Tempur Sealy International Inc (TPX) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to the Tempur Pedic first quarter 2009 earnings conference call.

Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Mr.

Barry Hytinen.

Please go ahead, Sir.

Thank you, Dustin.

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 our 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 10K under the headings, "Special Note Regarding Forward-looking Statements" and "Risk Factors".

Any forward-looking statement speaks only as of the date on which it is made.

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

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 as well as filed with the SEC.

And now with that introduction, I will turn the call over to Mark.

Thanks, Barry, and to our listeners, thanks for joining us this evening.

Today I will provide our view on our performance in the first quarter, and an update on progress with respect to our key strategic initiatives.

And then Dale will provide a detailed review of the quarterly results and updated guidance.

In the first quarter, sales were below our expectations.

Our industry continues to experience sluggish consumer traffic and many high-end shoppers are deferring their purchases.

Given that environment, I am pleased with how well we executed during the quarter.

We made progress in our long-term initiatives, most notably our initiative to drive gross margin, and we kept our other costs contained.

We are pleased with the gross margin expansion in the quarter.

Our operations team is performing well and driving improvement.

And we did a nice job containing operating expenses, while continuing to commit large amounts of resources to building our brand.

As a result, we delivered earnings in line with our internal expectations.

We will continue to tightly manage the business to ensure we maintain our financial flexibility and deliver the earnings per share guidance that we outlined in the last call.

As we've discussed before, we view 2009 as a year to optimize the business and position ourselves for growth when the economy improves.

A key focus is to further lower our debt to improve our financial position.

And to that end we lowered debt nearly $20 million while increasing our cash balance and increasing the cushion versus our covenant.

For the foreseeable future, we expect that debt reduction will be our number one objective from a capital allocation perspective.

Looking forward, it remains difficult to predict sales with a high degree of confidence.

We are now projecting a continuation of Q1 sales levels throughout 2009.

And we have chosen to widen our sales guidance range to reflect continued weakness and low visibility in the market.

Our key assumption is that the economy will not get better in the near term.

However, we are confident in our ability to improve our margins and to manage our expenses and to lower our debt.

And as a result, we are maintaining our prior EPS guidance despite lowering our sales projections.

Dale will provide more detail on the financials in a moment.

So I will focus the rest of my commentary on progress in the key strategic initiatives that we outlined on the last call.

Number one, we made significant progress on our initiative to improve gross margins with a 250 basis point expansion year on year.

We have plans underway across our operations to expand margins including projects that improve utilization rates, a better redesign of our transportation network, and a range of sourcing opportunities.

And we expect productivity to continue to be favorable as our prospects should ramp through the year.

Now having said that, lower commodity costs were the biggest driver of improvement in this quarter.

As a reminder, our goal is to drive gross margins to a level approaching 50% over (inaudible).

Number two, regarding our initiatives to improve effectiveness with retail customers, we continued the rollout of marketing copy, messaging and video footage so that local retailers can link their advertising with ours.

And in addition, we executed on the first of a series of scheduled promotional events.

The experience (inaudible) wind promotion was centered on the Presidents Day holiday shopping period.

And it encouraged consumers to try a Tempur-Pedic bed at their local retailer.

Many retailers took part, and given it was our first attempt at a national promotion, we were very pleased with it.

And we are encouraged to see that even more retailers are planning to take part in our Memorial Day event -- The Tempur-Pedic Test Drive.

In this event consumers have the chance to win a variety of prizes including a car, simply by trying one of our beds at their local retailers.

Events like these are relatively low-cost ways to drive consumer trials of the Tempur-Pedic Sleep System.

And we are also working on additional ways to improve our retailer effectiveness.

Initiative three, we are making good progress on two.

That's our effort to broaden the range of products that we offer.

We completed an important consumer research study just recently.

And that has provided unique and in-depth insight into consumer needs within the sleep category.

We are acting on this data in a variety of ways, but in particular to differentiate and tailor products to specific consumer needs.

Our R&D pipeline is robust and we anticipate rolling out some very compelling products as a result of his research.

Number four, we've made early progress on our goal to stabilize and ultimately grow the direct business.

On a sequential basis, the direct business was flat, which is an improvement from recent trends.

Consumers are using the Internet to research their mattress purchase before they buy.

And we are dedicating more resources to our Website and we are marketing online to consumers who have expressed an interest in mattresses, as well as consumers who are researching health and wellness issues.

The fifth and last of the initiatives, we continue to see the substantial opportunity to improve our household penetration in our international markets.

During this quarter, this first quarter, we increased the number of spots per store in our international business.

And that reflects retailer recognition of Tempur-Pedic's ability to meet a wider range of their consumer needs.

And we are in the process of rolling out a compelling new mattress, the Sensation mattress which appeals to a very broad range of consumers.

So, the first quarter of 2009 has been challenging on the sales front.

