Tempur Sealy International Inc (TPX) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen.

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

This call is being recorded.

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

Please go ahead.

Thanks, Jay.

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 the Private Securities Litigation Reform Act of 1995.

Investors are cautioned that forward-looking statements including the Company's expectations, regarding sales and earnings involve uncertainties.

Actual results may differ due to a variety of factors that could adversely affect the Company's business.

The factors that could cause actual results to differ materially from those identified, include economic, competitive, operating, and other factors discussed in the press release issued today.

These factors are also discussed in the Company's SEC filings, including the Company's annual report on Form 10-K, and 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, and 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 and filed with the SEC.

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

Thanks, Barry, and good evening, everybody.

Thanks for joining us tonight.

Today I'll provide a brief overview of our performance in the fourth quarter and an update on our key initiatives for 2009.

And then, I will outline our strategic focus areas for 2010 and beyond.

Dale will then provide a detailed review of the fourth quarter, and full-year results, as well as our guidance.

During the fourth quarter, we continued our focus on maximizing sales, improving margins, and generating cash flow.

And sales were up 29% from last year, and 9% sequentially.

Sales exceeded our expectations, both in the US and internationally, partially due to the gradual improvement in the macro environment, and partially due to the success of our sales and marketing initiatives.

Our productivity projects, and fixed-cost leverage helped increase gross margin by 550 basis points year-over-year to 48.5%.

And reflecting some expense leverage, operating margin was up 590 basis points year-over-year to 19.3%.

Our focus on cash continued to drive results.

We lowered debt $18 million during the quarter, and our funded debt to EBITDA ratio stands below 1.7 times for the first time since the first half of 2007.

And Dale will provide more details on the financials in a moment.

I'll now move to a recap of the progress we made on our key 2009 initiatives.

You will remember that we had five initiatives that we focused on throughout the year.

The first was to improve gross margins where we made solid progress with a full-year improvement of over 400 basis points.

While commodity costs were helpful, the primary driver of improvement was our ongoing productivity program.

Our second initiative was to improve our retail effectiveness.

In 2009, we launched traffic-driving, and in-store promotions.

Overall we were very pleased with these programs, and we learned a lot from them.

In 2010, we will apply these learnings to make these events even more effective.

In addition, our recently launched advertising campaign, called, Ask Me is showing strong traction.

And as you all know, our ongoing investment in highly effective advertising is a primary driver of customers to our retailer stores.

Third, we set out to broaden the range of product that we offer.

In the fourth quarter we rolled out our TEMPUR-Cloud Supreme, the first in the softer-feeling TEMPUR-Cloud line.

For some consumers our existing mattress offerings just feel too firm, and our Cloud line is aimed at broadening our appeal to this consumer segment.

We have been very pleased with the rollout so far.

Our retail partners and consumers have been very enthusiastic about the new addition to the Tempur-Pedic portfolio.

Internationally, the Sensation mattress line, another unique and differentiated product that we started shipping earlier in 2009, is also expanding our appeal to a broad new group of consumers all around the world.

Our fourth initiative was to stem the declines and ultimately grow our direct channel.

Here, we made excellent progress in 2009 with sales up 9% for the year, and with exceptional growth in the fourth quarter.

Fifth and lastly, we made progress improving our household penetration in our international markets.

The Sensation mattress line is expanding our addressable market, and we've started implementing plans to significantly grow our retail distribution across many geographies.

Now, I am going to take a minute to outline our strategic focus areas for 2010 that are designed to drive growth, which we first discussed at our October investor event.

And from time to time, this year, we'll update the investment community on our progress against these focus areas.

First, we will make sure that everyone knows that they would sleep better on a Tempur mattress and pillow.

Our new, Ask Me marketing campaign will be a big factor in this area.

This campaign focuses on one of our brand's best differentiators: positive word-of-mouth referrals.

The campaign is cutting across all forms of media, from digital marketing and social networks to TV and print.

And in the first quarter, we'll launch TEMPUR-Cloud-specific TV advertising.

In addition, we're working with some of our retail partners to incorporate our marketing message directly into their ad campaign.

Next, we'll make sure that there is a Tempur mattress and pillow for everyone.

As we have discussed before, our new Cloud and Sensation lines will be big drivers in this area.

And in 2010 we will continue to fill our new product pipeline with compelling products that expand our reach.

Thirdly, we'll make sure that Tempur is available to everyone.

In 2010, we will expand our square footage at retail, and we will begin to add doors again, especially in our international markets.

We will also improve the reach and effectiveness of our direct business, particularly through the Internet.

We will update our website, and implement customer relationship management tools in the first half of 2010.

And lastly, we will make sure that Tempur continues to deliver the best sleep.

We are increasing our investment in R&D and consumer research, so that we ensure that we stay at the forefront of innovation.

While these four strategic areas are focused on growing our sales meaningfully faster than our industry, we intend to do so while improving our margins.

Through sales leverage, our productivity program, and selective price increases, we expand -- to expand our gross margins throughout the year.

