price on our -- and, at the same time, improving the quality and design of our foundation.

So that's the other thing.

But the primary price increases are a subset of the items, the more expensive ones.

Dale, on the guidance, I know you said that it assumes that the fourth quarter kind of run rate on units.

Obviously, the comps in '08 versus '07 were a lot more challenging.

Is it fair to assume -- if you stay at this kind of run rate, it's actually -- you're assuming it gets worse because the comps get a lot easier?

Is that a right way to look at it?

Actually, the way to look at it is the [V percifs] would be worse early in the year than later in the year.

Because -- if you have a consistent than a flat units with some improvement in revenue related to the price increase (multiple speakers) and some seasonality, there will be some increase in revenue as the year goes on.

The comps get easier as the year goes on, also.

Perfect.

Congrats on the execution, thanks.

Budd Bugatch, Raymond James.

Good afternoon and let me thank you for taking my question.

Dale, can you give us any quantification on the amount of deleverage in the gross margin that you faced, or any of the other elements in the gross margin degradation in the quarter?

In the quarter?

In the quarter or the year, either.

However you would like to give it.

The easiest way to think about it is -- we -- if you look at the volumes that we had for the year, sales were down for the year, as well as -- let me give you a full-year number.

Volumes were down for the year, approximately 18% on mattresses.

Obviously, much worse in the fourth quarter.

We talked a lot a year ago about Albuquerque being a $10 million addition to fixed costs.

Obviously, there are fixed costs in the other factories.

But we had -- that's the sales volume reduction, but then also, we reduced our inventory quite a bit.

So the production volumes were down more than the 18%, which causes all that fixed cost to be underabsorbed.

Understood.

So, essentially, it was a sizable nut that we had to deal with in 2008, and we will continue to deal with in 2009.

I will say that we feel like our inventories are in a good position.

We may see, as the year progresses, because of our network redesign, as I talked about, we'll not only have cost benefits from that, but we also will get some additional inventory benefit from that, but not huge inventory benefits because we squeezed so much inventory out of the business last year.

So we will have a more direct comparison of overhead pressure in 2009 to the actual volume decrease in 2009.

And you said in your guidance you had assumed as much as 200 basis points improvement in gross margin.

I take it that that's at the high end of guidance.

What would be at the low end?

What would be your gross margin assumption at the low end?

At the low end, we would assume that gross margins would be flat to just slightly up.

And can you give us a quantification of the amount of repatriation in the quarter?

From a debt reduction standpoint, we reduced our debt $75 million related to the repatriation.

We actually moved a little bit more cash than that, but it was a rebalancing of debt.

We had an unused facility in Europe, so we moved more money than that, but increased the debt level in Europe from nothing to not fully utilizing the facility.

It was about $15 million additional that was moved in terms of rebalancing the facility, so the balance, though, of the repatriation, net of the taxes, so we will see by the end of 2009 the full benefit of the repatriation plus the taxes, so $150 million less $12 million, so $138 million of debt reduction associated with repatriation.

We saw $75 million in the fourth quarter.

$75 million plus $15 million, so $48 million left or $63 million left?

In terms of net benefit of debt, $63 million left because all we did was rebalance.

Do you have a CapEx number for 2009, and I'll get off.

Our expectation for CapEx is it will be essentially flat to 2008.

Thank you very much.

Congratulations.

John Baugh, Stifel, Nicolaus & Co..

I want to talk about the gross margin sequentially.

It was awfully good in light of revenues dropping from $250 million to $189 million.

And you commented that you saw some raw material alleviation, although I think you're on FIFO so I would expect we would see a lot more.

Could you comment on, sequentially, what you did in the fourth quarter to achieve that gross margin level, because if you just look at fixed costs and variable costs, it should have been much lower than that.

We did, obviously, see even worse impact in the quarter of the fixed cost deleverage.

We had, as we talked all year last year, and we talk every year, we have a number of programs and initiatives constantly underway to improve the cost effectiveness of our manufacturing.

We have sourcing initiatives.

With the dollar strengthening, that helped us.

FX turned negative for us on revenue but it helped us, at least on the U.S.

side, in terms of some of our international sourced product, it became cheaper for us.

We had -- obviously, transportation costs were improved, as diesel prices dropped in the quarter.

Our core chemical costs, on average, for the quarter were still significantly up year over year, and were pretty much -- they were up a little bit compared to the third quarter.

That will turn in 2009.

But in the fourth quarter, we still had additional chemical pressure.

