Tempur Sealy International Inc (TPX) 2009 Q3 法說會逐字稿

Welcome to today's Tempur-Pedic third quarter 2009 earnings call.

This call is being recorded.

Now for opening remarks and introductions, I'd like to turn the conference over to Barry Hytinen.

Thank you Anthony and 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 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.

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 SEC filings, including the Company's annual report on Form 10-K under the headings special note regarding forward-looking statement's and risk factors.

Any forward-looking statements 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 Tempur-Pedic.

com and filed with the SEC.

I'd also like to remind investors we will host investor presentation next Thursday, October 22nd beginning at 10:30 a.m.

eastern time.

A live webcast of the event will be available on our website.

Now with that introduction it is my pleasure to call the call over to Mark.

Good evening, everybody, thanks for joining us tonight.

Today I'll provide a brief overview of our performance in the third quarter and then we'll give you update on our progress and key strategic initiatives.

Dale will provide detailed review of the quarterly results and our updated guidance.

During the third quarter we continued our focus on maximizing sales, improving margins and generating cash flow in an uncertain environment.

While sales are still down 11% from last year, again this quarter they improved sequentially.

They were up 21% in the third quarter compared to the second quarter.

Throughout the economic downturn we have not seen normal industry seasonality.

But in the third quarter we do attribute some of our improvement to a seasonal lift in order trends.

Our productivity projects helped increased gross margins by 590 basis points to 47.6%.

Lower commodity costs and pricing also a big factor in the improvement.

Operating margin at 19% was also up, an improvement of 200 basis points to last year and 330 basis points to last quarter.

Finally our focus on cash continued to drive exceptional results.

We lowered debt $54 million during the quarter.

Our year-to-date debt reduction is now $104 million which exceeds the high end of our full-year target.

Our funded debt to EBITDA ratio stands below two times for the first time since the first half of 2007.

Dale will provide more detail on the financials in a moment, so I'll focus the commentary on progress of 2009 strategic initiatives.

The first initiative throughout the year -- excuse me a minute -- has been to improve gross margins and as mentioned earlier we made great progress here.

Improved productivity and utilization rates throughout our operations are having a big impact.

Sourcing initiatives continue to drive lower material costs and pricing actions taken earlier in the year continue to be a benefit.

I'd like to take a moment right now to thank the many employees throughout our organization who have been responsible for driving our strong results in this area.

Our second initiative driving improved retail effectiveness and here, too, we're making good progress.

We're continuing promotional events we described in previous calls.

In the fourth quarter, we're executing several retail promotions including one focused on our ergo adjustable base and another one on pillows.

Clearly one of the most important ways we improved effectiveness with our retailers is to drive consumers to their stores.

In this quarter, we launched new advertising campaign called "Ask Me." So far we have been very happy with the response that it has garnered.

The "Ask Me" campaign leverages the power of our passionate user advocates and the extremely positive word of mouth that has always been a differentiator for our brand.

The campaign encourages people to use social media to learn more about Tempur-Pedic.

We're also working with retailers to help them leverage the "Ask Me" campaign into their own marketing efforts.

This quarter, we increased our investment in marketing spending and we intend to continue to grow our investment in the years and months ahead.

Our third initiative is to broaden the range of products that we offer.

This quarter at the Las Vegas bedding show, we launched the TEMPUR- Cloud line of beds, one of the most exciting launches in our history.

For some consumers our existing mattress offerings just feel too firm.

To address this we conducted extensive consumer research and product testing which led to the creation of a totally new formula, TEMPUR-ES.

This soft formula is used on the top of our TEMPUR- Cloud mattress line.

This line of beds features the support and longevity of a traditional Tempur-Pedic bed with the cloud-like support -- sorry, with the cloud-like softness of a pillow-top bed.

The first in the line, the TEMPUR- Cloud Supreme, is now shipping.

The entry level product, the TEMPUR-Cloud, will start shipping in the first quarter and a higher end model is planned for late 2010.

At the same time we outlined our new product segmentation.

We grouped our product into three collections, the TEMPUR collection, the TEMPUR-HD collection and the new TEMPUR- Cloud collection.

Each collection has multiple models with a range of price points differentiated by their functionality and specifications.

We believe this new segmentation makes differences between our products easier to understand for consumers and thus makes the selling process easier for our retailers.

Our fourth initiative is to stabilize and ultimately grow our direct channel.

This quarter we're quite pleased with our results.