And while we will expand our investment in advertising and R&D as well, we will tightly manage expenses and anticipate even greater improvement in operating margins.

This also means that we project continued strong cash flow, which coupled with our much-improved balance sheet will give us strategic flexibility and will allow us to institute a new share-repurchase program, which Dale will speak about shortly.

However, as we plan for 2010, we recognize that the macroenvironment continues to be unsettled.

Our retailers tell us that while they are starting to see customers come back to their stores, their business is still not back to normal, and people everywhere are still very cautious about spending.

So we will continue to manage the business very closely, monitoring sales weekly, and adjusting our costs and marketing investments to match.

We're projecting sales in 2010, much the same way we projected during 2009, using our most recent quarterly volumes as the basis for our going-forward plan, and then augmenting the plan with a review of seasonality and market conditions across each of our major markets.

In summary, we had a good quarter, and a good year in a challenging economic period.

We're pleased with the progress against our key initiatives in 2009, and we have significantly strengthened our balance sheet.

Looking forward to 2010 and beyond, we have great potential for growth, and we have a clear plan to capitalize on this potential.

And throughout the organization, we're executing the plan.

With that, I'll now hand it over to Dale.

Thanks, Mark.

I'll focus my commentary on the financials and our 2010 guidance.

As we look at sales.

let's begin with an overview.

In total fourth quarter net sales was $245 million, an increase of 29% over the same period last year.

As we projected on our last call, foreign exchange rates turned favorable during the quarter, and on a constant currency basis, net sales increased 24%.

Our revenue improved sequentially, 9% in total, and 4% in the US, which is counter seasonal and speaks to the gradual economic recovery, and its success of our sales and marketing programs Mark referenced earlier.

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

Domestic sales were up 40%, and international sales were up 15%.

On a constant currency basis, our international sales were up 3%.

By channel, in domestic retail, net sales were $131 million, an increase of 40%.

As Mark mentioned, our domestic direct channel was up over $6 million, or 74%.

Internationally retail sales were up 16% to $74 million.

On a constant currency basis, international retail sales were up 3%.

Looking at products, mattresses were up 26%, driven by a 17% increase in units.

Domestic mattress sales increased 34% on a 35% increase in units.

The modest decline in average price reflects the impact of deeply discounted floor models, related to our new product rollout.

We anticipate a similar headwind in the first quarter as we continue the rollout.

In the international segment, mattress sales increased 12%, but on a constant currency basis, international mattress sales were essentially flat.

International mattress units declined 1%.

In total, pillows were up 23%, driven by an 18% increase in units.

Domestic pillow sales increased 39% on a unit growth of 41%, while international pillow sales were up 13% on a 1% decline in volume.

Our other product line includes items that are normally sold along with the mattress, such as Foundations.

Other product sales were up 46%.

In the US, other product sales were up sharply, 60%.

This partially reflects the fourth quarter promotion on our Ergo adjustable basis.

Gross margin for the quarter was 48.5%, up 550 basis points year-on-year, and 90 basis points sequentially.

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

First, our ongoing productivity program continued to generate improved efficiencies in manufacturing.

Next, lower commodities cost, as compared to last year continued to be a big help.

However, commodities cost rose in the fourth quarter, as we projected on our last call.

We experienced a cost increase late in the quarter, which will be a factor going forward.

Next we generated incremental margin from fixed-cost leverage as production volumes turned positive on a year-over-year basis.

Lastly, the pricing action we took early in 2009 continued to be beneficial.

These factors were partially offset by unfavorable geographic mix and new product introductions.

Regarding geographic mix, as our investors are aware, our international segment is a higher gross margin business.

Our domestic segment, as a result of its faster growth, represented more of the Company's business than last year.

Regarding new product introductions, our new model, the TEMPUR-Cloud Supreme, began its rollout in the fourth quarter.

We are very pleased with both its rollout and sales to-date.

As we projected on our October call, floor-model discounts impacted our fourth quarter gross margin rate.

While floor model discounts pressured margin in the short-term, we view this as a great investment, as the incremental floor space we are gaining should help us meaningfully grow sales and margins in the future.

As we projected on our last call, we increased our commitment to driving brand awareness with over $21 million spent on advertising, including 9.1% of sales spent in the domestic segment.

This represented a 14% sequential increase in advertising expenditures.

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

In the fourth quarter, we incurred extra expense to catch up our bonus pool for the full year as a result of better-than-expected performance.

Our bonus plans generally have a maximum payout, and based on the fourth quarter performance, many of the plans hit this level.

For 2010, these plans reset to new performance targets.

Interest expense was $4 million, down $1.5 million year-on-year, reflecting lower debt levels.

Our fourth quarter tax rate was 32.7%, consistent with the third quarter and our projection on our last call.

Net income was $29.1 million.

Given our improved profitability, EPS was $0.38, up versus our adjusted EPS of $0.17 last year.

As a reminder, in the fourth quarter of 2008, we incurred a tax charge related to our repatriation of foreign earnings.

GAAP EPS in the fourth quarter of 2008 was $0.01.