And we see no reason for the category to improve in the near term, but however 2009 is off to a good start from a cash flow margin and cost perspective.

For the remainder of the year we will continue to generate significant cash flow while our focus remains on improving our competitive and our financial positions.

I will now hand over to Dale.

Thanks, Mark.

I will focus my commentary on the financials and our 2009 guidance.

First quarter EPS was $0.18, consistent with the prior year.

In total, net sales were $177 million, a decline of 28% over the same period last year.

Foreign exchange rates were unfavorable during the quarter.

On a constant currency basis, net sales declined 24%.

Domestic sales were down 28% while international sales were down 29%.

Again, on a constant currency basis, our international sales declined 18%.

Looking at it by channel, in domestic retail, net sales were $93 million, a decline of 28% yet flat on a sequential basis.

The direct business declined.

However, as Mark mentioned on a sequential basis, the business also was flat.

Internationally, retail sales were down 28% to $57 million.

On a constant currency basis, international retail sales were down 16%.

Our international third-party channel was weak as the global economic slowdown spread.

On a product basis, mattresses were down 29% in total, driven by a 25% decline in units.

Domestic mattress sales declined 29% on a 30% decline in units.

In the international segment, mattress sales declined 29% with a 19% unit decline.

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

On a constant currency basis, international mattress sales declined 17%.

In total, pillows were down 27%, driven by a 26% decline in units.

Domestic pillow sales and units both declined 25%.

International pillow sales were down 29% on a 26% decline in volume.

Similar to mattresses, foreign exchange rate negatively impacted international pillow sales.

On a constant currency basis, international pillow sales declined 20%.

Average unit selling price increased as a result of positive channel mix.

Turning to gross margin, gross margin for the quarter was 46.2%, up 250 basis points year on year, and 320 basis points sequentially.

This is the Company's first gross margin improvement on a year-over-year basis since 2004.

On a year-over-year basis, the gross margin improved, principally related to three factors.

First, commodity costs including transportation continued to drop and were slightly down versus last year.

Next, our focus on driving manufacturing efficiency is yielding benefits.

Lastly, pricing actions taken early in the year were also of benefit.

These factors were partially offset by fixed costs deleverage as production volumes were down substantially year on year.

While we spent over $14 million on advertising to drive brand awareness and consumer traffic, we lowered selling and marketing expenses in total $19 million year over year.

We also lowered G&A expenses by $3.5 million despite incurring over $1 million of incremental bad debt expense as compared to the first quarter of last year.

This represents lower G&A expense run rates as a result of the actions we took in 2008.

Interest expense was $5 million, down $3 million year on year reflecting lower debt and LIBOR rates.

Our first quarter tax rate was 38.4%.

The tax line includes a nonrecurring $1.3 million charge resulting from a change to a foreign tax law.

Without this charge, our effective tax rate for the quarter would have been approximately 32%.

Net income was $13.3 million, down $200,000 from the prior year.

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

Cash increased $6 million sequentially and we generated $26 million of operating cash flow.

Capital expenditures were $1.4 million, half the amount spent in the prior year, although we still plan for capital expenditures to range between $10 million and $12 million for the full year.

Accounts receivable were down $9 million sequentially and $62 million year over year.

Continuing a nice trend, DSOs are down 10 days compared to prior year and 1.5 days sequentially.

And our accounts receivables aging continues to show improvement with more of the balance being current today than at any other quarter point in the Company's public history.

As sales fell below expectations, inventories were essentially flat sequentially at $61 million but down $51 million year on year.

We continue to see opportunities to reduce inventories going forward.

We reduced debt $19 million since the end of 2008 to $400 million.

Over the past 12 months we have lowered debt by $197 million.

Our funded debt to EBITDA ratio was 2.38 times, down slightly from last quarter and will be below our debt covenant of three 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.

Based on the way we are modeling the business in terms of earnings before interest, taxes, depreciation and amortization, we anticipate our funded debt to EBITDA ratio will remain in the low to mid 2s for the balance of the 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 $650 million with essentially no adjustments to spending from our current projections.

Of course if such a scenario unfolds, we would anticipate taking actions to further reduce spending.

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

The Company has maintained EPS guidance a range from $.70 to $0.90 per diluted share, but reduced net sales guidance to range from $700 million to $740 million.

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

Visibility is low so we are widening our sales range to incorporate a broader set of potential outcomes.

At the midpoint of our range, we are assuming only a modest seasonal benefit to first quarter unit volumes.

The low end assumes modestly worsening trends with no seasonal benefit.

The high-end assumes volume levels consistent with the first quarter with a more normal level of seasonality.

I'd like to take a moment to remind investors of our typical sales pattern.

Historically, our sales are down modestly in the second quarter from the first quarter, followed by an increase in the third quarter and the fourth quarter is usually slightly down from the third quarter.

Our EPS guidance assumes gross margins are up in 2009.

