Tempur Sealy International Inc (TPX) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tempur-Pedic Third 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, Senior Vice President.

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

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

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

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

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

And now, as a reminder, the Company will be hosting an Investor Day presentation and Q&A session on November 11, 2010 in New York.

There will be a live webcast of the event available.

For more information, you may visit the Company's website or e-mail us at investor.relations@tempurpedic.com.

And now with that introduction, it's 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 Third Quarter, an update on some of our strategic focus areas, and commentary on our outlook.

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

We're pleased with the market share gains and the sales and earnings growth we've achieved in the third quarter.

Sales were up 32% from last year, and earnings per share were up 82%.

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

Fixed cost leverage [and] our productivity program helped increase gross margin by 340 basis points year-over-year, to 51%.

And with that improvement partially offset by strategic investments, our operating margin expanded by 400 basis points year-over-year, to 23%.

As result of this better-than-expected performance and continued good indications for the remainder of the year, we are raising our guidance for the full year, and Dale will go into the details.

Now, we're doing this in an environment that's still unpredictable, and we hear from many of our retailers that consumer traffic is still not back to normal.

But we believe that our business will continue to grow and our share gains will continue.

Now, here's a brief 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.

The Cloud collection, which appeals to those consumers who prefer a softer feel, continued to sell very well, and helped expand our market share significantly.

The price increase we took on the Cloud Supreme in the Second Quarter has not affected consumer demand, and the product continues to be very successful.

We are essentially complete with the rollout of the entry level Cloud model, and late in the quarter, we began the rollout of the Cloud Luxe.

Retailer interest in the Luxe is high, and we believe it will also help us grow share and improve average price.

We are at this moment in the final stage of commercializing a Cloud line of mattresses to be launched in our major international geographies, and we'll begin distribution early next year.

And similar to our kickoff events in the US, we will be focusing a lot of attention on the Cloud as it begins its international distribution.

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

This quarter, we increased our total advertising investment 37% above last year, to $25 million, primarily by ramping our Ask-Me marketing campaign in the US.

We believe awareness of our brand is a key component of market share and topline performance in every geography where we compete.

During the quarter, we also launched a new, much-enhanced website.

If you haven't seen it, I encourage you to visit tempurpedic.com.

The site does a much better job communicating our product architecture, and allows us to more effectively link our direct activities with our retailer networks' distribution.

It's also designed to be much easier for the consumer to use.

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

We began opening some new accounts during September and October, adding about 200 doors, and expect further increases in the Fourth Quarter.

During the quarter, we also expanded our average number of slots in our retail partner stores with the completion of the Cloud rollout.

Aligned with several of our key initiatives, including our commitment to ensure Tempur continues to deliver the best sleep, we utilized extensive consumer research and testing.

And as we discussed last quarter, we're in the process of conducting a significant amount of strategic research across the globe.

And while not yet complete, the findings are reaffirming our long-term plans.

In particular, we'll be focusing more attention on growth throughout our international markets, where we see marketing, product development, and distribution gains as the keys to achieving our objectives.

For example, we plan to increase brand awareness in Europe and Asia by increasing our investment in advertising.

Next month at our Investor Event when we have more time to review long-term plans, we will share more of these findings.

Throughout 2010, we have grown sales and profit while improving our competitive position, strengthening our product line, improving the effectiveness of our marketing, and increasing our margins.

We continue to project considerable potential for growth in Tempur-Pedic over the coming years, and over the coming quarters, we will invest to capitalize on this opportunity.

With that, I will now hand it to Dale.

Thanks, Mark.

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

In total, third quarter net sales were $295.8 million, an increase of 32% over the same period last year.

Foreign exchange rates were unfavorable during the quarter, such that on a constant currency basis, net sales increased 34%.

North American sales were up 47%, and international sales were up 4%.

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

By channel and North American retail, net sales were $198 million, an increase of 52%.

Our North American direct channel was up $4 million, or 34%.

Internationally, retail sales were up 4%, to $64 million.

On a constant currency basis, international retail sales were up 10%.

On a product basis, mattresses were up 33% driven by a 29% increase in units.

North American mattress sales increased 46% on a 47% increase in units.

In the international segment, mattress sales increased 3%.

On a constant currency basis, international mattress sales were up 10%.

International mattress units increased 3%, reflecting our comping the successful sensation mattress collection launch in a continued sluggish economic environment in Europe.

In total, pillows were up 20%, driven by 19% increase in units.

North American pillow sales increased 39% on a unit growth of 35%.

International pillow sales were up 3% on a 1% increase in volumes.

