Tempur Sealy International Inc (TPX) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to the Tempur-Pedic second-quarter 2010 earnings conference call.

Today's call is being recorded.

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

Barry Hytinen.

Please go ahead, sir.

Thanks, Elizabeth, and thank you, everyone, 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 economics, competitive, operating, and other factors discussed in the press release issued today.

These factors are also discussed in the Company's SEC filings, including the Company's Annual Report on Form 10-K under the headings, Special Note Regarding Forward-looking Statements and Risk Factors.

Any forward-looking statement speaks only as of the date on which 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 measure is posted on the Company's website at tempurpedic.com and filed with the SEC.

And 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 second quarter, an update on some of our strategic focus areas and a commentary on our outlook.

Dale will then provide a detailed review of our second-quarter financial results and will discuss our revised guidance.

We are very pleased with the continued substantial growth in our North American business and we're also pleased with the improved performance of our international business particularly on a local currency basis.

Sales were up 42% from last year and earnings per share were up 109%.

Our focus on improving gross margins and operating costs also continues to be affected.

Fixed cost leverage and our productivity program helped increase gross margin by over 200 basis points year over year to 48.7%.

And we were able to increase our operating margin by 480 basis points year over year to 20.5%.

These results build on our first-quarter results and so overall we have had a strong first half of the year.

As a result of this better than expected first half and continued good indications for the second half, we are raising our guidance for the full year and Dale will go into the details.

We are doing this in an environment that is still quite unpredictable.

We hear from many of our retailers that consumer traffic is still not back to normal.

But we believe that seasonality is returning and that our share gains in the first half will be sustained in the second half.

Now I'll provide an update on some of our strategic focus areas for 2010 and beyond.

Firstly I'm very pleased with the progress we made this quarter to ensure there is a TEMPUR mattress and pillow that appeals to everyone.

As we have discussed before, our softer line of mattresses, the Cloud collection, was designed to broaden our appeal.

The Cloud Supreme continues to sell quite well and we expanded the rollout of the TEMPUR-Cloud, the entry-level price point mattress in the softer collection.

In the third quarter, we will begin distribution of our (inaudible) soft mattress, the TEMPUR-Cloud Luxe.

And we're very pleased with the incremental floorspace and sales from this collection.

Internationally, we recently completed consumer research to size the market for a softer TEMPUR line in Europe.

While those markets generally skew firmer than the US, our research suggests a significant opportunity exists.

We are commercializing our line of softer mattresses for sale in Europe and anticipate the initial rollout will begin early next year.

The second strategic focus area that I want to discuss is our commitment to ensuring that everyone knows that they would sleep better on a TEMPUR mattress and pillow.

This quarter we increased our total advertising investment 53% to nearly $24 million, driven by the ramping of our Ask Me marketing campaign in the US.

This campaign focuses on one of the brand's greatest assets, the extremely positive referrals we get from existing owners.

We also continue to work with many of our retail partners to incorporate our marketing message directly into their ad campaigns.

The Ask Me campaign has had an exceptional return on investment.

Perhaps the best example of this is the sales performance of our firmer products.

Seasonally our inventory is normally down from first quarter to second quarter.

So while we hoped the Cloud line would grow sequentially from the first quarter based on distribution gains, we did not expect this from our more established models.

Yet many of our firmer mattress models experienced substantial growth on a sequential basis which we attribute largely to our allocation of resources, to sales and marketing initiatives and especially the Ask Me campaign.

Following these compelling results, we will expand our investment in marketing during the second half which we anticipate would help fuel our growth in the new year.

Our third strategic area is our commitment to ensure TEMPUR is available to everyone.

In both North America and internationally, the continued rollout of our new Cloud and Sensation lines expanded our square footage at retail considerably.

We're very pleased with distribution gains made by our entry-level Cloud mattress during the second quarter.

In addition, we made solid progress in Canada where we are in the early stage of our market development plans.

Since the beginning of the year, we've nearly doubled the number of doors we sell through in this key market.

Over the ensuing quarters, we will focus our efforts on growing brand awareness and driving market share.

We see considerable growth opportunities in Canada over the next several years.

Aligned with several of our strategic initiatives, including our commitment to ensure TEMPUR continues to deliver the best sleep, we utilize consumer research and testing.

Recent examples of this have included the development of our Cloud collection and the Ask Me advertising.

In the second half, we will be conducting a significant amount of strategic research in Europe and Asia.