At the low end of our guidance, we would anticipate gross margins for the year in line with the first quarter, despite lower production volumes going forward.

At the high end, we anticipate additional margin expansion from the first quarter rate, principally driven by production efficiencies.

We anticipate a slight worsening of commodity costs in the second half of the year.

But for the full year 2009, we anticipate gross margins will improve on a year-over-year basis by at least 300 basis points.

I would like to note that, for the second quarter, we anticipate the combination of domestic and international segment mix as well as fixed cost deleverage may result in gross margin being flat to slightly down as compared to the first quarter.

Our plan is to continue to invest in advertising at rates slightly higher than the rate occurred in the first quarter.

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 [for] a fixed interest rate.

Therefore, we would recommend investors anticipate interest expense to approximate $19 million for the full year.

And we are using a share count of 75 million shares.

Regarding our tax rate, our (technical difficulty) previously discussed reason for the higher than normal rate in the first quarter.

Based on our current expectations, we anticipate the full year tax rate to approximate 34.5%.

This takes into account the elevated rate in the first quarter.

As noted in our press release, our guidance in 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 for questions.

(Operator Instructions).

Mark Rupe with Longbow Research.

Congratulations on the quarter.

Just looking at the unit volume growth.

Obviously in the first quarter, or in the fourth quarter, you had an easier compare than in the first quarter.

I'm just curious to see if you are seeing anything going on as we get into April here?

If there has been any kind of stabilization at all at the high end or in -- within your products mix as well, has there been any kind of trade down?

We haven't.

We've said this before and we continue to say it and we keep our eye on it quite closely.

We still are seeing no material -- no significant difference between our sales levels at our different price points.

I mean, there is a little bit of movement up and down, but it really is noise level.

So we are seeing a very consistent level of decline across the board.

And as we've said for some time, we believe this is primarily is driven by deferral.

So it's not as though we are seeing something which is more weighted to the low end, for example -- or the decline is [not] more weighted than the high-end.

Okay and then, just on the selling expenses during the quarter.

Typically, there's somewhat of a seasonal uptick in Q1.

That obviously didn't take place in this quarter.

Just curious to see if there is anything kind of one-time in nature in there?

Not really because it's not so much -- there's a bit of tradition now obviously.

But the fact is last year we did invest quite heavily in the first quarter in marketing.

We said this some time ago that we were going to stage it more evenly this year, finding it to be more quarter by quarter.

As you know the biggest quarter is the third quarter.

So we will stage it more evenly according to sales.

And so there was no one-time one timers in there.

Perfect.

Thank you.

Budd Bugatch with Raymond James.

Good afternoon.

Congratulations on a very nice execution in the quarter.

My first question just really goes to the gross margin and I don't know, Dale, you walked us through a little with what the qualitative changes were between commodity cost improvement, manufacturing efficiency, pricing benefit and then the fixed cost deleverage.

I wonder if you could give us some quantification or orders of magnitude of those four items?

Yes, as we came into the year, we had started to see commodity costs decline.

And so we had an expectation around what we would have in commodity costs.

Commodity costs actually improved a little bit more than we thought they would where in the first quarter, the calls were actually slightly below the prior year costs.

But from an overall benefit looking at a 250 basis point improvement on a year-to-year basis or a 320 basis point improvement sequentially, about half of that improvement was commodity costs.

Some of that was expected.

Some of it was better than expected.

And then the other half was split fairly evenly between the impact of the price increase and the impact of our factory productivity initiatives.

As the year progresses, as I said, we are anticipating that commodity costs may actually start to increase again in the second half of the year, and that the continued margin expansion that we believe we will have in the business will be driven by the factory productivity and cost improvement initiatives continuing to pay benefits throughout the year.

And on the fixed costs the leverage, can you quantify that?

And what -- I know that was caused by volume.

Can you remove that with some structural actions in the manufacturing side?

You know, we are always looking at fixed costs to try to make them unfixed.

There are certain levels of fixed costs that are not attainable without closing a facility.

But we continue to run the numbers periodically, continue to look at that.

At this time, we have no plan to remove a facility the cost of transportation costs to this point offset the cash fixed costs that we incur.

And the two plants you've got them as reduced as far as you've got them nosedown as tightly as you can nail them right now with all of your (multiple speakers).

Yes, we feel like we have the fixed costs that we can impact pretty nailed down, but we are always looking.

Just lastly, during the quarter were there any notable changes and differences in the sales dynamic month over month?

What happened as we got -- as we went through the quarter?

January looked like it was a terrible month for most people at retail.

From our standpoint we saw January and February pretty much consistent with the run rates that we saw in the fourth quarter.

We saw a slight weakening globally in March.

But that's what we are basing our outlook on is what we saw throughout the first quarter.

And traditionally the mattress industry slows down a little bit in late March and into April, and then picks up again as the second quarter moves on.