If you recall, I think in the summer we talked about, when oil prices were going crazy and approaching $147 at the time we did the call in July, we mentioned that we were conducting a study of what happens to the business if oil goes to $200.

And that prompted a lot of outside-the-box thinking, getting together our best engineers, our best designers, the best thinking in the Company, the best chemists, and put together a long list of projects that we would do to try to offset the impact of $200 barrel of oil.

Those projects were started.

Obviously, it's a long list.

It will take many years to accomplish, but we got some immediate benefits from that out-of-the-box thinking that started to impact us in the fourth quarter.

And then, maybe a question for Mark, if you want to give us your thoughts, high and low, end of the range, on where you think your chemicals are going to be.

That's great.

But if you don't, I'm still curious as to what your pricing strategy -- it sounds like you're taking some prices up, keeping prices flat.

Assuming we're looking at significant drops in raw materials year over year, is there temptation to lower price at any point or do we hold the line on pricing and capture that margin?

Remember that we obviously didn't raise price at all last year, when the costs were going up significantly and many of the -- much of the rest of the industry did.

And we deliberately held off through the year, and we decided late in the year last year, or -- we decided and announced it in around November, that we were going to increase prices.

There's obviously been some easing in prices, but overall, the fact is that our margins, our gross margins have worsened very significantly, and we need to improve the productivity front that Dale was just talking about, but also we do need to take a little bit of pricing.

We're doing quite carefully.

We've done it very thoughtfully, taking on those products where we have, we believe, room for small amounts of pricing.

And we have experience in the past, which shows that the elasticity on our products is very small.

Our initial reaction from what we're hearing from retailers is people understand why we're doing it.

Obviously, it's always a challenge to take price, but we believe, on balance, this the right thing to do.

Obviously, we've given it a lot of thought.

But no, I think it is the right thing to do.

Have you cleared out all the inventory of the dropped SKUs?

Yes.

Great.

Thank you.

(Operator Instructions).

Joe Altobello, Oppenheimer.

Good afternoon, guys.

First question, in terms of your retailer base, could you talk about how many accounts you lost throughout '08 due to bankruptcy and how many you view as at-risk at this point?

I don't have an account number, I have a door number.

That's fine.

We lost about 500 doors in 2008 because of bankruptcies.

Now, in terms of our total door count, that doesn't show up because we added doors throughout the year.

That's just U.S., though, right?

That's correct.

And for the year, our doors are up, year over year, while we lost about 500 doors due to bankruptcy.

Our expectation, built into our guidance, is that our bad debt expense in 2009, although a lower revenue level, will be similar to what we experienced in 2008.

Okay.

And what was the bad debt expense in '08?

I missed that.

I don't think I gave it.

I think it was roughly around -- 7 -- $6 million to $7 million, someone will give me the exact number here.

That's fine.

$8 million bad debt expense in 2008.

Okay.

And the allowance for doubtful accounts at the end of the year?

At the beginning of the year?

No, no, at the end of the year.

What was the account balance there?

6.7.

6.7, okay.

And then, in terms of the ad spend, this is just more of -- a modeling question, but you mentioned that you expect the same level of ad spend.

Was that as a percentage of revenue or was that in dollars?

Percentage of revenue.

And what was ad spend in '08?

9.2%?

That's right, Dale, 9.2%.

Great.

Thanks, guys.

Bob Drbul, Barclays Capital.

This is actually Matt McClintock, filling in for Bob.

I just have two quick questions.

The first one is -- Dale, you talked about -- it seemed like you were talking about the weakness in the quarter and how that -- maybe I have the wrong impression, but it seems like it got worse during the quarter.

Could you give us like, I guess, a view of the sales cadence, like the trend per month during the quarter?

I want exactly go month by month, but when we did the third quarter call, it was mid-October.

We had already seen dramatic a turndown in the business.

We talked about it on the call.

We changed our guidance based on that.

If you -- we did see the business deteriorate further, from October to November.

If you look at the ISPA data that's available, ISPA says for our total industry, October was down 23% and November was down 30%.

Because of the pressure on the premium end of the business being more significant than on the low end of the business, the premium numbers would have been a little bit worse than that, than what ISPA is showing from a total industry standpoint.

So we saw a dramatic turndown at the beginning of October.

It got a little bit worse in November and then kind of held.

And then, I guess, similar to -- in the third quarter, you talked about how the overall sales weakness was broad-based across price points.

Was that the same theme in this quarter or did you see similar to, I guess, the ISPA data weakness, more weakness at the higher end of your price point range and maybe stronger sales on the lower end?