While the nature of this work will be kept confidential for competitive reasons, we want our investors to know this program is underway.

We believe the program will help us better understand consumer preferences in these markets and we expect it will have a meaningful impact on our long-term growth plans.

We will continue to invest in initiatives that will drive growth over the long term.

So in summary, we had a good quarter and we are expecting that we will have a good year.

Before I handed over to Dale, I want to make a brief comment on some potential equity transactions by our executive officers.

While plans can change, some of our officers intend to monetize a portion of their equity for estate and tax planning.

For example, I intend to enter into a plan that would sell up to 10% of my vested holdings on an annual basis, assuming some minimum stock price levels.

By its nature, this sort of financial planning is personal, so we do not intend to address it further.

With that, I'll not hand over to Dale.

Thanks, Mark.

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

In total, second-quarter net sales were $263 million, an increase of 42% over the same period last year.

Foreign exchange rates turned unfavorable during the quarter.

[Posted] on a constant currency basis, net sales increased 44%.

North American sales were up 59% and international sales were up 10%.

On a constant currency basis, our international sales were up 14%.

By channel in North American retail, net sales were $173 million, an increase of 64%.

Our North American direct channel was up $7 million or 72%.

Let me pause here and note a minor change to our channel reporting.

Following the acquisition of our Canadian distributor on April 1, they are now reporting Canadian sales in the North American retail channel.

Previously, sales to the Canadian distributor were reported in the third-party channel.

In addition, since Canada represented the vast majority of all sales through that channel, we will no longer be reporting North American third party.

This change does not impact our international third-party sales.

Internationally, retail sales were up 8% to $54 million.

On a product basis, mattresses were up 44% driven by a 42% increase in units.

North American mattress sales increased 58% on a 61% increase in units.

The 2% decline in average price reflects the impact of deeply discounted floor models related to our product rollout.

As we projected on our last call, on a sequential basis, average price was up about 6% following the pricing actions we took in May coupled with fewer floor models.

In the international segment, mattress sales increased 10%.

On a constant currency basis, international mattress sales were up 15%.

International mattress units increased 14%.

In total, pillows were up 16%, driven by a 15% increase in units.

North American pillow sales increased 27% on a unit growth of 28%.

International pillow sales were up 7% on a 4% increase in volume.

Sales of our other product line which includes items that are normally sold along with the mattress were up 53% in total and 77% in North America.

This product line grew faster than mattresses, driven largely by the pricing action we took last year when we upgraded our foundation and improved attach rates of our adjustable beds.

Gross margin for the quarter was 48.7%, up 210 basis points year on year but down 50 points sequentially.

On a year-over-year basis, the gross margin improved, principally related to increased production volumes to support higher sales, resulting in fixed cost leverage.

And our ongoing productivity program generated improved efficiencies in manufacturing and distribution.

Partially offsetting these benefits were unfavorable geographic mix, new product introductions and higher commodity costs.

On a sequential basis, our gross margin was down modestly, primarily related to geographic segment mix.

As we've discussed before, our international segment is more profitable on a gross margin basis than our North American segment.

Our second-quarter operating profit was $54 million, an increase of 85%.

With significant sales growth, we drove over 480 basis points of operating expense leverage.

This is despite having ramped advertising spend as a percentage of revenue up 60 basis points.

Our operating expenses were up modestly on a sequential basis, largely due to the absorption of our new Canadian subsidiary.

Interest expense was $3.8 million, down $700,000 year on year.

Our tax rate was 33%, up modestly from prior year, largely related to the growth in the US.

Net income was $33.5 million, up from $16.9 million.

Given our improved profitability, EPS was $0.46, up from $0.22 last year.

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

Our accounts receivable balance was up, reflecting higher sales levels.

However, DSOs were down six days from the second quarter of last year.

Inventories were up $14 million year on year, consistent with our positive outlook for sales, yet down approximately four days from last year and last quarter.

We generated $45 million of operating cash flow during the quarter and capital expenditures were $4 million.

Our funded debt to adjusted EBITDA ratio was 1.88 times, far below our debt covenant of three times.

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

Through open market purchases, we brought back 3 million shares during the quarter, fully utilizing the $100 million repurchase authorization we announced in April.

With first quarter activity, this brings our year-to-date buyback to 6.7 million shares, for a total spend of $200 million.

We continue to view the share repurchase program as an excellent means to return value to stockholders over the long term.

So we're pleased to announce our Board of Directors has authorized the repurchase of another $100 million of the Company's common stock pursuant to the program described in our press release.