Now let me briefly summarize the income statement for the full year of 2009.

Sales were down 10%.

On a constant currency, sales declined 9%, reflecting the negative effects of foreign exchange rates earlier in the year.

Domestic sales were down 8%, and international sales declined 14%.

On a constant currency basis, our international sales declined 11%.

Reflecting our initiatives to drive profitability, our gross margin was up 420 basis points to 47.4%.

Our operating margin was up 300 basis points to 17.4%.

Full-year EPS was $1.12.

This compares favorably to our adjusted 2008 EPS of $0.94, and our 2008 GAAP EPS of $0.79.

Now I'll turn to the balance sheet for a brief review.

Our accounts receivable balance was essentially flat sequentially, despite higher sales as we lowered DSOs by three days from the third quarter.

Our accounts receivable continued to be in very good shape despite the economic environment, and we have lowered DSOs by nine days over the course of the year.

Inventories were up $9 million sequentially, consistent with our projections on our last call when we highlighted that our inventory levels were running below our internal targets.

We generated $15 million of operating cash flow during the quarter, and capital expenditures were $5 million.

We reduced debt $18 million to $297 million during the quarter, for a total annual reduction of $122 million.

Our funded debt to EBITDA ratio was 1.68 times at year end, down sharply from last quarter, and far below our debt covenant of three times.

Just to provide a historical context, the last time our debt was below $300 million was in the second quarter of 2005.

Now I would like to make a few comments about our share repurchase program.

Earlier today we announced our Board of Directors has authorized the repurchase of $100 million of the Company's common stock, pursuant to the program described in our press release.

We are very pleased to make this announcement.

It's a strong indicator of our confidence in the Company's future.

And as we have said before, we believe share repurchases are a highly effective means to increase stockholder value over the long term, particularly since our cost on any incremental borrowings is approximately 1%.

Now I would like to address our guidance for full-year 2010.

First, let me address recent order trends.

So far, three-and-a-half weeks into the first quarter, we have experienced strong order momentum, especially in our US retail business.

However, having navigated through the macroeconomic events of the last couple of years, we recognize things can change quickly, and it is a long year.

We feel it is prudent to continue guiding sales based on our most recent quarterly volume levels, augmented with a review of seasonality and market conditions across each of our major markets.

Based on that methodology, the Company has set its sales and EPS guidance for full-year 2010.

We currently expect net sales to range from $950 million to $970 million.

And we currently expect EPS to range from $1.40 to $1.50 per diluted share.

We project our gross margin to be up for the full year, yet down modestly on a sequential basis in the first quarter.

We expect to complete the Cloud Supreme rollout, and begin the rollout of the TEMPUR-Cloud this quarter.

So floor-model discounts will have an impact on the first half, and a bigger impact on the first quarter.

We anticipate interest expense for the full year to be approximately $12.5 million, which includes the impact of our interest-rate swap, as well as facility fees.

We anticipate capital expenditures will be $20 million to $22 million.

We anticipate the full-year tax rate to be in line with 2009 at 33.5%.

And we are using a share count of $78 million for the year.

This share count projection does not assume any benefit from a potential reduction in shares outstanding related to the Company's share repurchase program.

As noted in our press release, our guidance and these expectations are based on information available at the time of the release and are subject to changing conditions, many of which are outside the Company's control.

This concludes our prepared remarks.

And at this point, Operator, we would like to open the call to questions.

Thank you.

(Operator Instructions) We will go first to Mark Rupe with Longbow Research.

Guys, congratulations once again on the quarter.

As it relates to the Cloud, is it still too early to get a sense on whether or not it is meeting the expandable market opportunity expectations?

Well, as you said, Mark, it is still too early.

It has just been really in the market for eight weeks really.

And the initial take on it is it is performing at least as well as we have expected, if not maybe a little better.

It is doing quite well, and from what we can tell, our expectations about expanding beyond -- to a new user, or said another way, the level of cannibalization is relatively where we thought it would be, but it's early days.

So it looks like silt on track, but it's early days.

As far as the recent quarter momentum quarter to date, is the Cloud having a decent portion of that benefit?

Having -- it obviously is a participant in the performance year-to-date, but it is roughly in line with what we had expected.

Okay.

And as the product-specific advertising rolls out, do you have any kind of expectations on what that could do for general Tempur-Pedic traffic or Cloud-related business?

Well, as you know, we have, until now, never run a commercial -- a TV commercial which has been product specific.

And so this is going to be a new thing for us.

And part of the purpose of it is, obviously to advertise the Cloud, but it is partly to give new news, which is always an effective advertising message in its own right.

And it's partly to make sure that we communicate to consumers that there are a range of Tempur-Pedics, that there is not just one Tempur-Pedic.

Which is one of our key communication challenges.

Exactly how that is going to lift the business, to be quite honest, I'm not quite sure.

We'll run that ad, the Cloud ad, and we will run the other ad in parallel, and we will measure the relative effectiveness.

It will be interesting to see, quite honestly.