No, we continued see the decline in the business be pretty much across the full price spectrum.

Pretty evenly, too.

And this -- would you say that the trends have held into January as well?

Yes.

That's it.

Thanks, guys.

(Operator Instructions).

Arieh Coll, Eaton Vance Managed Investments.

Good afternoon and I wish you the best of luck going forward.

As I'm sure you have observed out in the economy, auto sales down 35% year over year in recent months, Tiffany sales down 35% in terms of same-store sales.

Clearly, the products you sell are great, but at the same time they are considered premium or luxury goods by many consumers.

What I'm trying to understand from a marketing perspective is what are you thinking of doing to try and change the mindset of consumers going forward so when they think about their priorities of how they want to spend money, they're going to take a Tempur-Pedic mattress from being a luxury expensive item that they can't necessarily spend on today with a more restricted wallet, to one that is more important in a hierarchy, so they actually, more of them, make that decision to make the purchase as opposed to deferring or trading down to a more conventional spring mattress?

I think that, as you said and as you implied, we have seen a certain amount -- we have seen a significant amount, I should say, of people deferring, people deciding that they would like to have a Tempur-Pedic, but given the environment, they're going to wait a little while.

I think the key to -- one of the reasons that we have such high expectations for the brand and for the Company is because the value that we provide is a great -- is associated with health and sleeping well.

And it is something that is very important a lot of people.

It's something which is not really a luxury in the traditional sense, it is only a luxury in the sense of looking after oneself in the way that keeps you healthy and keeps you well, and is, in fact, the responsible thing to do.

And as the baby boomers age, the opportunity is only getting bigger.

So we see the underlying trends to be very good.

I think one of the things that's interesting is that if you think about the cost of one of these Tempur-Pedic beds, it's literally measured on the order of a dollar a day.

It's a very small investment, and more and more people are seeing it.

And one of the kind of indicators that we have found interesting, that sort of tells me that the underlying demand for the product is still there, is that in this last year, despite the fact that -- all that's gone on, the number of slots that we have in each retailer is, in fact, growing.

So retailers and, by extension, consumers continue to see that this is something that is not a bauble or an unnecessary luxury, but actually something that is a very sensible investment in the health in their life.

It's an important part both of the way we're designing our products and the way we communicate them and the way we will continue to evolve how we communicate them.

But I think (multiple speakers) --

Thank you.

And just a follow-up, do you have an estimate for what percentage of your buyers finance the purchase, either through a credit card or some other sort of zero-cost loan program?

And what I'm trying to understand, in the past three, four months, to what degree has that access to purchase been limited and been an explanation for why sales have fallen?

We don't know across the entire population of our sales.

The only part of our sales that we know with certainty is in our direct business because we do have, through a third-party relationship, some financing available to consumers in the direct business.

Historically, the percentage of our direct business that has been financed, not bought with a credit card, because we require all purchases in our direct business to be paid with a credit card.

But in terms of real financing, 12-month, 24-month type financing, that has been -- run historically in the 45% range of our direct business.

We have always -- generally, from our retailers, we get the sense that it has, on average, been about that, higher at some retailers, lower at others.

Some retailers really emphasize financing as a business model.

Some retailers don't do any financing.

So on average, we've always kind of ballparked that about 45% of our product is financed.

But you do raise a great point.

The fourth quarter part of the second leg of turndown that we experienced and many other companies experienced was a severe tightening of consumer credit financing available.

The decline rates that we saw in our own direct business were up significantly.

People who wanted to buy the product, but then, because of increasing FICO score requirements or their own FICO score is declining, combination of the both, consumer credit just wasn't readily available in the fourth quarter and we kept hearing that repeatedly from retailers as well, that the people come in, want to buy the bed, but then, they can't get financing.

So, that is something that -- contributed to the additional pressure of the fourth quarter.

Our expectation, obviously, based on using fourth quarter as the foundation for 2009 guidance, is that that will continue.

We're not going to try to project when consumer credit is going to start to loosen up again.

But that is something that was a factor.

Thank you.

Brad Thomas, KeyBanc Capital Markets Inc..

Good afternoon.

Just wanted to follow up on the door count question from earlier.

As you think out for 2009, what sort of an impact are you baking in from store closures, and how are you thinking about total door count growth?

From a door count standpoint, we would anticipate -- we can't really forecast bankruptcies, but from a cost standpoint, we are expecting to incur roughly about the same dollar magnitude of bad debt.

So, obviously, that would imply some negative pressure on door count.

We also will have some growth in doors in certain accounts.