But what we've seen in April is consistent with our expectations so far.

Yes.

I understand that it can change sequentially, but I was looking year over year.

Was March worse year over year than January and February were year over year?

Good question.

Hang on one second.

Let me look at a number real quick.

I believe that -- March was pretty much on par with what we saw last year by month.

We did see the business slowing down last year as first quarter progressed.

So kind of the year-over-year decline was fairly consistent within a few percentage points.

For each month during the quarter?

Yes.

Thank you very much.

We have a bunch more questions, but we will let others in to ask theirs.

Joan Storms with Wedbush.

Good afternoon and I reiterate my congratulations on the quarter.

Couple of questions.

First of all you know that direct business has continued to be weak although I guess more (inaudible) on a sequential basis.

What exactly are you doing to initiatives in that category to improve that business or to try and drive that business?

As we said, the year -- the quarter-over-quarter, the direct business was flat and that doesn't sound like a great victory, but that's the first time in a long time that that has been true.

And so in fact we are quite pleased with that, especially given that the environment is declining.

So I don't want to declare victory by a long way.

But all I would say is that we are quite pleased with that result.

There are two -- there are two or 3 things, but there are two things that I would point to that are going on.

One is one that I mentioned on the last call and it is a big focus for us going forward, which is we really believe that the Internet is an increasingly important source for us for leads, both for sales and direct and also to our retailers, guiding people to our retail partners.

And also obviously for selling directly online.

The number of leads -- the effectiveness of advertising online is very good, relatively speaking.

And we continue to move more of our spending to that method.

What we've seen is a substantial list and the number of leads that we've achieved in the first quarter and as you can imagine, the benefit of leads don't pay off in the quarter that you get them.

They come later, but we are seeing that's quite good.

And so the one thing I would point you to is that is a result of what we've been doing is an increased focus on the Web has increased the number of leads.

And if it plays out as we -- as it has in the past, that should be good going forward.

The other thing is that we dropped a major or a defective, I should say, catalog at the beginning of the year in January and it was a good catalog with a good offer and it resonated quite well.

So it was effective sort of old-fashioned [BR] marketing.

Which paying off.

And then, can you talk a little bit on the promotions that you were running for Presidents Day and then the one coming up for Memorial Day?

The thing is that one of the things that -- obviously we don't, as you all know, we don't price promote.

And we don't have periods when we have sales on our products and at the key holiday periods, almost all, I think all of our retailers use these periods as times of promotion when they advertise to bring consumers into their store.

And they traditionally advertise low prices and so forth and special offers and we have not in the past been able to participate because we don't, we are not able to do that.

But working with retailers, we have tried and have been quite pleased about our success at creating a promotion that is interesting for their consumers and, therefore, interesting for them and gives consumers a reason to buy it now or at least come into their store.

And one of the key things is that retailers across the board are saying that the thing they are lacking is people coming into the store.

So these first two promotions have been very much focused on getting people merely to come into the store and try a Tempur-Pedic which, in the first one, it was a relatively simple principle that if you came in and tried a Tempur-Pedic you got a game piece.

And if you took it home you could check it on the Internet and if you won, you won a series of prizes.

And we got a heck of a lot of names through that.

And we also -- but our retailers, but a lot of people came through and came to retailers and the retailers did see some significant new footsteps that they didn't anticipate they would have got.

And as a result this next one, the one that is coming up for the next holiday, we've got even more retailers.

We got frankly more retailers -- more retailer participation than we thought we would for the first one and we are getting even more for this one.

Great.

And then Dale, I just want to make sure I understand the gross margin guidance for the second quarter.

In that, you are flat to slightly down versus Q1?

Right.

Okay.

Got it.

Thank you.

That's because of the mix of the business between the US and international.

We expect the international business as a percent of the total would be a little bit lower in the second quarter than what we have seen here recently, because kind of the comparisons on a year-over-year basis.

The international business experienced the economic slowdown later than the US business did.

So the decline was a little bit delayed relative to the US business.

So that mix is different.

The relative margin, gross margin of the businesses are different so that puts a little bit of downward pressure on the next quarter.

Thank you very much.

(Operator Instructions).

Keith Hughes with SunTrust.

Thank you.

Just back to the gross margin again.

You talked about raw material prices perhaps moving up as the year progresses.

Is that just your read on petrochemical markets?

Or are your suppliers actually telling you that that is coming?

No.

That's just our read on the market.

We saw oil bottom out down in the 30s and it's up into the low 50s.

I didn't see what it did today, but -- so oil has stabilized and if anything has moved up a little bit.

We have seen in some of the intermediary chemicals like propylene then bottom and move up a little bit like oil did.

So our anticipation is that as the year goes on, there may be a little bit of upside pressure on commodity costs from where they are at today and just as that continues to flow through the chain.