Sales of our Other Product line, which includes items that are normally sold along with a mattress, were up 37% in total and 52% in North America.

The Other Product line grew faster than mattresses, largely related to improved attach rates of our adjustable beds.

Gross margin for quarter was 51%, up 340 basis points year-on-year, and 230 basis points sequentially.

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

One, increased production volumes to support higher sales resulted in fixed cost leverage.

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

And third, favorable product and channel mix.

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

On a sequential basis, our gross margin was up primarily related to fixed cost leverage and improved product mix.

Our third quarter operating profit was $68 million, an increase of 60% year-over-year.

With significant sale growth, we drove over 400 basis points of operating margin improvement.

Our operating expenses were up, reflecting our commitment to investments and sales and marketing initiatives to drive growth.

In addition, the increase in G&A expenses primarily reflects costs associated with the strategic research we had discussed last quarter.

Interest expense was $4.1 million, and our tax rate was 30.5%, down from prior year, driven by a one-time gain due to the reversal of a previously uncertain tax position.

Net income was $44.2 million, up from $25.7 million.

Given our improved profitability, EPS was $0.62, up from $0.34 last year.

Now, I'll turn to the balance sheet and cash flow for a brief review.

Our accounts receivable balance was up, reflecting sales levels, however, DSOs were down four days from last year.

Inventories were up $20 million year-on-year, and modestly from last quarter.

Inventory days were up five days year-on-year, yet down one day sequentially.

Payable days were up three days from last year and seven days sequentially, reflecting seasonality and our focus on improving cash flow.

We generated $72 million of operating cash flow during the quarter, and capital expenditures were $6 million.

Through open market purchases, we bought 1.8 million shares during the quarter.

With first half activity, this brings our year-to-date buy back to 8.5 million shares for total spend of $250 million.

With the repurchase activity and $6 million of capital expenditures, our debt was essentially unchanged from the second quarter, while cash was up $23 million from the last quarter.

Our funded debt to adjusted EBITDA ratio was 1.7 times, well within our current desired range of 1.5 to two times.

We are pleased that our Board has authorized an expansion of our share repurchase program by $50 million, bringing the total authorization to $150 million.

Since we bought back $50 million of stock in the Third Quarter, our remaining authorization currently stands at $100 million.

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

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

We currently expect net sales to range from $1.095 billion to $1.115 billion.

And we currently expect EPS to range from $2.05 to $2.10 per diluted share.

We expect our gross margin to be up approximately 250 basis points for the full year, driven by fixed cost leverage in our ongoing productivity plan, partially offset by geographic segment mix and commodity costs.

We expect interest expense for the year to be approximately $14.5 million.

We anticipate the full-year tax rate to be approximately 33% despite the lower rate in the third quarter.

We are using a share count of 72.8 million for the full year.

And this implies a share count of approximately 70.5 million in the fourth quarter.

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'd like to open the call to questions.

Thank you.

(Operator Instructions).

Our first question today comes from Bob Drbul with Barclays Capital.

Hi, good evening.

Hi, Bob.

I just have -- can you talk a little bit about the Cloud Luxe and how it did post-Labor Day?

Any thoughts around that is my first question.

And on the Cloud internationally, are there any metrics around the ramp-up of doors?

Or how we should think about it from that perspective?

The Cloud Luxe is really early in its rollout, Bob.

I mean anecdotally, it seems to be going very well.

There's a lot of retailer interest.

We have a very good timetable of how it's going to roll out, but it's going to take several months to roll out materially and it's going to take something like seven or eight months to roll out completely.

So, quite frankly, it's just too early to make any serious comment about it, other than all indications are that it's doing well.

So, it's doing fine so far, but it's too early to make a real database judgment.

As for international, it's a significant opportunity but it's going to roll out kind of country area by country area.

It's not going to roll out all in one go.

And we anticipate that it will get very significant penetration, but perhaps not as great of a penetration as we're going to get in the US, just because in general as a rule, people in Europe and in Asia prefer firmer beds than they do in America.

So, while there is a demand for this bed, it's going to be somewhat less, and that's going to be reflected in the number of doors and ultimately the number of sales.

But the time it'll take to get to the same proportion of distribution that we have here in the States is going to be -- it's going to take a little while to get there.

Okay.

And then just one last question is one for Dale.

Can you talk a little bit about -- and you talked about rising input costs or chemicals.

Any pressures on the chemical input costs around Polyol or TDI?

Well, Bob, as you may recall, we've talked all year that we expected kind of a quarterly increase on our primary chemicals.

We had an increase right at the end of last year, we had an increase in the first quarter.