So, on balance, 2009 may be a flat year on total door count, or it may be slightly down.

But we don't think it's going to be a big driver, positively or negatively, other than the expense of the write-offs.

And then, Mark, you commented earlier about still gaining a share of slots in 2008.

Are you still thinking that that can be an opportunity in 2009?

It seems like the higher end is losing share in this difficult consumer environment, and that customers are trading down, in many product categories.

Do you think there is a risk that perhaps you don't see the slot growth or could lose some slots in 2009?

We -- as I said, we saw slot growth in 2008, in this sort of very difficult situation.

And we continue to believe that there is opportunity for growth in 2009.

One of the things that we saw was, in the third and fourth quarters, we introduced some new products in the third quarter of last year, which have been well received and where they have been distributed have been successful.

We know that there's potential for those in significantly broader distribution than they are.

A lot of retailers were sort of tightening their belts at the end of the year, and were deferring their decision to roll them out to all their stores.

We believe that is an opportunity going forward.

So we think we start the year with a set of products that have the potential to increase their distribution and thus increase our overall slot -- average slot per store in 2009.

Let me add my congratulations as well on some nice execution, and best of luck in 2009.

Joel Havard, Hilliard Lyons.

Thank you.

Good evening, everybody.

Mark or Dale, I seem to recall that you quit talking about it too specifically, but advertising expense as a percentage of sales had gone from what had been a traditional -- call it 10%, 11%, to something maybe closer to 9%.

Maybe, Dale, you'll give us a little insight, maybe lower than that Q3, Q4.

And then, Mark, how does that rate jibe with what sounds like maybe a little bit more enhanced advertising effort in '09?

I realize that you're really maybe talking more marketing as it pertains to supporting the retailer.

But can you combine those possible disparities?

Let me give you the housekeeping side of it (multiple speakers) talk some more from a strategic standpoint.

Third quarter advertising was about 7.3% of sales.

Fourth quarter advertising was about 8.2% of sales.

So we did spend less than the 9% in the back half.

We talked about the year, we told everybody basically back in April we would spend less than the average for the balance of the year because we would try to get the year back in line with what we felt was a reasonable advertising rate.

If you recall, we had a lot of fixed advertising already in place, noncancelable in the first quarter, and then when the business started to turn south in the first quarter, we couldn't get out of that spend, so it was very high in the first quarter.

Again, the second quarter was higher than -- our norm expected rate, just because, again, some of it was already preplanned and you couldn't get out of it.

So the back half was planned to be curtailed, to try to get the year back in balance.

We did pick up from a percent of sales from 3Q to 4Q, and we think that that 9% level is about the right level in this environment.

I'll let Mark talk more about the strategic side of it.

The key -- one thing is that we think -- it's hard to tell what the exactly right number is.

But we, first of all, we're very committed to maintaining an appreciable marketing communication and we think 9% is an appropriate number.

And also, to time it as closely as we can, to be timed in sync with the sales, so we expect very close to 9% each quarter.

It will vary up or down 1% or so, but it is going to be of that order.

What we're -- and I think there's kind of a couple of strategic things.

One is that we're, interestingly enough, we're seeing, as I'm sure you will have heard, advertising rates are quite low, especially for our type of advertising, our cable advertising.

And we're getting quite good rates.

We're also getting quite good returns, even in the first part of this year.

So we are quite pleased with the advertising we're running right now.

The other thing is that we are putting an increasing focus on is our Internet advertising.

It's got a lot of advantages.

One is it is quite efficient, but also you can -- we can pulse it very well.

And we can pulse it both in timing and amount, and also specifically on different types of offers and products.

And we're getting more sophisticated at using that.

And the third thing is that we're continuing to evolve.

I mentioned that we're doing some research.

We're continuing to evolve the message that we communicate to consumers.

I don't want to go into the details of it, but we see some quite good opportunities for improving the precision of our communication and the effectiveness of our communication, which we think will have leverage going forward.

And finally, I also said in the prepared comments that we're working hard with the retailers to provide them with advertising copy that is useful and immediately applicable for them, but which reinforces our message.

It's really a win-win.

It helps their advertising be more effective, and at the same time, it doubles or it increases the amount of advertising that we get.

So there's a variety of different things.

It is an important part of what differentiates us, and clearly, it has and will continue to serve us well.

Mark, thanks for that overview.

Guys, best of luck.

Joel, one thing, just as a note, since you asked about the historical.

On a full-year basis, we were 9.2% of sales for advertising.

In the full year 2007, it was 9.4%.