For the second quarter in a row sales are up sequentially, and for the first time in a very long time our direct business was up year-on-year.

Our US direct channel was up 16% in the quarter.

As I mentioned last quarter, we've seen a significant improvement in internet generated leads and eCommerce sales.

We're pleased with lead conversion and we plan to build on this progress.

Our website is in the process of being completely revamped and we're implementing a series of initiatives across our direct business.

Fifth and lastly is focus on improving household penetration in our international markets.

Our new mattress line, the Sensation, was launched earlier this year and has been very well received.

The Sensation features dynamic support base which provides both unique feel and functionality.

Building on the success of the first Sensation, we're in the process of rolling out the second in that line at an entry level premium price point.

We've had a good quarter in what continues to be a challenging economic period.

While we're not prepared to call a recovery in the economy, our third quarter results reflect a degree of stability in the market.

When the economy does recover, and more consumers open their wallets and purses again, I believe the steps that we have taken during 2009, will position the Company well to capitalize on its substantial growth potential.

With that I'll now hand over to Dale.

Thanks, Mark.

I'll focus my commentary on the financials and our updated 2009 guidance.

As we look at sales, let's begin with an overview.

In total net sales were $224 million, decline of 11% over the same period last year.

Foreign exchange rates continue to be unfavorable during the quarter.

On a constant currency basis net sales declined 10%.

However, the negative effect of currency on revenue has eased substantially from what we experienced in the first half of the year.

And we expected to be neutral to slightly positive in the fourth quarter.

Our revenue improved sequentially 21% following a 5% sequential improvement in the second quarter.

We believe our US business troughed in the first quarter of this year, and the international business troughed in the second quarter.

As we look forward, we anticipate the fourth quarter will be down slightly on a sequential basis, reflecting normal seasonality, however, we expect sales will be up on a year-over-year basis.

Now, let's turn to the details of our third quarter performance.

Domestic sales were down 12% while international sales were down 10% on a constant currency basis our international sales declined 7%.

By channel in domestic retail, net sales were $130 million, a decline of 12%, yet up 23% on a sequential basis.

As Mark mentioned our domestic direct channel was up 16%.

Internationally, retail sales were down 10% to $61 million.

On a constant currency basis, international retail sales were down 7%.

On a product basis, mattresses were down 14% driven by a 15% decline in units.

Domestic mattress sales declined 15% on an 18% decline in units.

We are pleased with our improved average selling price, especially since our new entry priced AdvantageBed has been performing well.

And the international segment mattress sales declined 13% on a 9% unit decline.

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

On a constant currency basis international mattress sales declined 9%.

In total, pillows were down 10% driven by an 11% decline in units.

Domestic pillow sales declined 9% on a 10% unit decline.

International pillow sales were down 10% on a 12% decline in volume.

Gross margin for the quarter was 47.6%, up 590 basis points year-on-year and 100 basis points sequentially.

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

First, our focus on driving manufacturing productivity is having a positive impact.

Next, commodity costs continue to be down versus last year.

Although they did rise from the levels we were experiencing in the first half.

Lastly, pricing actions taken early in the year continue to be a benefit.

These factors were partially offset by fixed cost deleverage as production volumes were down versus last year.

We increased our commitment to drive brand new awareness with $19 million spent on advertising, including 9% of sales spent in the domestic segment.

Our G&A expense was up compared to last year and last quarter.

In the third quarter, we incurred extra expense to catch up our bonus pool for the first nine months as a result of better than expected performance in outlook.

In addition legal expenses were slightly higher.

In the fourth quarter we expect G&A expenses to be down sequentially.

Interest expense was $4 million, down $2 million year-on-year reflecting lower debt levels.

Our third quarter tax rate was 32.7%, consistent with our guidance on earlier calls.

Net income was $25.7 million, up from last year.

Given our improved profitability, EPS was up $0.02 from last year to $0.34.

Turning to the balance sheet.

We continue to improve our financial flexibility.

Our accounts receivable balance was up sequentially with higher sales, though we lowered DSOs by two days from the second quarter.

Our accounts receivable continue to be in very good shape despite the economic environment.

Inventories were down $3 million sequentially.

We feel our inventories are too low at the end of the quarter given the demand levels we have been experiencing coupled with the new product launches Mark discussed.

We have modestly increased our production plans to increase supply and improve delivery to our customers.

We generated $55 million of operating cash flow.

Capital expenditures were $4.2 million.