We're currently targeting the debt to EBITDA ratio to be between 1.5 and two times.

Now, I would like to address or updated guidance for full year 2010.

While our business continues to perform well, the macro environment continues to be uncertain.

So we believe it is prudent to continue to use a relatively broad range with modest expectations for seasonality.

We currently expect net sales to range from $1.06 billion to $1.1 billion.

We currently expect EPS to range from $1.85 to $2.00 per diluted share.

We expect our gross margin to be up in excess of 200 basis points for the full year driven by fixed cost leverage and our ongoing productivity plans, partially offset by geographic segment mix and a conservative outlook for rising commodity costs.

As Mark mentioned, we think our advertising is proving to be very beneficial to sales and brand awareness.

So we continue to plan for advertising spend to be slightly above 9% of sales for the full year.

In addition, our projections include the strategic research Mark referenced.

We expect interest expense for the full year to be $14.5 million which includes the impact of our $100 million repurchase in the second quarter.

We anticipate the full-year tax rate to be approximately 33%, up slightly from our prior projection, primarily related to the increased projections from our US business.

We're using a share count of 73.5 million shares for the full year.

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.

At this point, operator, we would like to open the call to questions.

(Operator Instructions) Chad Bolen, Raymond James.

A couple of quick questions.

Dale, you discussed the sequential decline in gross margin which I think was a little bit below your expectations on the prior call.

I think you attribute it primarily to geographic mix.

Could you kind of maybe walk through some of the other puts and takes sequentially?

Were there any incremental commodity price increases relative to the one you had late in the quarter?

What other buckets were there sequentially?

And as we look ahead to the third quarter, how should we think about some of those puts and takes?

Sure, as you know, gross margin has a lot of puts and takes.

We had on the positive side, ongoing productivity initiatives, a little bit less floor models.

Mid quarter we had a price increase.

So we had a lot of positive things impacting gross margin.

On the negative side, we did get the price increase in commodities in late March.

We didn't see additional price increases in the second quarter, but basically the March increase was reflected in the second quarter outcome.

So with all the puts and takes, the primary factor that easily explains the decline was the change in geographic mix.

In the first quarter, the US business, the North American business was 66% of the total.

In the second quarter it was 73%.

We have said -- disclosed and told everybody that our international business has a higher gross margin than our domestic business.

But I think one positive is as we look at our US business, we saw our US business continue to improve its gross margin in the second quarter.

Such that the US gross margin is now just marginally below the Company average and the international business -- and this if you do adjust for royalty, which does not affect the overall Company.

The international business is a little bit above the Company average.

In the second quarter, the international business gross margin was down a little bit.

But the second quarter is a trough period for the international business.

Second quarter is always the worst quarter.

So you have lower volume impact on the business and obviously FX turned very negative which compounded the geographic mix in the second quarter.

From an outlook standpoint as I said earlier, we expect for the full year for margins to be up at least 200 basis points which would indicate improving gross margin trends for the rest of the year.

Some of the key drivers there are getting a full impact of the price increase we took in the middle of the second quarter with continued growth, getting more fixed cost leverage, continuing to see the productivity initiatives deliver.

Even though the US business will continue to perform well, since the second quarter is historically the trough quarter for our international business, we will see the international business improve from a geographic mix standpoint.

FX, who knows?

But it looks like at least right now like FX may have troughed in the second quarter.

So that may slightly help in the back half in terms of the sequential basis, the geographic mix.

But we do also expect on the negative side to continue to get in the back half of the year some commodity price increases.

All those things combined mostly on the positive side of the ledger indicate that we expect margins to be better.

Great, that's very helpful, Dale, thank you.

You did also acknowledge some uncertainty with regard to the macro outlook, obviously.

A lot of the data points we have seen recently have come in below expectations, particularly with regard to either housing activity or confidence or things like that.

Can you give us -- it doesn't sound like it, but can you give us a sense of maybe how business progressed through the quarter and did you see anything that would indicate a slowdown as the quarter went on or any feedback regarding July 4 holiday or what you've seen in Q3 to date or have things just been relatively steady for you guys?

Well throughout the second quarter, our business was pretty steady.

Obviously there's always a little bit of -- even within the seasonality of the year, there's a little bit of seasonality within the quarter.

But taking that into consideration, the business performed very well throughout the quarter in the second quarter and here on July 20, we are seeing the business continue to perform and within our expectations that we used to set this guidance.