I think it will definitely lift the Cloud, it's just going to be a question of how it balances the whole.

And we will watch and learn as we do.

But what I think it will do is it will bring new news to the consumer about Tempur-Pedic, which I think is the key message.

Perfect.

And just lastly, on the product segmentation strategy that you announced late last year.

Have the retailers gotten on board with that?

Is there any adoption rate on getting the soft, medium, firm strategy down?

To some extent we get very quick adoption, because the foot covers and the layouts --- the retailers will quickly take that and they'll like that.

But what I'm hearing from retailers, and the key people, the guys, the RSAs, the people in the stores selling the product, they really are giving us positive feedback on it, because it makes it quite easy for them to explain to the consumer what the differences are between the three different categories.

It is only anecdotal, but the data that we are hearing is quite positive.

People have really responded well to it.

Perfect.

Congrats again, thanks.

Thank you.

We'll go next to Brad Thomas with KeyBanc Capital Markets.

Thanks, good afternoon, and let me add my congratulations as well.

Thank you.

I wanted to talk about -- say a little bit more, there are a number of initiatives that you have in place that seem to be working well.

The new Cloud rollout, the macroenvironment is improving.

It seems like you are gaining effectiveness in working with retailers.

As we try and strip those apart, could you help maybe quantify how much some of those different initiatives are benefiting sales?

Well, not exactly, is the answer.

There is-- clearly the two things -- the three things that you mentioned, the new products, the marketing programs that we're doing with the retailers, like the Ergo promotion that we talked about in the comments.

And of course, the economy, all contribute, and we're not really sure how much is each.

And there's a degree to which -- a lot of people -- or at least -- again, it's hard to put an exact number on it, but we know there is a significant portion of people who, during the recession, were putting off purchasing products.

And some proportion of those people are now reopening their wallets and their purses.

And it is hard for us to split out what is driving what, to be honest.

Right now for planning purposes inside, we're sort of assuming it is a bit of everything, because we don't know right now.

Honestly, it's very hard to split it out, what is driving what.

We get the feeling that all of those things are contributing.

We're getting positive-enough feedback from the retailers, that we come away, feeling like "Yes, the programs are working." We know from consumer research that the new products are being well received.

And we know from commentary from our retailers that the foot --people coming in to the store is somewhat increasing.

But if we look at just the Cloud, specifically, could you quantify for us, how much of a benefit that that had on sales in the quarter.

And how much of a tailwind it may be if the current rollout trends continue through the first half of the year?

Yes, Brad.

This is Dale.

For the fourth quarter, Cloud represented just a little less than 5% of our sales.

But obviously, the bulk of the fourth quarter, we didn't have the Cloud.

It was just in a rollout phase.

We got it, by the end of the year, into about half of our stores.

So here in the first quarter, you'll see roughly the other half of our stores get the Cloud Supreme, hence a lot of additional floor models.

Plus here in the first quarter, the first phase of retailers will get the TEMPUR-Cloud.

So we'll have that phase of rollout beginning here in this quarter as well, and then the TEMPUR-Cloud rollout will continue into the second and third quarter.

And then later in the year, we'll start shipping the TEMPUR-Cloud LUX.

So, for the fourth quarter it was not a big driver.

Certainly it was a positive impact.

TEMPUR-Cloud Supreme, as we said earlier, is performing well, but it's early.

Okay.

Sorry just to be clear, you said the Cloud Supreme was 5% of sales in the quarter?

Yes.

Okay.

Great.

Thanks so much, and congratulations again.

Thanks.

We'll go next to Tony Gikas with Piper Jaffray.

Thank you.

Good afternoon, guys.

Great job on the quarter.

Could you talk a little bit about why the international business is underperforming by such a margin compared to the US?

Second, Dale, maybe you could help us out with what is the mix between fixed and variable costs today and perhaps 12 months ago?

And then I have a couple of follow-ups.

Okay.

Let me give you a headline on the international, and then Dale will give you a little color.

The first thing that you really have to take into account is that -- the easy comps, frankly that the US had.

The US fell a lot further than the rest of the world did, so if you just compare apples to apples, international has a much harder compare than does -- or not much harder -- was not nearly the compare that the US had.

So I would say that the first thing is that it is a macroenvironmental thing that is the primary driver.

Secondly I think -- and I would say also, for example, that the Sensation, which we don't talk about as much, but which is a product launched in the rest of the world, has been quite successful.

Maybe not quite the level of the Cloud, but still very successful.

And it has been effective in multiple countries.

And there are other things going on in international which are quite encouraging.

But having said all of that, we are seeing greater growth in the US, and some of -- and particularly, the Ask Me marketing programs have been more effective, or have been useful here, and we haven't had the equivalent overseas, But we intend over the near future to be able to take some of the learnings from the US and apply them in international.

And on your question of around fixed versus variable-- the question is one that is, at this moment, a little bit hard to quantify.

You almost have to look at it in steps.

If we go back to 2007, we had a fixed variable component, and it varies by type of cost.