We reduced debt $54 million to $315 million.

We have reduced $104 million this year, and $204 million over the past 12 months.

Our funded debt to EBITDA ratio was 1.96 times.

Down sharply from last quarter, and well below our debt covenant of three times.

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

I'd like to start by echoing a point Mark made earlier.

While we have experienced improvement in our sales trends, sales visibility is still low and we certainly do not have evidence to call an economic recovery.

We continue to use the methodology for guidance that we have been using since the downturn began.

We will use our recent sales volumes and extrapolate based on those results.

Based on that methodology, the Company is increasing its sales and EPS guidance for full year 2009.

We currently expect new sales to range from $790 million to $805 million.

With this outlook, we are forecasting the normal seasonal pattern, traditionally the fourth quarter is slightly lower than the third quarter.

And we currently expect EPS to range from $1 to $1.05 per diluted share.

We anticipate interest expense for the full year to be $17.5 million, and we are now using a share count of 77 million for the fourth quarter and 76.1 million for the full year.

The increase is principally related to more stock options being in the money given the higher stock price.

Regarding our tax rate, based on our current expectations, we anticipate the full year tax rate to be slightly below 34%.

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) We'll take our first question from Mark Rupe from Longbow Research.

Great quarter.

On the gross margin, Dale can you provide any more color on the composition of the three major buckets for the improvement?

Was it one-third, one-third, one-third?

No, no, basically what we've seen as the year's gone on is a little more shift towards productivity.

I think last quarter I said we had thought that the composition was about 40-40-20.

Productivity, chemicals and the price increase we took earlier in the year.

At this stage we would tend to gauge it more like 45% related to productivity, 40% related to chemicals, and 15% related to pricing.

Okay.

And then as we look forward, the puts and takes obviously some of these will continue to play a role going forward.

I would assume chemicals maybe not have same kind of benefit but then also at the inventory production coming back up, is it similar composition coming forward, do you think?

No it will probably shift a little bit going into this quarter.

Last year in the fourth quarter it was when we started to see chemicals coming down, or actually they kind of peaked mid-quarter and then they started dropping, and were dropping fairly dramatically once they turned.

As we look at the -- into the year through the fourth quarter, we expect productivity to continue to be a prime driver.

Pricing that we took in the first quarter of this year, will continue to help, commodities will be a little bit less of a help, not dramatically less, but we do expect and have and received notifications of some further price increasing commodities.

Right.

And the other thing to take into consideration for the fourth quarter is that we do expect to get a little bit of volume leverage on a year-over-year basis.

Right.

But at the same time we are going to be shipping a lot of floor models on the Cloud Supreme, which we ship at a pretty good discount, so that will put some pressure on gross margins in the fourth quarter.

Okay.

And then on the -- sales performance, obviously came in better than people expected.

In your commentary you said some of it was due to seasonality.

Was there anything else that was going on?

Obviously I know you're working with the retailers pretty hard but was that pretty much the gist of it?

Traditionally the third quarter is the best quarter of the year and we did see that.

The seasonality didn't look exactly like normal seasonality as we came through the quarter but we continued our promotions, we continued what we've been doing for the first two quarters of the year, so nothing substantive change other than that.

Okay.

And then just lastly on the pillow business, obviously the fourth quarter always historically had been a stronger business and obviously last year was weaker.

You mentioned there was fourth quarter retail promotions.

Are you doing anything different strategically in the pillow business as we head into the fourth quarter?

The promotion is the new thing.

We will be putting the focus of it throughout all of our channels, and you will -- the pillows is a very important business for us and we will continue to put a strategic focus on it.

There is nothing fundamental that you don't know that 's going to be announced in the next three months.

Thanks, good job.

Our next question comes from Brad Thomas with KeyBanc Capital Markets.

Good afternoon and let me add my congratulations as well on a great quarter.

Thanks, Brad.

Taking a look at your guidance, my math in terms of the sales outlook in the fourth quarter is that you're looking for 8% to 15% increase in sales.

Could you just talk a little bit about the drivers of that, and maybe what kind of benefit we could see from the Cloud rollout, and what you're expecting from the different channels, just anymore color behind it, what drives that forecast?

Sure.

From 3Q to 4Q traditionally in the US you see a drop-off in mattress business.

And that historically been the seasonal nature of this business.

We haven't seen normal seasonality for a little bit, but since we feel like we saw some return to normal seasonality in third quarter, we are currently expecting that we will see, a little bit of drop in mattress business in the US in the fourth quarter.