Okay, and two more quickies, if I could.

With you guys now not at the upper end of the leverage target of 1.5 to two times, but getting a little bit closer to it, should we think about the buyback going forward as maybe more cash flow or free cash flow driven in the next couple of quarters as opposed to maybe adding incremental debt?

And then the other unrelated question, was Mexico the other piece of what was in the domestic third party?

And I guess where did that go?

I think you said it doesn't affect international third party.

Where do we see that going forward?

Chad, let me answer those in reverse order.

Mexico was the other piece of the third-party business in what used to be domestic.

Mexico is de minimus.

So it really doesn't affect and it also is now being reported in retail because it is a retail business but it really was a de minimus level compared to the US and Canada even.

On the buyback question, our target is to be 1.5 to two times debt to EBITDA levered at 1.88 here this quarter.

I think a good assumption would be that on a go forward basis, it's more than likely the repurchase will be more along cash flow lines at least for the time being.

But that is still to be determined and we will view that and determine exactly what our strategy is on that as time goes on.

Great.

Thanks, guys, for taking my questions.

Congratulations on another great quarter and good luck to you for the rest of this year.

Mark Rupe, Longbow Research.

Great quarter.

Dale, as it relates to the productivity plan, I know it's four years, it was 700 basis points was the target.

And the inherent oil assumption I believe was at $150 a barrel.

Given that we are a few years into that, any update on that?

Just trying to get a sense as we approach 50%, that was the original objective to get back to.

I have to assume where oil is today that an above 50% gross margin would be very achievable.

Just curious to see what your thoughts are on that.

Yes, I'll give part of the answer and then I'll let Mark give his view on it also.

Certainly when we set the 50% target, we were sitting here as a business at about 43 and change in terms of gross margin and so we were targeting for productivity initiatives to deliver a 700 basis point improvement without oil contributing.

Obviously the commodity prices are much lower than they were in 2008.

That's partly why we are approaching 50% much faster than we thought we would.

But from a long-term outlook standpoint, where we -- the 50% target was a long-term target, we do expect commodity prices to go up over time.

So another two, three years out, maybe commodity prices are back where they were in 2008.

Does that mean that in the interim it's possible we could go over 50%?

,Yes that is a scenario that is possible.

But as that approaches and what we had said all along was if we got above 50%, we would look strategically at what the right answer was.

We haven't changed that position but it is something that we will continue to evaluate and determine strategically what we should do.

Should we allow it to continue to go up?

Or is there a time to say let's go and reinvest the excess into the business.

Mark, do you want to add anything?

I think that is the key.

The thing is from time to time, depending on where oil prices are in a given quarter, we can bounce around above and below.

But in the long term for our long-term planning, we have used 50% as our target because we believe it's an appropriately good level.

But if we find ourselves systematically being able to be above it, we will reinvest that in whatever way is the best way.

The most obvious way is improving what we offer the consumer for the same price.

There are obviously things we can do.

But that is our plan, the way that we've built our strategic plan as we look forward over the next five years.

It's based on the idea that it will take time to get to 50% and then we will hold it at that level.

Okay, perfect.

As it relates to the Cloud Luxe, how should we kind of view that launch here?

Is it a different buyer than the Supreme and the entry-level Cloud in your perspective?

The answer of course is yes in that it is a significantly more expensive mattress and that is a major segmentation band.

But it is part also of the whole soft mattress concept which is what Cloud is which was appealing to the other 50% of the population who prefer a soft mattress versus a firm one.

And I would say that from the beginning, we have described these three mattresses as good, better, best and this one is the best.

As we first initially estimated, we thought that we would get essentially two extra spots per store when this was fully rolled out.

We think that could be a little bit conservative right now.

But that's what we were aiming for, thinking about it as a -- that the average store would have two of these items.

And clearly that would mean that they're different users.

So I do think it is clearly -- it brings in additional users, otherwise it wouldn't justify its place on the floor assuming there is a degree of cannibalization of any two products.

When you had no products that were soft and now you have three, there is a degree of trade-off between them.

Perfect and as it relates to the Sensation, I know there has been talk at least in the past about possibly bringing that product to the US.

I know you've got a lot on your plate right now with taking Cloud internationally as well.

Is there any kind of window where you would like to wait here, let's see how the Cloud rolls out and not kind of throw it on the heels of this Cloud success?

Or would you potentially capitalize and bring the Sensation here sooner rather than later?

Well we don't want to talk about -- obviously, we can't talk about launches before we have committed -- until the time is right.