So in terms of trying to be conservative in our outlook for commodity costs, we have built into our estimates that they will increase some in the second half of the year.

Would you still, based on your estimates, still be down year over year and towards the end of the year?

Yes.

Our commodity costs peaked in November of last year.

So we will still be getting year-over-year improvement, but on our sequential basis we expect the second half of your commodity cost to be a little bit higher than the first half.

Okay.

That's all for me.

Thank you.

Brad Thomas with KeyBanc Capital Markets.

Good afternoon.

I wanted to follow up on the gross margin as well.

Dale, you've mentioned this is the first quarter since 2004 that you've had year-over-year gross margin improvements and obviously very strong quarter in terms of gross margins from year over year.

Seems like there are a lot of things that could keep working in your favor both in terms of things that you are doing as well as the environment.

How should we think about the sustainability of this if the commodity prices don't turn around and start going way up?

And if sales do start to stabilize?

I think that the gross margin improvement that we are seeing this year -- obviously last year, our gross margin erosion was worse than any year in history because the commodity costs kind of went crazy.

This year, we are seeing good gross margins expansion.

We expect that to continue through the year.

And so unless commodity costs were to go crazy again, we think that we can maintain if not continue to grow our gross profit on a go-forward basis.

As Mark said, we do have a longer term goal of getting back to about the 50% level.

We've told the story several times, but last year when oil and commodity costs were escalating significantly almost on a daily basis, we got our best scientific and engineering minds together and did a lot of brainstorming around how we could substantially improve the COGS, cost of goods structure of the business.

And they came up with a lot of ideas and plans and it's a multiyear plan, but they are implementing that.

And they are working those plans and driving costs improvement in the business and plan to continue to drive costs improvement in the business for the foreseeable future.

So we believe that we are building in -- will be building into the (inaudible) our business cost reductions and ongoing cost reductions, that will enable us to mitigate future increases in commodity costs despite -- unless they just go crazy.

Okay.

Thanks.

That is helpful and then, as we think about the price increase benefit and the factory productivity benefit, how much of the quarter would have benefited from those initiatives?

I mean, would we start to see an increase in benefit from those as we get into the second quarter?

Yes.

The factory productivity overall costs improvement initiatives that are going on within the operations group, that's something that we expect to build upon itself as the year goes on.

So that will be an escalating benefit in the business.

The price increase benefit event, that happened about midway through the first quarter, so there is a little bit of additional help there incrementally.

But then that's pretty stable for the rest of the year because at this time, anyway, we don't anticipate any additional changes in pricing.

Okay.

Great.

One follow-up with your new guidance, are you expecting a lower level of sales?

Are there additional steps that you want to take to bring your cost structure down a little bit more and the same question as far as inventory.

Do you think you are going to try and bring back down a little bit more?

From a cost point of view we are permanently focused -- we are obviously focused very closely on our cost and we have taken some costs out of both -- all three of our plants this year.

But at this moment we feel we are roughly at the right place where we need to be.

If things change, they change.

But as we stand today, as we look at it today, we deal like we are roughly at the right place.

We continue to -- before we continue to focus on all elements of our spending, we are pleased to be able to have maintained our advertising significantly this quarter.

And we intend to keep that going through the rest of the year.

But obviously we are watching everything everyday because it is such a hard -- as you know very well, the economic environment is hard to predict.

And so we are being as flexible and responsive as we can be.

Great.

Thanks so much and let me add my congratulations as well on some nice execution.

Matt McClintock with Barclays Capital.

Dale, I just want to be a little bit more clear on the $650 million breakpoint that you set for the covenants on a sales level.

When you make the statement that includes no adjustments to spending, I just want to understand what that specifically means.

Does that mean no adjustments to your existing full year spending plan, including what we would normally consider variable expenses such as advertising?

Yes.

When we say looking at our no adjustment to our spending, that's with -- basically what we do from a modeling standpoint is degradate gross profit versus what we are expecting due to lower volume.

So negative leverage there and less opportunity to achieve benefits of the cost improvement programs.

And then from an operating expense standpoint, there is a little bit of natural reduction, keeping marketing if you are advertising if you will about 9% of sales.

Some highly variable other components of operating expenses but it doesn't take into consideration measured, thought through, executed, additional cost actions that if we saw the economy take a further leg down that we would do.

We wouldn't just let things flow through on a strictly variable basis.

All right.

Great.

That's all I have.

Thanks.

Joe Altobello with Oppenheimer.

Good afternoon.

First question, I guess I'll just follow up on the advertising number.

I guess, since you mentioned it, Dale, it sounded like you said that advertising in the quarter was a little over $14 million.

Is that right?

It was right about 8%.

Okay and you had said it was going to be around 9% for the full year.

So it sounds like the first quarter was somewhat artificially low.

Well we said that we thought we would spend about 9% for the year.

It was a little bit low in the first quarter at 8%.