Pillows should be a little bit better based on historical patterns.

The Cloud is starting to ship.

However most of what we're shipping-- most of what we're going to be shipping our expectation at this stage in this quarter is floor models.

Floor models are generally pretty deeply discounted so they are not going to be a big driver of top line.

Internationally the thing that has historically provided some counterbalance from our business is seasonality versus the US industry seasonality business is, is that the fourth quarter traditionally has been seasonally been the strongest quarter internationally.

Again, at this stage we're not really counting on much seasonality out of the international business this quarter, the international markets.

They have been a little bit out of phase with the US market in terms of the downturn in terms of when they felt the impact.

We've seen now a couple of quarters of sequential growth domestically, the international business looks like it may have turned a little bit but not enough that we would have expected to see normal seasonality.

Does that help?

Okay.

Great.

I was wondering if you would just talk a little bit more about the composition of your sales.

You have really seen some results, great improvement in that direct business.

What is driving that improvement, and then as we think about the gross margin impact from that, how much of a tailwind was that on your gross profit this quarter?

Well, the composition of the sales, as I said, this is the first quarter in a long while that our actual sales is direct have increased year-on-year.

But still the proportion that increased didn't have a material effect on its own--that was not enough to make a difference to the gross margin.

Talking specifically, though, about why we're seeing a growth in D.R.

, we've seen all this year that that has been a focus for us, because we really believe that there is potential there and one of the things that we've done is put particular emphasis on growing leads so that--growing leads by the way that we structure and invest in our advertising, the way that we use the web to generate leads.

Interesting one of the things that we've learned about leads is that for every -- every lead that turns into a sale, three or four of them, go through a retail -- through a retailer.

So interestingly we increasingly view our marketing as being one whole thing.

We don't really -- we try to think of them altogether because almost all consumers who buy at retail have checked on line, so there is a great deal of integration of the channels.

So that hasn't really had a big effect on our gross margin.

The thing that is driving our gross margins, again, one other thing about our gross margin business is that we're pleased that our average selling price is slightly up this year, even though we put a big emphasis on the AdvantageBed.

So we're seeing what we've seen throughout the and tire downturn, while the absolute level of sales are down, the proportion of sales at each level at each price point is roughly the same.

Where we've seen as Dale said where we've been able to see the improvement is to some extent commodities but also significant improvements in

Okay.

Great.

Thanks again, look forward to seeing everyone next week.

Thanks.

(Operator Instructions) We'll hear from Keith Hughes from SunTrust.

Thank you.

Just building on your comment, Dale, on raw material price hikes will you be looking at retail prices and potentially raising them again in the fourth quarter or early 2010?

Keith, retail pricing is something that we look at on a routine basis, but we are not -- would not talk about that or comment on that prior to, A, making a decision, or, B, communicating that decision to retailers.

So at this stage certainly it is something that we look at and do from time to time, and on certain parts of our line, but not something that we would plan or talk about right now.

Okay.

With the debt to EBITDA under two times, is that a number that you would like to stay at longer-term?

Under two?

Yes, I mean, is that a number your comfortable longer term or will you continue to pay down debt?

We said for this year that we would continue to pay down debt, balances this year.

And that's what we're going to do.

We, from a long-term standpoint, yes, we want to be under two.

I think that most people in today's world versus two, three years ago world, will try to operate a little bit more conservative capital structure.

I think that we will generally try to operate on a little more conservative capital structure, but we haven't changed our strategic intent at this stage around where cash flow goes, and so it's going to continue to go to pay down debt.

Okay.

Good job.

Thanks a lot, guys.

Our next question comes from Budd Bugatch with Raymond James.

Good afternoon, everyone.

Hey, Budd.

Just a strategic question asking you to put on kind of your crystal ball, if you would, think about it and look into your crystal ball -- not put it on.

I was impressed with the segmentation of product between the ES and the HD and TEMPUR that we saw in Vegas and commend you on that.

Can you quantify or maybe talk in some color as to the size of each of those markets and how you think they'll play out over time relative to one another, and how they'll grow?

Well, I mean, I think the -- that is a crystal ball question, but I will say this, that I think that the advantage of the segmentation and the importance of the segmentation for us is that it makes it easier for us to explain quickly to a consumer what the difference between the beds are.

And that is useful for the consumer and also useful for the person selling it.