But the thing I will say which as you can tell from my comments is that we are being -- we are trying to be quite thoughtful about leveraging the learnings and the developments we have in each part of the world and every other part of the world.

So that's why we are testing versions of the Cloud as I said in Europe right now.

And you can imagine things that are being developed in Europe might well be tested in other places in the world too.

And not just that, I think we are going to increasingly coordinate developments as we go forward so that we're making products that have as broad of an applicability as possible.

So there's nothing to announce at the moment but the principle of what you are implying is exactly what we are doing.

Perfect.

Good luck, guys.

Thanks.

Brad Thomas, KeyBanc Capital Markets.

Let me add my congratulations as well.

Mark, just want to follow up on your comments about how you noted that the firmer models had posted I believe you said substantial growth during the quarter.

Could you just share a little bit more color about what it was that you saw, how you try and back out whatever cannibalization that you think you may have generated from the cloud rollout?

And what is it that gives you conviction that it's perhaps the advertising campaign rather than just the Cloud really being a totally different product or the overall market perhaps being stronger?

Yes, as I said in the comments, as I'm sure you know, in the mattress industry in general, the second quarter in the US is smaller than the third quarter.

And we had anticipated that that would be the case for our base business, but we had anticipated that the Cloud because it was new and because of the rollout that we would have -- we had expected in our plan that the Cloud would grow sequentially quarter on quarter because of this newness and the rollout.

But we had expected that as normal.

The rest of the business would have a small diminution in the second quarter.

And as I said, Cloud did grow but so did the rest of the business.

If you look at the -- and it's hard to do it exactly, but if you look at the data for the industry as a whole and you compare the second quarter with the first quarter, you can see that overall the industry was at best flattish quarter to quarter.

So the fact that our non-Cloud business was up indicates that it was benefiting from more than simply seasonality or simply industry environment.

So, that is -- it is good news.

From a cannibalization point of view, clearly there is a degree of cannibalization but we're quite pleased with how low relatively speaking cannibalization is.

This is Dale.

Let me just add a point there.

Like Mark said, if you look at the first quarter versus the second quarter from an industry standpoint, obviously that's using ISPA data and the second quarter you only have two months.

So if you look at the first couple months of the first quarter compared to the first couple of months of the second quarter, the second quarter is showing at a normal seasonality where the first two months of the second quarter are slightly down from the first two months of the first quarter for the ISPA sample.

But our business did very well in the second quarter.

So we didn't see the normal seasonal pattern in our overall business or in our core business which we expected to see.

And just to follow up on some of the questions about margins from sort of a big picture standpoint, last fall I believe you outlined a longer-term goal of 25% for your operating margin.

I guess nine months later, how should we think about that opportunity given the success we've had in the Cloud line, some of the updates in terms of productivity improvements and perhaps as you think about some of the mix headwinds as well?

Let me answer that first and then Dale will too.

Those numbers, the 15 to 25, are our long-term plan.

They were made -- we communicated them about a year ago and they remain our long-term plan.

That is the plan.

As you know, our plan is based on the belief and the conviction frankly that we have a lot of potential growth because we have a product that is preferred by the consumer but has a relatively low market share and so -- both in the US and internationally.

And so our plan is predicated on the four elements of our plan to capitalize on that and to grow our business.

And we believe that the key numeric metrics around which we hang it is the 50% gross and the 25% operating margin.

And implied in that for example is the fact that we're going to spend 9% on advertising which is baked into the plan which builds toward what we believe is the optimal amount of spending.

So the whole thing from a quarter to quarter or year to year because of things from price of oil to rollouts, you are going to see fluctuations.

But the idea is those two numbers are what we are working to for the foreseeable future.

Yes and I would just add that here we are three quarters after we rolled out that plan and we are feeling very confident in our ability to achieve it.

If I could ask one last question on door count, maybe you could just give us an update of where you are in North America and international.

And then, Mark, I know you talked about Canada.

I don't know if we can talk too much about the door trends during the quarter overseas but maybe you could just give us an update on where you are.

I know you added Dreams in the UK last quarter.

Seems like there's still a great deal of opportunity there.

There is a good deal of opportunity, you're correct.

The addition of Dreams was a very important part of the growth in the UK and Europe overall.

And there are other customers that we expect to be announcing soon.

Dale has got the precise numbers here, so I'll let him give them to you.

Domestically we're right about 6500, so up approximately another 50.