For example, within our COGS, we have traditionally seen roughly about a 20% fixed component within COGS over the last two years with volume decline in the business.

The business is less at this stage than it was in 2007.

The fixed component of COGS is a little bit higher.

And as volume is starting to come back in the business, we'll see the fixed component shrink as a proportion of the total COGS as we get some volume leverage.

And the same thing can -- on operating expenses, you have a little bit of the same thing.

Throughout the recession, while we were cutting fixed costs, fixed costs were a larger portion of our expenses, because you can't cut them all, and you can't cut them all at the same rate.

But the key is, we have been able to reduce some fixed cost in the business over the last two years of the recession.

And so, we're in a much better position to get operating leverage, both in the gross margin standpoint and in the operating expenses, as we see volume come back in to the business.

Is that helpful?

Yes.

So on those fixed costs, you guys have done a great job over the trailing 12 months of cutting costs, how much do you expect will be permanent once the business is fully rebounding, the consumer is coming back?

And then my last question would be on the calendar 2010 margin expansion that you talked about, Dale.

Where is that coming from more specifically?

Maybe just a little clarity around that?

Let me address the second part of that first.

On the margin expansion for 2010, we would expect gross margins to be up about 100 basis points, and operating margins to be up a little bit more than that.

And from a gross margin stand point, that's going to come from continued productivity on our four-year productivity plan.

We expect to see some volume leverage on the business.

$950 million to $970 million is a lot more than $830 million that we just finished in 2009.

So we'll see some volume leverage throughout the P&L, not just gross margin, but also in the operating expenses.

And from an operating expense stand point, we cut a lot of costs throughout the downturn.

However, we are also looking to continue to invest in certain parts of the business.

We'll increase, as Mark said, our R&D expense.

We'll increase our advertising.

We have here in the short-term, some increase in selling expense, because we have restructured our sales organization a little bit to have better coverage of the stores.

And another component of margin growth in the business is price.

We took a price increase early in 2009.

And as Mark said, we will take some price this year, selectively on certain products.

So on the gross margin, primarily productivity and leverage, not input costs.

How should we look at the input costs portion of that?

We actually expect commodity costs to be up this year.

We took a price increase -- we got a price increase.

We did not like it.

We got a price increase in our commodities in December.

Kind of mid to high single digit.

Our expectation is that we will see some additional commodity price pressure this year, as the year progresses.

But will offset that as the year goes on through productivity, through leverage, and also through some selective pricing actions of our own.

And then the cost cuts that you have made over the last year.

Maybe just characterize how much of them are permanent.

Well, I think that the cuts that we made are primarily permanent.

But as we're looking at the business in terms of starting to see some growth again, we are identifying different areas of the business where we feel it is prudent to make some additional investments.

As I mentioned earlier, we are going to invest more in R&D.

We are going to ramp back up our advertising spend rate a little bit.

And we have made some additional investments in our selling organization.

Ok.

Thank you, guys.

Good luck.

(Operator Instructions) We will go next to John Baugh with Stifel, Nicolaus.

Good afternoon, and thank you.

Could you give any more color on pricing, number one, or do we just have to wait on that?

And then if you could, just walk us through, again, the methodology of the sales guidance for the year and what is in there, and what is not in there as it relates to the Cloud rollout, for example, in the first strong three or four weeks of orders?

Thank you.

Let me -- hey, John, let me go first, and then I'll ask Dale to add to it.

As Dale said, we do anticipate taking some price, and in fact, we will be taking selective price.

And we will be announcing those changes in Vegas next week.

I don't want to give any details now, but we will be able to in just a few days after we have spoken to our retailers.

In terms of the sales guidance, our method is, in broad terms, quite simple.

We have taken the fourth quarter, and assumed that that level of sales will continue for the rest of the year.

And it's a pretty blunt instrument, but it is deliberately so because it still remains very hard.

And the degree of unpredictability in the market that we're seeing, that makes it very hard to be much more scientific than that.

What we do as well, is by geography, we look at seasonality and things like that, but particularly seasonality just to make sure we're allocating it correctly across.

But fundamentally, it is a pretty simple system, and we are not getting it down to the level of product by product.

Because quite honestly, it is very hard to know, if you take the benefit of a product, should you take the negative of a country that is having a particularly difficult or particularly slow response to the -- or recovery from the recession?

So it's a fairly simple system, and it's the best one -- we have been using it for some time.

It has worked for us so for, and it is the one that we are continuing to use.

Even though Cloud was not in --Supreme was not in half the stores in the -- or just by the year end, it contributed 4% to 5% of revenues it sounds like.

You haven't assumed, well, if it's in all of the stores at this rate, that -- that part is not -- or that piece is not part of the $950 million to $970 million guidance.

Is that correct?

That's right.

But as I said, please -- it's not as though we have got some secret formula that we're not sharing.

Okay.

No, that's fine.

Last question.

What would be your expectation, once we have all three of the Cloud products out, and I realize that's late this year.

But what would be the hope or the goal for slots per door amongst the three?

Do you have some kind of internal plan you might share or thoughts there?