Very difficult environment.

And so we tried to keep a tight rein on all of our expenses.

And we do anticipate getting back to a 9% level and trying to -- as the year progresses.

But we did start the year a little bit under that.

We had always planned in fact that the first quarter was going to be relatively lower.

And we still project for the full year we are going to be in the 9% range for the Company as a whole.

Okay.

Perfect.

And then in terms of the guidance --

Another thing.

Could I just add one other thing.

Sure, sure.

The cost of advertising, particularly on television and in print, has come down quite a bit -- especially for our type of advertising.

And in fact, the number of impressions that we got have been at least as high if not higher than we had anticipated when we were projecting a higher percent of higher number of our sales.

So in fact it was a very considered decision.

We took it down quite [thoughtfully].

So, is there a chance that the advertising could actually decline the percentage of sales and you still get the same number of impressions?

It certainly has this year.

I mean, this quarter.

And it's hard to predict going forward.

For the rest of the year we predicted -- we haven't changed our assumptions about that for the rest of the year and, again, it is just so hard to know.

So we haven't projected that.

Got it.

And then secondly on the topline guidance, it sounds like the big obviously driver of the change is the macro environment and it sounds like it worsened a little bit in the first quarter from where you thought you would be three months ago.

And if that is the case, is it the US that has worsened or has it been the international market that has worsened?

And if that is not the case, if there are other drivers to that, is it something competitive that is going on?

I'll just give you one piece of color and then I'm sure Dale would answer, but the way -- and I think you are framing the question correctly, but the way we are thinking about the year is, we took the fourth quarter and said, "Let's assume that just carries on."

That was how we thought about how to plan because it was so hard to take visibility.

And we are down modestly from what we had projected in the first quarter.

And it is more down in the international than it is here relative to the Q4 run rate.

And that is the change that we've seen.

And that is what we are now using as our base as we project forward.

Okay and then lastly, this is probably more of a longer term question, but in terms of your leverage, you guys have done a good job of paying down debt and maintaining your leverage ratio.

Is there a point where maybe later this year, early next year you feel comfortable enough with your leverage ratio and where the market is where you could potentially reinstate your dividend or perhaps buy back stock?

We would love that.

Can you tell me when we are going to feel comfortable with the economy?

That's really what it comes down to, is seeing a sustained change in the environment.

We are not going to get out on a limb on this.

Our first and foremost responsibility is to protect the business.

And as Mark said in his comments, our -- at this time our primary usage of cash flow is going to be to reduce debt.

Is there a leverage ratio that you want to get to though?

Is it 2 times or 1.5 times or is it sort of a moving target?

You know, there is not a specific leverage ratio that we want to get to.

We just want to -- until we see a different environment, we want to continue expanding the amount of cushion we have.

And so we are going to be sure that we keep the business protected and as you -- I appreciate your comments that we've done a very good job of doing that and that's been a primary focus for us, making sure that we are driving cash flow, reducing the debt, maintaining cushion to our covenants.

And we have been able to expand that cushion a little bit.

And we want to continue to expand that cushion until such time as we feel different about the environment.

Okay.

Got it.

Thank you.

(Operator Instructions).

John Curti with Principal Global Investors.

Good evening.

Four questions for you.

First off, with respect to the timing of the repatriation of cash and taxes.

If you could speak to that and its potential impact on the timing and magnitude of pure debt reduction for this year, are you still planning $80 million in net debt reduction?

Yes.

Let me give a little bit of clarity on the repatriation.

From a technical standpoint, the repatriation is completed.

It is not completed from a movement of cash standpoint.

We declared $150 million dividend that has technically been completed.

To coordinate that what we got was, we took the cash on hand out of our international businesses, brought it back to the US.

That occurred in the fourth quarter.

The balance of the dividend was set up as an intercompany loan where the international business now owes the US business the money for the balance of the dividend.

They will pay that money out of their cash flow, primarily over the balance of the year.

I think going back three months ago, we said we thought that would get the cash flow all moved by some time in the first two to three quarters of the year with the national situation being a little bit weaker than we were anticipating at that time.

Now it will take pretty much the bulk of the year to pay off the intercompany loan.

Is that helpful?

Yes.

One other thing you mentioned -- tax.

In the first quarter we paid half the tax on the repatriation as a cash outflow.

The second half of the ** tax related to the repatriation will be an outflow in the second quarter.

And do you -- would you anticipate then it you are able to pay off the $80 million in debt that it would occur relatively evenly throughout the four quarters?

Or is it going to be more backend loaded or --?

We paid down $19 million in the first quarter.

So that is a quarter, basically a quarter of it.

I would expect a paydown in the second quarter probably to be a little bit lower just because of the timing on the tax payments, both domestically and internationally.

We tend to have a little bit higher cash tax impact in the second quarter, but we will see debt reduction throughout the year.