I will add that in Canada, we had 400 doors now and that's not a number we have reported before and we won't continue to report on an ongoing basis.

But we will fold that into a North American number and adjust our targets accordingly.

But as Mark mentioned earlier, we have significantly expanded our distribution in Canada this year and are very pleased with that position and now we just need to keep driving the increase in brand awareness and consumer knowledge of the product out there.

Internationally right about 5150 which is up another 30 doors or so, principally from completing the rollout in the UK.

But we do see significant opportunity both as the year progresses internationally as well as long-term internationally to drive substantial store growth.

I'll turn it over to others, but congratulations again on a great quarter.

(Operator Instructions) John Baugh, Stifel Nicolaus.

Good afternoon and congratulations.

Just quickly, Europe, reading so much about Europe.

Could you give any color on any trends there positively or negatively?

But I have to charge you for the advice.

Look, we had pretty good growth in the second quarter, 14% in our international business and Europe was consistent with the European growth.

But the sovereign debt crisis happened in the middle as did the ash cloud and so on.

So there's a lot of confounding things going on in Europe.

But frankly as we look forward, if we look at the detail from the quarter, there are some countries that have done quite well, some that have done quite poorly and some that we thought would do well have done badly and vice versa.

It's a mishmash and it seems to be quite -- it's still a high degree of uncertainty.

So quite honestly as we look forward, that is going to be one of the things that we will be sensitive to because it is not easy to predict.

It hasn't -- the business -- let's face it, we're up quite nicely.

But it's just that it is -- if you look at it from country to country, there's a very high degree of variability.

So we have a certain degree of concern about how this is going to shake out because the sovereign debt crisis is not over yet.

Okay and then any help with how influential on the unit number -- it was 61% in the second quarter.

It was a similar number or slightly better in the first quarter, US mattress units.

I know you have got some sample sales in there.

Any help on extracting that or maybe for the whole year '10 what do you suspect sample sales of Cloud will be and influencing that unit number of mattress sales in the US?

Well the floor models were down in the second quarter versus the first quarter.

In the first quarter I think we had about 4500 or so, 4500 to 5000, I don't remember the exact number.

Floor models in the first quarter, we had in the neighborhood of 3000 floor models in the second quarter.

So 3000 is kind of -- floor models is de minimus compared to 61% growth in units and because we did have floor models last year, not 3000 but there's a certain number of floor models that happen on a continuous basis with new stores or changeouts or whatever.

As we go on through the rest of the year, we will continue to roll out the Cloud, the entry-level Cloud.

It's continuing a nice progression.

Early in the year we thought maybe we could get it completely out by the end of the second quarter but we're not there yet.

So we'll continue rolling out the Cloud.

And we will start rolling out the Luxe.

Now we had said last quarter that we thought the Luxe would be out around August 1.

However as things have gone on, we did have some product shortages in the second quarter.

So we made the decision to delay the Luxe until after Labor Day because -- the reason why we had product shortages was as Mark mentioned and we've talked a lot about, we expected a seasonal decline in the core business but the core business saw substantial growth sequentially.

So we weren't really geared up for that.

And so given some customer issues that we created for our retailers out there, we wanted to make sure that we were adequately producing and adequately inventoried for Labor Day.

So rather than throwing a significant rollout of the Luxe into the Labor Day mix, we're going to wait and roll it out post Labor Day.

Now we also expect that the Luxe versus our earlier thought, the Luxe we think will be -- get even broader for distribution than what we originally thought.

And part of that is because we've made a strategic decision to discontinue the Celebrity.

The Celebrity is something that we have been looking at for a while.

We brought out the Allura a year and a half, two years ago as an upgraded Celebrity.

We kept the Celebrity out there though because it continued to perform pretty well.

But the Allura continues to significantly outperform the Celebrity.

It's a much higher price point.

And as we are bringing out the Luxe, we're going to discontinue the Celebrity and that opens up even more floor space for the Luxe.

So we think net net it's a significant win for us.

What was the price point again on Celebrity?

Same price as the Luxe.

That's helpful.

So post Labor Day means what?

October?

In time for (multiple speakers)

It will be in September but we still wait until after the Labor Day crunch.

Okay and then just refresh me again on the magnitude and the timing of the price increases in May.

And I guess a different way to answer the question, what the price influence on Q3 and Q4 will be year over year.

Well, the Advantage retail price went up $100 in May and a lot of that went to the retailers on the Advantage.

We decided we needed to improve the margin on the Advantage for the retailers.