But, we did not see an increase in the second -- late in the second quarter or late in the third quarter as expected.

So, right now, we're -- we've been fairly stable from a commodity cost standpoint since kind of the March timeframe.

Now, as we get into the New Year, our expectation is we'll see some pressure there.

But right now and for the balance of the year at this stage, given our contractual relationships, it's stable from where it's been for the last six months.

Great.

Thank you very much.

Our next question comes from Mark Rupe with Longbow Research.

Hi guys.

Congratulations on the quarter.

Mark and Dale, on the fourth quarter kind of thought process on the outlook, is there anything that's different in what the trends that we've seen so far as it relates to kind of the US business and international business as we head into the fourth quarter?

Is there any change in inflection, demand trends or expectations?

Not fundamentally.

As you know very well, the comps that we're going up against are different in the latter part of the year than they were in the first half of the year.

So, if you look at it from a comp base it's different.

If you look at it on a sequential basis, bottom line, the sort of simple answer to your question is nothing fundamental, beyond the fact that there is a certain degree of -- the industry is reporting that they're expecting a weaker second half than they had in the first half.

And to some extent, that's factored in.

But if you look at our numbers sort of sequentially, as you can see, the trends are essentially the same.

Okay --

Mark, I would just add that what we have laid out in this guidance is kind of pretty typical seasonality.

US business would be a little softer in the fourth quarter from the third quarter, international business a little bit stronger.

Okay.

Perfect.

And then I know in the last call, you commented just briefly on kind of the core business, non-Cloud.

Anything you can offer on how that's doing as we speak?

We're quite pleased, to be honest.

Obviously, the Cloud has driven a lot of our growth this year.

We had anticipated when we launched it that there would be a material amount of cannibalization.

The cannibalization of the Cloud has been less than we anticipated, but quite significantly, and the base business is growing sequentially, too.

So, overall it's pretty good.

Great.

And lastly, on the gross margin, I know you've had this four-year productivity plan in place.

You've had great strides so far.

Just curious to see what kind of the near-term or mid-term opportunity is on that and what kind of the key focus initiatives are right now.

Remember, the gross margin target is a long-term plan, and it was set in place in a different-- frankly different world.

But, the long-term plan is still the long-term plan.

But on the other hand, there are investments we are making and need to make in things like advertising to build awareness, which we are going to continue do.

So, from time to time, from quarter to quarter, we're going to flex this.

It's a long-term target, it's not something that we're going to adhere to month-by-month and quarter-by-quarter.

Okay.

Perfect.

Thank you.

We'll now hear from Budd Bugatch with Raymond James.

Good evening, Mark and Dale and Barry, and congratulations on the performance.

Thanks.

Again, trying to piggyback on something you said, Mark.

You said that the average slots per door are up, I think.

Any way to give us a quantification on that?

How would we look at that?

We haven't traditionally given that, and, frankly, I don't want to set a precedent here right now.

We obviously are very focused on it because it's a very important metric.

And obviously also, the importance of Cloud, particularly, is that it is bringing in a new consumer to the retailer, and therefore it justifies its additional slots.

We are growing slots but I'm not going to break the precedent here and actually say what the number is right now.

But, I would say that we're well on the path that we had set out when we introduced the Cloud, where we said we wanted to get two incremental slots.

We're tracking absolutely on that path, and are very comfortable with that still.

Did we set a timeframe for getting those two incremental slots?

Basically, it's when all three are fully rolled out.

So, that would say that maybe September of next year or actually mid-part of next year that you think you would have had two incremental slots per door?

Yes.

We would expect that the Cloud Luxe will essentially be fully rolled out by probably end of the first quarter kind of timeframe, ballpark-ish.

Mark, I think, said seven or so months.

So, kind of by that timeframe we should have achieved that target.

Okay.

And how about quantifying for us the percentage of sales or units that are now a Cloud versus non-Cloud with the Company and how that -- you've said that most of the growth, or a significant portion of the growth, has come from Cloud.

How do we think about the percentage of total units now that are Cloud domestically?

Well, we're not going to break down our revenue by product line.

What I will say is consistent on what we've said before.

The base business is outperforming the industry this year, and outperforming it pretty well.

And the Cloud is, Mark has said, has been significantly incremental, much more incremental than we planned.

So, we're getting good growth on the core business.

And the Cloud has been a very nice upside for us.

But we're not going to get into trying to break out the business by product.

Okay.

I keep trying.

That's all right.

You can try.

We'll just keep not answering.

We'll keep at it.

Domestic versus international for the fourth quarter, I know you said that international is typically stronger fourth quarter -- apologize for that.