We've got about roughly about a quarter of the $80 million in the first, quarter.

And we will have a little bit less than that in the second quarter and in the balance across the third and fourth.

Okay and then with respect to your SG&A levels.

It looks as though the last three quarters you've run just slightly over $22 million on average.

Is that likely to be a good run rate for the rest of the year?

Or is that likely to come down a little bit more, as you continue to take out some extraneous expenses?

Are there anything of a one-time nature that would take it up or down?

No, I mean, the primary one-time nature within G&A has been some lumpiness around bad debt as we have experienced some bankruptcies, as we have been more conservative in our receivable policies to give protection against those bankruptcies.

So that is certainly an item that for about the last three quarters has been much higher than normal and, again, that is something that will probably continue to run a little bit higher than normal until we see a change in the environment.

But as I mentioned in my earlier comments, from a overall balance sheet health standpoint our receivables are in one of the best -- basically, the best condition they have ever been in because we have been so diligent about it.

So we will, by and large, we've taken the cuts that we think we need to take.

Yes, we are -- every day we are challenging every day that we are questioning expenses, but there's not another big cut to come unless circumstances warrant it.

Then, lastly, could you talk a little bit about what's going on with the number of doors, both domestically and internationally, and what you kind of see or what you're planning for, for the balance of the year?

In the first quarter doors are approximately flat year on -- quarter on quarter.

They were up last year, but this first quarter they were approximately flat.

Interestingly though, both in the US and overseas, slots per door are up somewhat.

And in the quarter for it to measure to be up is a good thing.

And I'm -- I think increasingly that is important, particularly in the US, given the fact that we are very fully -- we're not fully, but we are largely distributed, largely available pretty much everywhere.

I think increasingly we are going to be putting our focus on sales per door rather than number of doors.

But anyway, the number of doors is about flat for the first quarter and the number of slots per door is up slightly both in the US and overseas.

Yes.

Let me just add that we typically talk about doors in terms of our furniture and bedding stores; and then we separately count doors in what we have called specialty which tends to be the back stores and pillow only stores and we have had department stores in that specialty category.

Because department stores was an experiment.

We are and have made the decision to back off on the department store channel.

Not entirely, but we are pulling back in terms of the number of doors we are in, in department stores.

And that is a conscious decision we have made to try to get it down to really only bigger stores that have a better, much broader furniture business as opposed to being in all of the little stores -- all the little department stores out there that may have a very small furniture or bedding department.

And those just aren't working for us.

And so just to give the exact number, that number is now about 140 department stores in the US, down from about 500.

500?

Yes.

And you mentioned you are getting more slots per door.

Are you seeing some of your competitors having to give up slots because of financial difficulties, or products that are not meeting what consumers want, and you are offering -- you've got a little bit better financial staying power and also introducing some new products, able to take more slots?

I think that the key driver of it is that, in aggregate, it is a measure of the retailers' belief in the proportion of customers that they can meet the needs over these beds.

So what it reflects is the fact that we are able to appeal to a wider range of the bed buyers for the retailers.

And, obviously, we are in the more expensive range and from a retailer point of view given the straight choice, they would rather sell one of our beds than another just because we are on average going to be higher priced and, therefore, a greater dollar margin for them.

So it is ironic but in this very tough environment, with an environment where people are finding it hard, the [phrase] that chooses is the low footsteps.

Not enough people coming into the stores.

When you have somebody come into the stores you can find the bed that appeals to them which is a Tempur-Pedic.

Obviously it is good for the consumer but it is good for the retailer.

And given the breadth of different beds that we offer.

it's in their interest to have more and increasingly that is what we are seeing that they were recognizing.

Okay and in terms of the few SKUs that really compete directly against you in one form or another of a product, are the competitors being forced because of their own financial difficulties or for whatever other reasons to be a little less promotional?

A little more rational in their promotional practices than pricing?

Or are they getting a little more desperate?

You know we have seen -- if you are talking about knockoffs --

Right.

Basically that.

What we have seen from the knockoff side of the business is a little bit of retrenching.

Some of the knockoffs losing floor space.

Some of the retailers focusing on us and removing some of the other brands.

This goes -- that are on the floor.

It's a mixed bag out there.

We have seen some very promotional activity.

And here I'm talking beyond (inaudible).

I'm talking mattresses in general.

We have seen some curtailing of certain types of promotional activity, but then at the same time we have seen some significant promotional activity of the cutting beds' prices in half.

That it's not at a level that is something that we feel impacts us, but you can see some significant promotional activity and you see general a focus more around the low end of the market than the high end of the market.

I think one of the things that we have learned is that the -- and we've said it for some time, but it is we really now are very compelled about this.

That for those -- there are people there's a very large -- and it's for us at least a very pleasingly large number of people -- know of and are aware of the benefits of the Tempur-Pedic and aspire to have one?