On the Cloud, that price was increased before we started shipping it.

So that price really went up in February.

We increased the price on the Luxe and we haven't shipped it yet.

So it won't start -- in reality versus what we are planning, obviously we expect the Cloud to do better but that is built into our latest guidance.

The big one was the Cloud Supreme.

That price went up 15% in May.

And so you know that has been a benefit to us.

I won't get into trying to articulate what that price increase does from an overall business standpoint because that will allow you to back into how the Supreme is doing.

The Supreme is doing extraordinarily well.

So you know, pricing is a positive impact.

As we said a quarter ago, it will be a positive impact on the back half of the year and we continue to expect to see a positive impact for the balance of the year and into next year.

Any price changes on the international product line?

And that is my last question, thanks.

We had some price changes on the international line, modest pricing changes.

Those typically go into effect at the beginning of the year and it varies by market.

Again, they tend to be selective price increases, not across the board anywhere.

It's fairly minimal impact, but modest price increases on a couple of products internationally in certain markets.

Joe Altobello, Oppenheimer & Co.

Just a few questions.

First I think when you launched the Supreme, the vast majority of the retailers took that as an incremental slot.

And I guess you sort of answered this question a little bit with regard to the Celebrity.

But as you launch the Luxe and the base Cloud SKU, is that still going to be the case where the retailers that take that will have to take that as an incremental SKU -- an incremental slot?

The Cloud Supreme was for all intents and purpose incremental wherever it went.

The Cloud is largely incremental, it's not quite as much, but largely incremental disproportionately.

As I said a few minutes ago, I said that we had hoped overall to get two, the net of two by the time we had the full rollout of the Cloud Supreme and the Luxe.

This decision to swap out the Celebrity for the Luxe, we're essentially replacing a price point with another product at the same price point.

[We're feeding to a] different consumer and not overlapping with the the Allura.

So it provides a justification to a retailer to have a broader range.

So we as I said expect to end up with a little more than two Cloud spots per store as a result of (inaudible)

We expect because of the Celebrity decision to possibly get broader distribution than what (technical difficulty)

Okay, got it.

Fair enough.

And then secondly, you mentioned earlier -- I think it was Mark on the call about maintaining a lot of the marketshare gains you guys have made the past call it six or nine months or so.

In that regard, have you seen any changes with regard to your competitors?

Obviously your results have been much better than anybody else's.

So I was curious if you had seen a change on their part.

Are they increasing the competitive spending?

Are they increasing the innovation cycle because the new products are coming out in the back half of this year?

Obviously we're in a very competitive market with very tough and good competitors and they continue to be aggressive as they always are.

In terms of specifics, I think it's probably better to ask them.

Okay, but in terms of your business, you have not seen anything or any change from them of late?

The competitors have products that they are rolling out.

We will see if there's anything new that we haven't seen yet at Vegas in a couple of weeks.

But it's a tough competitive industry and people aren't sitting still.

But by the same token, we are not either.

We're continuing to drive forward and we're continuing to take share.

Okay, great.

Just one last one in terms of the strategic research you guys are doing second half of the year, it doesn't sound like it's going to be all that much but could you quantify the incrementally spend on the SG&A line we should see?

Yes, it would be about $3 million approximately incremental spend and we are covering a variety of markets.

We did a similar kind of strategic research in the US a year and a half ago and it kind of led to the Cloud and the Ask Me campaign.

And so we are trying to step up the level of research and doing kind of a special research project in Europe and Asia to cover some of the major markets and that spend will be kind of balanced over the back half of the year.

Keith Hughes, Suntrust.

Two questions.

Number one, based on your comments on the market research in Asia and Europe, in 2011 will we expect more product introductions there than in the United States?

That would definitely be jumping the gun.

We haven't done the research yet.

The thing about it is the way to think about it is this.

I have said this before and you've heard me say it, but it sounds trite.

But our key -- we recognize or we believe we have great conviction and we have great potential for growth.

But the four elements that drive our ability to achieve that growth is to number one make sure that there is a mattress and pillow for everyone and make sure that everybody knows about it.

Those are the first two of our strategic imperatives.

And the fact is that the European and Asian consumers have different preferences than the American ones do.

And as you all know very well, it's not the same in Japan as it is in China or Germany as it is in England.

And so understanding the consumer better is critical and understanding how to communicate effectively to maximize the effectiveness of our communication is also very important.

So it may be that the upshot of this will be new products and so on.