So really, for the full year, it was effectively flat as a percentage of sales.

And Operator, we'll take our next caller.

(Operator Instructions).

Tony Gikas, Piper Jaffray & Co..

My congratulations as well, guys.

Nice execution.

A few questions.

You talked a little bit about execution of the ad spend.

Any change to the ad campaign or the message?

I recognize it still seems very fresh, but just curious on that front.

And then, second question, in terms of -- like the next quarter and going forward, it sounds like there will be some charges related to the repatriation of some cash.

Should we be using the 34.5% tax rate, and you'll give us a non-GAAP number?

I'm assuming that's how you're going to do that going forward, and then I have a couple follow-ups.

Let me address the financial questions first, and we'll come back to the -- again, the question on advertising.

On the repatriation, we believe that we have accrued the appropriate taxes in the fourth quarter.

It may tweak very slightly, and basically, what causes it to tweak a little bit is foreign exchange rates.

However, we have accrued in the fourth quarter what we believe is the total charge for the repatriation.

We're actually going to pay it in the first quarter.

For the additional repatriation that we're doing, in terms of moving cash, that comes at no additional tax because it was all put into one tax analysis.

So the repatriation, the additional monies that we will be moving from our international operations to the U.S., come at no additional tax charge.

Does that help?

That's perfect, thanks.

And then, on the ad message.

As you said, the advertising is new and is fresh, and we think that one of our key goals with that was to increase awareness of our product, of our brand, I mean, with the target audience.

And it really did.

We got a measurable increase.

I didn't mention that before.

We have had a significant increase in consumer awareness of our product.

So it's worked.

But playing to -- or, as the environment evolves, and referring to the question -- the previous questioner, there is a degree to which we want to evolve it from being a message of luxury to one of health and a sensible investment.

It's not actually a fundamental change, but that is going to be part of the tonality change.

The other thing is that we're finding that one of the things that plays incredibly well with consumers is when they hear from other people recommending the product.

And we're going to be leveraging that sort of word-of-mouth communication quite extensively going forward.

And finally, although it's still not seen, I believe there will be some quite good learnings coming out of the research we're doing.

So I do see it evolving.

I don't see us doing (technical difficulty).

Couple quick follow-ups.

It seemed like the international business outperformed the domestic business a little bit in the quarter.

Is there a lag in the international business?

Is there further weakness to come there, relative to the U.S.

business?

And then, Dale, one final question.

What's in your guidance in terms of FX headwinds for the coming year?

In terms of the international business, we did see a lag in 2008 -- as we talked -- as the year progressed.

Early in the year, the international business was positive.

First quarter, the U.S.

business was down, international business still was growing.

We saw that turn in the second quarter, did a little bit worse in the third quarter, you get a little bit worse in the fourth quarter.

We did see a lag.

We saw different countries get hit at different points in the year.

The key thing that we have -- and then, ultimately, in the fourth quarter, we even saw the economic malaise hit Asia.

The U.S.

got a double whammy.

It dropped significantly early in the year last year, and then took another significant decline in, basically, late September, early October of this year, after the financial markets melted down in the U.S., partly complicated by the significant tightening of consumer credit.

Internationally, we haven't seen a second lag.

Doesn't mean there won't be one, but we think that, particularly from a credit standpoint, the tightening of consumer credit that happened in the U.S.

happened globally, so that that impact is already out there.

And so, on a -- we look at it on a market-by-market and what's happening there, and what's happening in the local environment, and we feel like the international business on a constant currency basis will perform.

It performed better in 2008.

It will perform better in 2009.

A piece of that is because there are a lot of countries where we have a smaller business base, and even in this environment, we're still getting growth in those businesses, so that mutes some declines in some of the more established markets.

But -- and then, the next part of your question was FX impact in 2009.

We do believe that we will have negative FX impact in 2009.

Essentially, what we have in our plans is the average FX rate in the fourth quarter apply -- will apply to 2009.

So, to the extent that the dollar strengthens from where it's at today -- actually, today's rates are slightly less than or slightly beneficial to what we saw in the fourth quarter.

If the dollar strengthens further, we've got a little bit of room there before it hurts us more negatively.

If the dollar weakens any, then that will provide some additional benefit.

Thanks, guys.

Good luck.

That does conclude the question-and-answer session.

I'll now turn the call conference back over to you for any additional closing remarks.

Thank you, everybody, and we look forward to talking to you again in April when we will review the first quarter.

Thanks for joining us tonight.

That does conclude today's conference.

We do thank you for your participation.