At the same time as dividing it into these three groups, obviously we introduced the new Cloud bed.

The Cloud bed has a softer initial feel.

Significant portion of the population, something of the order of 40-plus percent, who prefer a softer feeling bed.

One could say that the target market for the soft bed is the 40%.

Now, the truth is that the HD bed appeals to some proportion of the soft bed users, too.

So as you're standing here right now, I think as good a guess as any is a third, a third, a third, in terms of where we'll ultimately be for those three collections.

What I would also say is we see them as -- within each collection we see opportunities for adding both adding products but also evolving some of the product line we have within the collection.

What we have now is by no means what we will ultimately have.

Okay.

As a couple of just a couple of other questions, the inventory in days cost of sales outstanding really did drop dramatically, and as Dale said you aren't happy with the service levels, and I suspect your customers and retailers probably are not all that happy with it either as it gets down that level.

What is your goal for year-end inventory, in days cost of sales outstanding or dollars?

What do you see that to be?

I'll ask Dale to answer the specifics of that but I think the point that you're making about inventory being below where we want it to be is right.

Frankly in this last quarter we had glitches with our customers, which we're not happy about and it is a big area of focus.

To some extent it is a function of the fact that it is incredibly hard to predict volumes in this environment.

Everybody knows that.

It is just very hard.

That is not an excuse and that is something that we're addressing.

We're pleased that our inventory is low and we believe in the long one we'll get inventories that low but right now our systems are not good enough for that-- we're going to need some increase in inventory going forward.

I don't know what the exact plan is for the end of the year.

But at the end of the second quarter you may recall when asked a similar question, or I made a similar statement, that our inventories are getting a little low and I thought in the third quarter we might increase inventories in the mid to high single digits, demand exceeded our expectations at that time.

Which is a good thing.

But that did lead to service issues during the quarter.

So I would say, again at this stage, that our expectation for this quarter is that combination of trying to beef up supply as well as be generating sufficient amount of stock on the new products that we've launched, the Cloud Supreme specifically, that is starting to ship now.

We would look for inventories to be up in the area of roughly $10 million or so.

So somewhere in the area of about $58 million, because last year inventory ended at what $60 million or about 51 days of sales, right?

Right about $60 million.

Correct.

And 51 days cost of sales.

Okay.

We can do those numbers.

You also said in terms of gross margin that there was some fixed cost deleverage and when you gave your percentages to Mark, you went 45, 40 -- you went, I think, to -- kept to 100%.

What was the size of the fixed cost deleverage to gross margin?

I don't have that in front of me but volumes were down about 15% on a year-over-year basis with the -- and that's unit volumes on mattresses, with fixed costs in our COGS being in the neighborhood of 20%, that would indicate you're looking at in the neighborhood of--you can run the math on that.

But what we've talked about in terms of the percentage was these were the good guys, and they -- I gave you 100% but it actually adds up to each of these pieces individually add to more than 100%, because you do have the deleverage that was still occurring.

Do you think you'll still have deleverage in the fourth quarter if you're attempting to build inventory?

No, I believe that in the fourth quarter we will actually begin to see some leverage in the factories, because the -- we expect revenues to be up in the fourth quarter on a year-over-year basis, and we expect to be building some extra inventory, where last year revenues were down, and we were dropping inventories.

So that--

Two other quick questions in relation to what Keith asked you about, is your adjusted debt to -- or debt to adjusted EBITDA goes down.

Are there any priorities for cash that are changing, and as you are looking in that crystal ball going forward what kind of priorities for cash might you have next year?

It is a crystal ball and our priorities will change.

When we started this year, our big priority was to make sure that we were safe with our covenants and we have remained so.

And we're going to end this year obviously comfortably but obviously comfortably below two and we are going to revisit -- we will I'm sure revisit what our objectives are and we'll probably talk about that in the first quarter call.

But for right now, for the rest of this year, we plan to use cash flow to pay down debt.

What we'll do next year we'll talk about in January.

And will you be talking about maybe guidance for 2009 at the Analysts Day or now if you would like?

2010 you mean?

2010, pardon me, yes.

No, we're not going to talk about guidance at the analysts meeting next week.

From a framing standpoint, if you look at what we have tried to do from a guidance standpoint, and we are not giving 2010 guidance now, but if you want to frame 2010 based on the convention or methodology that we've been using and take wither expectations for the fourth quarter or more reasonably take expectations for the second half, and roll that forward for the next year, that would give you-- given our current guidance is $790 million to $805 million, that implies the second half of $448 million to $443 million.