Thank you.

It will depend by customer and so forth, but we think of that order it would -- some will have three and some will have one, but that's what we're hoping for.

Great.

Thank you.

We'll go next to Joe Altobello with Oppenheimer & Company.

Thanks.

Good afternoon, guys.

First question, I just wanted to delve into the macroenvironment for a second.

Obviously the last couple of years have been two years that we have not seen this industry, maybe ever -- probably ever I should say -- So is it your sense in what you are seeing in terms of the pickup in demand here, and what you are hearing from retailers that there is a lot of pent-up demand amongst consumers?

Because I would imagine that mattress purchases are something you can defer for quite a long time, but not forever.

So it would seem like after the last two years of double-digit decline, there is a lot of pent-up demand out there that could take multiple quarters to show through.

I think you right.

No, I'm sure you are right.

I'm sure you are right that there is a pent-up demand.

And it is even possible -- it is even likely, frankly, that the degree to which the pent-up demand affects the premium mattresses is probably greater than the sub-premium.

Merely because, if you have to have a mattress, you just have to go and get one.

Whereas a premium mattress is often a considered purchase, or a purchase that you could defer.

But how much of it that is, and whether it has started to come through yet, and how much of it has come through yet, really we don't know.

And it's part of why we are being -- as we say there are multiple things affecting us.

We think that that is a component, but we don't know how much.

And it sounds like your retailers are--

Several quarters for it to play through.

Or longer.

Or longer, right.

And it sounds like your retailers are sharing that cautiousness at this point?

Yes.

There's no doubt that the retailers -- as I said in the comments -- they are seeing some returns, some form of more predictability.

But it is still very different to what it was 18 to 24 months ago.

Okay.

And then secondly, have you started to repurchase shares yet this quarter, and your thoughts on reinstating the dividend at some point?

No, we have not.

We're just announcing the share repurchase today.

And the Company has been in a blackout period.

So we have not started repurchasing.

In terms of dividend, that's something that is on the table, but not something that we felt was the right thing to do yet at this time.

Got it.

And I'm sorry, just one more if I could.

Sure.

The other sales you mentioned in the US were up pretty solidly.

It looked like a lot of that came from the success in the Ergo promotion.

How much of that is sustainable?

Well, the Ergo promotion was a good event for the fourth quarter, no doubt about it.

We -- and it's -- there are two things about it.

The first is that we don't and won't ,do promotions on mattresses.

But doing promotions on ancillary things like foundations.

We did a closeout on the old foundation in the middle of the year.

We did the Ergo foundation at the end of the year.

It is something that makes sense.

The retailers like it.

It gives a reason for consumers to shop now.

And it works well with the retailer's go-to-market strategies.

And we will continue to do promotions like that going forward.

So that particular one we will repeat probably at some stage, but we have no plans to do no so at the moment.

But we will have promotions like it.

On the other hand, speaking of the Ergo itself, one of the things that is an important part of our overall strategy is that the Ergo, adjustable base, is now attached to a significant number of our sales.

A significant proportion of the people who buy Tempur-Pedic buy an adjustable base.

And obviously that is a good ring for us, but also consumers who have them, love them.

And one of the tricks to being effective with selling them is to get the retail salespeople to be used it to, and have confidence of doing it.

And this promotion gave a lot of people the experience of selling Ergos and realizing how consumers can really warm to them.

And so, it was both a tactical promotion, but also a strategic thing to help us in getting the salespeople across the country used to selling what is a -- not a normal -- has not been a normal sale item.

Got it.

Okay.

Thank you very much.

Our next question comes from Budd Bugatch with Raymond James.

Good afternoon, and good evening, and add my congratulations on the operating performance of the quarter.

Couple of questions, if I could.

Mark, I know you don't want to talk much about the selective price increases, but in the way of just thinking about it in kind of a gross amount, would we be fair to add something on the order of $30 million to $40 million to sales for that in 2010?

Or are we way out of the ballpark?

By the price increases were contemplated as part of the guidance.

We had price that was a factor all through 2009.

Well, I understand that, Dale.

I'm looking at it as a base of 2009 on top of that.

Just building it -- the way that John wanted to build the sales up from, essentially 2009 is another way to look at how do you get to a sales number?

You'll have a better understanding of the opportunity next week when we announce it to our retailers.

Okay.

What the ad budget for next year?

Are you going back up to closer to 10% to 11% that you have historically spent and targeted?

How should we think about that?

We're going to go back to about 9%.

I think it's 9% -- just a little bit more than 9%.

But, it's something that we -- as we have talked before about, it is something that we believe -- it is absolutely critical to the Company.

The -- it's something that we believe very strongly is an important part of our overall investment.

We are moving, as we said, by 2014, in our long-term plan, we have a target of 10% as a percent of sales of investment and marketing and of advertising.

And we are moving on that part, and this year we will be on 9%.

It's something that if you think about the Company, the two really big things that we have going for us is a product that is preferred by consumers and a very, very powerful brand.

And we intend to invest in both of them, I mean in advertising and R&D.