And they are not buying one right now because quite frankly they are nervous about the environment.

This is not the sort of person who is going to say, "Well, let me see if I can save $200 or $300 and buy a knockoff."

It is not a logical step.

You don't say well I was going to buy that, but now I'm going to -- you are much more sensible to wait.

I think what is happening in the retailer world there's this bifurcation.

You are having what sale is describes which people advertising beds in order to get the steps in the store literally $299 and $399 and half-price sales and so forth.

And realizing that for everybody who comes in and pays $399 on a bed, they are not -- it just doesn't pay enough to keep their doors open.

So they need people to be buying beds at the higher prices.

So there's sort of this split between the top and the bottom.

And if you are in the middle with an undifferentiated product which doesn't have a name, it is a hard place to compete.

Okay.

Thank you very much.

Joel Havard with Hilliard Lyons.

Good evening.

Dale, I thought I was the only one who would bother you on details on the debt side, but the repatriation loan, is that being treated as an interest income offset to your domestic debt interest expense?

No, because it is intercompany.

The loan between the US and the international to complete the repatriation and any interest income, there is an interest rate associated with it.

However that is all intercompany and in a consolidation it all gets eliminated.

Is it an income statement issue at all or is that just --?

No.

Okay.

All right.

To that end then, you had said if I caught it right, interest expense for '09 you had penciled in at about $19 million?

Correct.

Okay now but you are -- at least I am presuming you are going to pay down a little bit more debt from where you were at Q1 end?

Absolutely.

Okay.

All right.

Well as I think about that, are you allowing for higher interest expense in the second half of the year?

That's kind of built into our model.

You know, we had roughly about $5 million of interest expense in the first quarter.

So if you analyze that, that is 20.

We will be reducing debt as the year progresses which would create some downward pressure or opportunity there on interest expense.

We do anticipate a little bit of increase in interest rate.

However our interest -- $300 million of our debt is fixed.

So any interest in rates only affects us on the margin there.

That's all I had.

Congratulations on the quarter.

Joan Storms.

Wedbush.

Just a quick question on some of the declines in the other smaller channels like healthcare and third-party.

Any sort of explanation there particularly on the healthcare side of the business?

Healthcare, I mean healthcare is sort of -- healthcare is down and as you know there is a lot of retrenchment in healthcare right now.

Everybody is tightening their belts and it's true here and it's true internationally.

And so there -- and if you look at it percentage wise it is a decline that is sort of comparable to the rest of the business decline.

It is down, but it's not differentiatedly down from our overall business.

And obviously the root cause is not consumer spending, but government spending largely, but it is down.

In the case of the third party, particularly -- I mean across-the-board there are a couple of countries in our third-party international business which have been decimated by some of the economic things going on.

So where we have seen a material loss of business just because they are not -- as countries, they are not in business anymore.

But there's again, overall, across the board, countries where -- in aggregate the third-party sales are down.

In America or in domestic, I mean, the largest business is with Canada.

Canada is down.

Their business too, their sales to their customers is down.

It is sort of down we think roughly the same as us, maybe a little less bad than it is south of the border, but they have been taking some pretty tough actions in terms of making their costs straight.

They have been really lowering their inventories.

So we think in the long -- in the fullness of the year or in the next three quarters of the year that's going to go back to more like a normal rate.

That's helpful.

Then I was wondering -- just to follow up on John's question about doors.

So should we expect for the year then, going forward essentially flat?

I think you had commented on the quarter.

We have gotten out of the practice of trying to give guidance on doors.

Yes, I think the safe thing is to say it will be roughly flat.

And then if you are going to be -- a tax rate for Q -- you got the annual at 34.5 but the Q2 if you're going to be paying the rest of the tax there, will that be similar to the Q1 tax rate?

No that doesn't affect the tax rate.

That just affects cash.

Basically the balance of the year the quarterly tax rate will be less than 34.5 to get the full year back to 34.5.

The tax law change, essentially what that was, was it caused us to lose some NOLs.

Okay.

And then, lastly, I was wondering if you commented on the test with that new little store within a store format that we saw at the Vegas show?

That's the Experience Center?

Yes.

That is doing very well and we are accelerating the rollout of that.

We had -- when we were in Vegas we said that we were going to roll out 50 in the first quarter and depending on how well that went we would perhaps roll out more.

We have already committed to 100.

And we anticipate that that will continue to go.

And where it is, it is still doing very well.

We are very pleased with it.

Good.

Okay.

Thank you.

Keith Hughes with SunTrust.

My question has been answered.

Thank you.

All right then.

At this time, I would like to turn the call back over to management for any additional or closing comments.

Thank you.

So, thanks everybody and we look forward to talking to you again -- with you again in July when we will review the second quarter.

Thanks for joining us today.

Bye-bye.

Again that does conclude today's conference call.

Thank you for your participation and you may disconnect at this time.