If you roll that forward into the next year that would give you a ballpark in the neighborhood of 8% to 10% top line increase.

Just using the current methodology.

Okay.

And that methodology you're comfortable to use going forward?

We're comfortable with it based upon what we've seen so far and it's worked fairly well so far.

And obviously we did a little bit better in the third quarter than that methodology indicated, however, until more time goes by and we see some more market data we'll continue to tweak.

But that is the methodology we've been trying to do.

Thank you very much.

Excellent execution Mark, Dale and Barry.

The next question is from John Baugh with Stifel Nicolaus.

Thank you and my congratulations as well.

Discuss the international.

I am not as close to that side of the business.

Is sensations driving that, are you doing promotions over there?

Did you increase advertising?

Just give us some color on the international side.

It turned quicker than I thought it would.

The international -- first of all, as you well know, international is hardly homogeneous.

There is much difference in parts -- there are countries in Europe, for example, Spain, which I'm sure you're reading about the 20% unemployment there which is performing differently than other countries.

So you have to be careful of it.

But the truth is, as Dale said, it went into the downturn a little later than the US did and it seems to be coming out a little slower -- not coming out, stabilizing a little slower.

But having said that, the activities in -- in international have included all the things we talked about in the US.

There have been promotions, which have been quite successful.

They celebrated the fifteenth year of Tempur-Pedic and had a promotion in many countries associated with that which worked quite nicely.

The Sensation bed has been a very successful launch.

It's one of the more successful launches in the history of the Company, but certainly of the international business as it's been currently configured.

And then there has been investment in advertising and suddenly in some of the countries in Europe it has been quite effective.

So the same things we have been doing in the US have been done in international.

The only thing you have to bear in mind though is that you -- that the we don't get down to this granular level, but the impacts in some of the European countries are quite different to other European countries and Asia is quite different to Europe.

There are pockets of growth or pockets of better performance, I should say, pockets of earlier signs of stability, both in Asia and in Europe, but there are still weak places.

And then I think you slipped in there marketing spending was going up in the US in the months or quarters ahead.

Did I hear that right?

And could you put a little more color behind that?

Yes, you did hear it right, and we are going to continue to -- throughout the downturn we've continued to invest in advertising, we will continue to do so.

But this new advertising campaign that we've just launched that has been very well tested, very well received, we intend to invest behind it.

And we feel like this is a time when -- when the -- it is justified to do so, and so now is the right time to start to build the groundwork, assuming that we are starting to stabilize.

So, Mark, that means your ad both domestic and international will be up?

I recall you were pulling it back a little bit the early part of this year.

We've -- Dale will give you the specifics.

We've said in more than once quite frequently what we say we shoot for around 9% as a total target.

We've been a little bit below that.

We intend to be approximately at that going forward.

So that's the number that we feel is appropriate for us.

And it will obviously grow if if it goes up or down with sales.

But we've been a little cautious on it earlier in the year.

We feel like in this fourth quarter is a time that we should -- we are planning right now to be spending it on normal run rate.

I would just add, John, in one of my comments is that we did spend in the US at 9% in the third quarter, so that was up from a spend rate in the first half of the year we were spending in the low 8s, so we did tweak it up.

And international continues to--since it's a little bit behind the US, it is still a little bit behind the US in terms of spending as a percent of revenue.

But as we get into the next year, we will see ad rates, our media spend as a percent of revenue tweak back up towards the 9% level that we have been expecting, and we may spend a little bit more than that in the US here in the next couple quarters given the new "Ask Me" campaign and the planned advertising around the Cloud product line that we plan to do in the first quarter.

Okay.

And then, lastly, I heard a comment on APU, was that up sequentially, up year-over-year, and would that be up without a price increase, or you're including the price increase?

It's roughly the same as the price increase.

Slightly higher than the price increase.

The price increase is equated to a little over 3% across the business.

ASP was up about 3.9%, so you've got a little bit -- so you've got the price increase, plus a little bit of mix, which actually surprised us a little bit because one of the products that's doing very well is the Advantage, which is our lowest priced bed.

It is new to the portfolio this year, and has performed very well.

But we are seeing some (inaudible) to ASP beyond the pure price increase.

That is year-over-year, right, Dale?

Yes.

Thank you.

(Operator Instructions) Our next question is from Matt McClintoch with Barclays Capital.