I concur, and I think you asked me about Tempur, is a very -- very powerful campaign, so -- I understand that.

You did say something about integrating it with retail more closely.

That's something that historically has kind of a buzz word in the bedding industry.

Can you help me understand what that means?

Yes, we're not doing co-op.

We're allowing the retailers to use our commercials and our copy --

We're -- it's really important, and I think Dale makes a good point.

We're not talking about moving to co-op.

What we are saying is we have made these commercials, and we have made versions of these commercials that are, frankly, user-friendly for the retailers to be able to use in their advertising.

It provides them the opportunity of high-quality advertising and allows them to add their own tags or add their own brand names and so on around it.

It just makes it very easy to use.

But it is a provision of copy and collateral and so on, not co-op advertising.

Okay.

And R&D you talked about increasing that.

Can you give us kind of a number of what you think that is going to run to?

It's about 1%, give or take.

And R&D is, again, another important thing.

Obviously, we're very pleased with the results of the Cloud so far.

And that was the direct result of R&D, the creation of the new ES material was a very specific and aggressive R&D project in 2009.

And we will continue to do that during 2010.

And the bonuses, Dale, I think you said you accrued for them again in the fourth quarter.

How do we think about that for 2010?

Are you going to accrue all year, and is there any level of increase that we should think about?

In fact, the bonuses in 2010, starting here today, will be less than they were in 2009.

What I was trying to say, was the way the bonuses work, is there are certain targets set out.

And if you meet those targets and go beyond those targets, then the bonus can accelerate.

So, we mentioned in the third quarter that part of the reason G&A was up in the third quarter was because we were catching up for the year, not that we weren't accruing all year.

But we were accruing based on what the projections were.

And when we got to the third quarter, and had a very strong third quarter, we had to catch up for three quarters.

And then the fourth quarter was significantly above our expectations.

So we had to not only accrue for the fourth quarter, but catch up for the full year, based on over achieving the target levels.

So, as we sit here today looking at 2010, we have a plan and targets for the bonuses, and we'll be accruing at target.

And just to be clear the targets are -- have they changed at all in terms of -- and what are they now?

I'm sorry?

What kind of targets are they?

Sales, operating income, where is the emphasis on targets?

Our bonus structure has always had a component of revenue and earnings, and then, also, a component of objectives, personal objectives for each employee.

And so those elements will be, maybe slightly different in 2010, but they are still key elements of the bonus plan and compensation philosophy of the Company.

Okay.

My last area of questions is in a cash return to shareholders.

With the share authorization and the history of paying a dividend for seven quarters in the past, do we take it from what we have heard today that you're emphasis will be on share repurchase above -- before share -- share dividend.

Is that a fair comment?

Or is that just too aggressive?

Yes, I think that's a fair comment, since we have authorized a share repurchase program and not reinstated a dividend at this stage.

And you seem to indicate that you would borrow to repurchase shares when you were talking about the incremental borrowing costs, and the fact that debt is down below $300 million for the first time in a long time, if not always.

So do we --

We did not per se, say that we were going to borrow to buy shares, although that's a possibility.

However, the alternative is to continue to pay down debt.

And so the key thing I was trying to point out is, our incremental debt cost is about 1%.

Now that's not our full debt cost, but our incremental debt cost is about 1%.

So, the alternative of continuing to pay down debt or buy some shares is a choice of what you do with the cash, and that's about a 1% cost difference.

Okay.

And so for modeling purposes, should we take free cash flow and do a percentage of that to share repurchase?

Would that be a feasible or a rational way of doing it, thinking about it?

If you also want to factor in some share repurchase that's a reasonable way to do it.

Share repurchase is not reflected in our guidance.

As we purchase shares at the end of each quarter, we'll tell you what we bought, and we'll tell you what impact it has on interest expense, and on share count on a go-forward basis.

Okay.

And my last question, Mark, for you, any peak at Las Vegas next week as to what we might see new?

I guess we'll see the ES-LUX.

Is that true?

Yes, you can be the first to know, Budd.

But, yes, you will.

Four-day's advance notice, but yes.

No, we'll have the LUX there.

We talked about it last time, but now we have it.

And there's a couple of other interesting things there too.

Should be a fun event.

Okay.

Look forward to seeing you thing there.

Thank you very much.

And again, congratulations.

Thanks, and we look forward to seeing you too.

(Operator instructions).

Our next question will come from Jack Murphy with William Blair.

Good afternoon.

I would like to ask just first, a broad question about the brand architecture strategy.

And then something a little more specific.

In terms of the -- looking at what you have done so far with the Cloud, can you give us any updated thoughts on what else might be in store in terms of filling out that brand architecture.

And then also -- I'm not sure if you have mentioned in the past what the pricing may look like on the next two Cloud products.

If you could just address those two points, I would appreciate it.

From the point of view of the architecture, it's -- one of its primary -- the architecture as a whole is both to clarify for the buyer, for the consumer, and frankly for us as well, what it is we're trying to do with the product range that we offer.