But it may be other things too.

It's the appropriate time.

We did it a year and a half ago here in the US and I think it's the appropriate time to do it over there.

What the outcome will be, we will see.

We have said this many times though is that roughly speaking, we have 12 mattresses in the US and in any given country in the rest of the world, they have access to roughly that number.

We don't see the need to have 30 or 50 or even 25 products.

We could see the need to have some expansion.

It's the degree to which each product is optimized for meeting the needs of a different set of consumers and therefore is going to maximize the effectiveness on the floor for the retailers in each country.

And it's that that we are striving towards.

Dale, can you give us the ending share count in the quarter?

I don't have that handy.

It will be in the Q.

Obviously the average for the quarter was 73, 152 but I don't have it at my fingertips for where it ended.

That's fine, I can get it out of the Q.

Just along the same lines, how much in options should we expect per year from you that would go into the share count?

I think a ballpark figure to think about is about 1 million.

Per year?

Yes.

Jack Murphy, William Blair.

Just a couple of follow-up questions.

Mark, I think you talked about international, saying that it performed well given the conditions.

But just to kind of clarify, relative to your internal expectations, it sounds like US, North America did better than you'd expected at the beginning of the quarter, international did worse.

Is it fair to characterize it like that?

I think that it is.

We had not anticipated the -- obviously the crisis in Greece and everywhere else.

It happened and we hadn't anticipated the cloud, both of which did have some effect on the business as a whole.

But even taking those things aside, the European and the -- which is the bulk of our business overseas -- market has been troubled throughout the quarter.

So yes, that is true.

And then within the European business, how has the Sensation help up relative to the remaining products in the portfolio?

It's done quite well.

It is a very different product to the Cloud, but like the Cloud, it appeals to a different audience.

The people who like the Sensation generally are different than the ones who like regular Tempur-Pedic.

They are seen as two different -- they are two different consumer groups.

Right and the relative runway for that product since rollout, is there still a ways to go in terms of let's say extraordinary rates of growth?

I don't want to get into the details, we try to avoid specific details on specific products.

But let me characterize it like this.

It is without question a successful launch and it has worked well in several different countries around the world.

So definitely we would fall into the category of a successful product position.

It is not hitting the ball out of the park in the same way that the Cloud has.

But you're not going to get very many Clouds.

So I think it's done very well.

It's a good new product introduction which is relatively low cannibalistic versus general product introductions.

(Operator Instructions) Bob Drbul, Barclays Capital.

This is Jessica (inaudible) on for Bob.

I just wanted to ask you a question, kind of a follow-up to the overall macro environment.

On your last call, you said that the overall mattress market was probably on track for 7 to 8% growth this year.

Do you have any update on that outlook or think it's still a reasonable expectation?

And then [on traffic] you said it was still not quite back to normal but last quarter we had been seeing some stabilization.

Would you say it's consistent with the first quarter?

Or have you seen some change in that?

On the outlook for the year, I think the best gauge right now is what have we seen at least from a sample basis.

ISPA sample represents now about 70% of the industry.

Through May, the industry has shown an 11% year-to-date improvement.

So at this stage, short of any new information, I would expect the industry to do somewhere in that 11 range.

I don't know that there's going to be a dramatic turnaround.

We may change our mind in a few weeks when we see the June data.

But with the data being delayed, we don't see a full Q2 yet but somewhere in that high single to low double digits seems to make sense given May year to date for the sample anyway is up 11.

Okay, great.

And then was there any sequential change in traffic that you noticed on the first or second quarter?

Or is it pretty much the same?

It's the same, I don't have access to statistical data from our retailers.

What I have is just what I hear from them.

And what I've heard, I've heard it's still less robust than it has obviously been in the past but also it still feels a little sensitive.

What they say is that -- what we have seen and what they say is that on the big weekends, they tend to get good traffic.

But very quickly after the weekend, it falls away.

So it is still less than it has been and it is still volatile.

We will now take a follow-up question from Mark Rupe.

Dale, just a quick follow-up on the Luxe versus Celebrity.

I know that they're at similar price points but do you anticipate any kind of margin impact on that transition?

Yes, the Luxe is a higher margin product.

Ladies and gentlemen, that does conclude today's question-and-answer session.

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

Thanks, Linda.

So thank you, everybody, and we look forward to talking with you again in October when we will review the third quarter.

Thanks for joining us this evening.

Ladies and gentlemen, that does conclude today's conference call.

And we thank you for your participation.