Good evening, everyone.

Dale, just to start off , one quick question, I think you've done a good job outlining all of the tailwinds for gross margin for the upcoming quarters but I wanted to get your thoughts on the -- on the inventory and the inventory levels and should we be looking for any headwinds for ramping up productions, such as I don't know, speeding up raw material deliveries, or anything like that, similar to the inventory shortage you had back in

No, because we started ramping things in the third quarter.

The business performed--as the business performance was going, we were trying to ramp production, and we feel like while we had a few spotty issues, it wasn't big across the board issues like we had in 2007.

It was more spotty.

We've felt like at the -- by the end of the quarter, or certainly by now here early in the fourth quarter, we've got that little bit better in terms of customer service levels, et cetera.

And so at this stage, we do expect to increase inventories in the neighborhood of $10 million, quarter to quarter and we feel like we need to do that with business improving a little bit, as well as just putting stock in our own warehouses for the Cloud so we can support it -- support the retailers with it.

And so we will see production continuing to ramp some, and we feel like we're in pretty good shape with our suppliers right now.

Great.

Thanks a lot and I look forward to seeing everyone next week.

Thanks, Matt.

Our next question comes Henry Cappelen from Oppenheimer.

Great.

Thank you for taking my questions.

The first question I have, I guess, is about the top line guidance for the year as someone mentioned earlier, it implies 8% to 16% growth -- 8% to 16% growth in the fourth quarter.

I wanted to know if that was indicative of any improvement in the -- in the sales by quarter in the third quarter?

Is that a new run rate that you're seeing?

Are you seeing an improvement there?

Primarily it's a -- it's turning positive because from a comparison standpoint, we're now comping against a financial crisis.

That occurred at this time last year, late September, after the--couple of key bankruptcies at this time last year, everybody thought the entire global financial system was melting down.

It almost did.

But so business took a dramatic downturn, not just for us but any consumer products company, this time last year.

We have much easier comps, and what we were taking from a volume standpoint in the third quarter, that just ended, carrying that forward into the fourth quarter, and then seasonally adjusting it.

Okay.

So that's the approach that we're taking.

Okay.

Does that help?

Yes.

I guess the other question was about if you could just talk about utilization rates that your -- at your facilities and where they were in the third quarter and where you see them in the fourth quarter, even beyond, considering you're thinking about ramping up inventories, I want to get the sense of what kind of leverage we might be able to expect.

Our factories have been running at about one-third of capacity utilization.

It's not going to be materially different in the fourth quarter, even though we're adding some inventory.

Okay.

Great.

And then just I guess the last question is, I wanted to ask you about the market share for not only Tempur-Pedic, but, other competitors in the specialty channel, I wanted to see if you were still gaining share and if the differential is still growing and maybe what percentage there?

We have--we have a very small share of the total market, and it's one of the reasons that we believe we have good potential for growth.

But in the specialty market we think over this year we've probably gained share just we don't have -- the data is that we don't have the data to validate that, we think so.

And what we looked at from the year as a whole going forward through the year, effectively quarter-by-quarter we believe our share has increased sequentially.

But remember what Dale just said, which was in the fourth quarter of last year there was a downturn in the business and particularly of the specialty and premium products that are the ones we compete with.

So we think it has been getting better all year, but it started from a low point.

Okay.

Thank you.

We'll hear next from Tony Gikas with Piper Jaffray.

Good afternoon, guys, couple of questions, can you talk a little bit about the SKU plan by the three new segments maybe for the next year and maybe the impact of price due to mix?

Second question, maybe just a quick update on retail door count and expectations.

And third question, do you guys have a better feel for the correlation with the housing market, how ever limited that is, have you learned anything in the last six to 12 months in that regard?

Well, I'll take a crack at the SKUs and Dale will do the doors and then on housing we'll both take a whack.

On the SKUs, the best way to think about this, first of all, what we've done with these new groups, these new collections, essentially grouped the first two groups, the TEMPUR and TEMPUR- HD were a grouping of exiting products and the Cloud products was the addition of three new products, two that we showed in Vegas and one that we've said is going to come next year.

As a new collection.

And what we see happening is over time is that we will have a range of prices and functionalities within all three of those ranges, and right now we have approximately 12 SKUs, depending on how you count it.

But it is around 12.

And we'll possibly end up with 12 to 15, of that sort of number.

We don't have a fixed number.