Because we want to make sure all of the products that we offer have a role to play and are earning their keep within the portfolio of products that we offer.

So the way that we think about the current portfolio, is that with the Tempur, TEMPUR-HD, and the ES, we have the three different fields.

And within each of them, we anticipate having a range of good, better, best, the typical merchandising strategy.

And so in a simple sense, that's what we're going to have.

We're going to have the three different fields, and a good, better best version in each one.

Now we may have -- instead of three, we may have four or even five in some of the different categories, but in broad terms that's what we'll do.

And we anticipate that that will --that they will continue to evolve.

It's not like we'll keep adding completely new products.

We'll have the set group, and then we will evolve them over time.

And as both our technology continues to evolve , and our ability to meet consumer needs becomes better refined, we'll upgrade or update different items within each range.

We don't anticipate growing and growing and growing.

And having said all of that, though, it's conceivable that at some stage, we could add another category.

We haven't got plans to do so at this stage.

But it's conceivable that we could.

So it's not as though three is for sure the end.

It's just that it certainly is not going to get much more than that.

And what we want to do is to make sure that each product within each architectural pillar earns its way.

And then in terms of pricing, the -- again, we'll announce the actual prices next week in Vegas of the new product.

But I can tell you that one will be at a lower price than the Cloud Supreme, and one will be higher.

And the one that will be lower will be squarely aimed in this $1,000 to $2,000 --what we call entry-level premium market, which is something that we have been talking about for some time, is an important place for us to focus.

And the other one will be a more premium.

And thus, we will have our good, better, best within the Cloud

Great.

And just one unrelated question.

I know direct is still a fairly small percentage of the total sales, but you are putting up very strong growth there.

Could you, Mark, talk a little bit about your initiatives with the online channel, how you are looking at that strategically?

And then, Dale, if you are willing to talk a little bit about what your expectations are for direct?

Okay.

Let me go first.

I want to answer the question, though, in two ways, because it's important to see that direct is a channel in its own right.

But it's also part of the overall communication with the consumer.

So we can't think of direct as something else.

It is a consumer who buys -- one of the statistics that we find very important because it governs a lot about how we think, is that -- of everybody who we contact directly and -- what we call a lead, who we get through our direct business, either internet or by telephone, who ends up buying a product, three out of four of them ends up buying at a retail store.

So it really tells you the story that there are not two different types of purchases.

So first of all we have to think of it as very integrated.

Our marketing and everything else, we think of it as very integrated.

But if I think specifically about that portion of business that is done directly on the internet, or done directly, either internet or by phone.

We are doing a variety of things.

One is the effectiveness of our internet marketing is something we have stepped up significantly, both the amount, but also the effectiveness.

The other is the way that we have worked on how we sell to consumers, and how we're aware of their needs.

A simple thing that is we had -- during the Christmas period last year, we had a brochure -- a catalog, I mean, with gift-type ideas, which we have never done before.

And this was quite a big success, both on the phones and on the internet.

But we are thinking of ourselves much more as a more typical internet merchant.

The one that I referred to briefly in the comments is the customer relationship management, which in the end it is a long part because there is a lot to do there.

But improving our effectiveness and our consumer knowledge of our consumer base is going to be something that we believe we still have a long way to go and great opportunities ahead with that.

So with that, Dale, what about from numbers?

Yes, from a looking-forward standpoint, the direct has had two very good quarters.

Third quarter it was the only channel that showed growth.

Here in the fourth quarter, the direct channel had a very significant growth, which is very positive that we have been able to thin the tide and turn it.

The direct business got hurt sooner and harder than the rest of the business did in the recession.

Ultimately the rest of the business caught up to it, but -- so it's good to see that turning and coming back.

But on a go-forward basis, we recognized that the bulk of the growth is going to come from retail.

And we would be thrilled to see direct have a growth rate similar to the retail growth rate.

But, by and large, the consumer research that we have done throughout the years that say 80% of consumers won't even consider buying direct, we still feel is valid.

So, retail is the key growth driver of the business, and will continue to be.

But we just want to make sure that the direct business is healthy, and is, as the business starts to grow again, that the direct business gets a piece of it.

Great.

Thanks.

Thanks.

Our next question comes from Bob Drbul with Barclays Capital.

This is actually Matt McClintock filling in for Bob.

Good evening, everyone.

Hey, Matt.

Just one quick question.

Dale, as sales has recovered, has the variance widened regarding the performance among the different price point ranges of your products?

No, actually, as we said throughout the downturn, we saw the downturn affect all of our product range about the same, from our lowest-priced product to our highest-priced product.

And as sales have started to turn now, we're talking about one quarter here, at least where it was positive on a V.

But we have seen three quarters of successive improvement.

And we have seen the business pretty much come back across the board as well.

Perfect.

Thanks, guys.

Thanks, Matt.

And that's all the questions we do have today.

I would like to turn the conference back over to our host for any additional or closing remarks.

Thanks a lot.

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

Thanks for joining us this evening.

That does conclude today's conference.

We thank you for your participation.