We're not going to end up with 25 or 30, perhaps a little more than this, but not much, much more.

What we will see is, the way we will get there, though, is both by the addition of some new items, by the replacement of some and by the evolution of others.

So it will be a gradual migration.

What we don't see happening is a massive increase overall in SKUs.

That is the first question, you were asking about pricing on SKUs.

As we said, we have not seen -- we are very focussed and we have said this for some time now, and we continue to be, on the part of the market, what we call the entry-level premium part of the market, which is the $1,000 to $2,000 mattresses, where we believe there is -- or we know there is a very big market and we believe there is significant growth for us as a potential.

The AdvantageBed, which we have put big emphasis on this year, is focussed there.

The TEMPUR- Cloud bed is also focused there.

So we see and will continue to see a big focus of growth there.

But we also see that our higher-priced beds are growing, too, and that is why we are able to see an average price actually modestly growing this year.

And we don't see that that's going to change going forward, and that is not in our plans, that is what we anticipate happening.

Dale, why don't you do the doors.

You asked about doors on the domestic side we actually saw a slight increase in doors this quarter.

We went from about 6,400 doors to right about 6,450.

So just a very modest increase in doors this quarter.

Internationally we saw slight decline in doors.

We went from about 5,000 doors to 4,900 doors, throughout this economic downturn, we've seen, we had up to this point, seen a slight decline in doors on a quarterly basis.

But now we -- things seemed to have stabilized on the bankruptcy side and we've actually seen some customers who went bankrupt, coming back into business, generally in a different form with different ownership, or they were bought out by a larger retailer who opened those doors back up.

So we are now seeing slight increase in doors, domestically, still a little bit of decline internationally.

The final part of your question I believe was around housing.

If you look at the historical data in the industry, the tightest, most significant from a statistical standpoint correlation to the mattress industry, is GDP.

Housing, there is not, per se, a direct correlation, but there is an ancillary correlation to the industry.

So it's not one of the leading indicators, though, per se of the industry that you can really tie statistically to the business.

Certainly the housing slump has been an issue that's weighed on significant portions of consumer products.

Certainly most consumer durables.

But there is a modest tie there, not a direct correlation, though.

And I think that there's a -- there's another to use Dale's phrase ancillary, unemployment is one and rate of change is something that is very focussed and both of them drive consumer confidence.

They're all the big things.

But housing by itself is not a good predictor.

It is many together, and it's all the ones that you would think.

The one thing that I think is--some of the discussion is about what is the long-term potential.

Has the demand -- have people's -- have people -- has America changed as a result of this crisis in terms of what people's proclivity to buy premium products are?

And whether that is the case or not I don't know, but what I do believe and where I think where we fit in, our products is a product that is something that is perceived as being good for you and healthy and frankly a good investment.

And in the end I think that will serve us well as this economy recovers.

Okay.

Great job, guys.

Thank you.

Thank you.

We'll hear next from Joel Havard with Hilliard Lyons.

Thank you, congratulations as well, everybody.

One question on the dealer front guys, I don't know who wants to take it, but I wonder if you're seeing in this new and revised mix of customers an improvement in the consumer credit availability in terms and that sort of thing?

It's getting a little better than it was, but it is not back to where it was 18 months ago.

We're presuming it won't go back to where it was 18 months ago any time--in any time frame that matters, Mark, but maybe your point is slight improvement from the dark days of a quarter or two back, and could you put any kind of number on it to quantify where scores are, or things of that nature?

Scores are still up, and in terms of score requirements, versus what they used to be.

Joel, I think the biggest thing is, you go back a couple of -- two or three quarters ago, our fourth quarter of '08, most of the first quarter of '09, consumer credit almost didn't exist.

Okay.

It exists now.

Okay.

That is helpful that consumer credit exists.

Because we have expensive product, and people--some consumers need credit to be able to purchase it, and some of the retailers use credit as a selling tool.

Dale, one last follow-up to that, have you seen anything with your dealer base, trying to let's refer to it as more traditional financing methods?

Is layaway coming back, is anything like that making a difference for you guys?

I haven't seen it.

Yes, I haven't seen it or heard of that in this industry.

All right, guys, thanks again.

Good luck.

That does conclude the Q&A segment.

I'd now like to turn the call back to the Company for closing comments.

Okay.

Thanks everybody, we look forward to talking with all of you again next week when we host our Investor Day in New York.

This does conclude today's conference call.

We thank you for your participation.