Is it going to be just normal seasonality for that?

Or should it be somewhat different than that?

No.

We are expecting kind of the normal seasonality.

Just US business tends to be just slightly down in the fourth quarter from the third quarter, based on historic seasonality.

Recent years are not normal.

And the international business tends to step up in the fourth quarter and tends to -- generally the fourth quarter is the strongest quarter of the year for the international business.

So that's how we're how we're expecting the fourth quarter to transpire.

Okay.

And I was quite taken with the working capital improvement, particularly in the receivables at a four-day improvement.

Is that sustainable?

I think that may be the lowest receivable days that I've seen since looking at the Company.

We have had tremendous improvement in the receivable performance going on two years now, even through the difficult times.

And in terms of further improvements in days, it may be getting a little bit tougher to get further improvements in days, but certainly we would not expect to have degradation in days -- The only thing would naturally cause some degradation would be if there is a growth shift where we had more international business because the days tend to be a little bit longer internationally than they are in the US.

But am I right to calculate the composite days at about 39?

Yes.

And is that the right number?

Is that within your terms?

Or, what are your domestic terms typically on terms of days outstanding?

Domestic terms are typically 30 days, international terms vary by country.

On average, it's probably closer to 60 days.

All right.

Thank you very much.

Congratulations again, and good luck for the fourth quarter and for the season.

Thanks, Budd.

(Operator Instructions).

We will now hear from Brad Thomas with Keybanc.

Thanks.

Good afternoon, guys.

And congratulations on another great quarter.

Thank you.

I just wanted to follow up a little bit more on the Cloud and then ask kind of a question on its rollout on, I think, in a different way.

Could you maybe just talk a little bit about the floor space you're getting by the different line and maybe kind of what inning you're in and how many doors you're in?

I mean it seems like the Supreme, even going back to last quarter, was in just about every door you thought it would get in and we were pretty far along on the entry level Cloud as well.

But, could you just maybe characterize it from that perspective?

I think the way -- I mean, very broadly speaking, we think that the Cloud Supreme should be in every one of our retailers.

And if it isn't, it nearly is.

And it will be.

Know what I mean?

It's very -- essentially penetrated.

We think the Cloud is going to be in the big majority of our retailers.

It's not going to be in every one, it's not going to have quite the same penetration, but it is going to be a very, very well distributed product.

And the Luxe, for a premium product which by its nature is going to have a lower distribution, is going to be one of our highest distributed premium products.

So, I think that in sort of like one, two, three in terms of number of doors that we're going to end up with, all of them material, starting with the Cloud Supreme essentially everywhere.

Is that useful?

That's helpful, Mark.

And then within your Other category, I know during the quarter you rolled out the entry-level-priced adjustable foundation.

Could you tell us a little bit about what you're seeing in terms of the initial response?

And is that getting more people to buy the foundation or having -- and are you seeing anything in the way of cannibalization?

It's early days again.

And so again, it's longer days than the Luxe, but it's still early days in terms of how long we've had it in the stores.

But, what we're seeing is as of now, interestingly, no impact on the -- minimal impact on the advanced model.

In fact in some ways, many of the retailers are telling us, we've heard from more than one account that it helps people talk up.

If you introduce them with the lower priced one then you can move them to the higher priced one.

So, in fact, it's actually an aid to selling the higher priced one.

So, we're seeing very little cannibalization at this stage.

But, again, very early days.

I want to be cautious about how I characterize it.

We're pleased with how it's rolled out, it's been well accepted.

Too early to really comment on it.

But, I mean you've really had some phenomenal results within the Other category for the last three or four quarters here.

It seems to be a big opportunity within foundations.

I mean where are you guys from a slotting standpoint in terms of having your foundations on the floor?

And could you just talk a little bit about your strategy there?

The thing about -- I don't know if I'm exactly correct, but we're essentially 100% distributed with those bases.

It's the issue of how many of the slots are carrying the base.

If we find the retailers who have the greatest number of their beds with an ergo underneath them, their attachment rate is higher.

And in fact those customers have higher USP in general.

So, it's a win-win, and most -- it's a conversation that we have with our customers, and it's something that the kind of demonstrability of that is something that's driving the growth of our other business this year because our attachment rate is growing because people are doing it.

It really is a function of making sure that the consumer can try an adjustable base whatever bed they prefer.

It's very -- what customers find is that it's much easier to tell somebody the adjustable base if the bed that they prefer has an adjustable base under it, rather than having to show them how it works on another bed.

And that is what we're driving, and we're growing the number of slots per store that carry it.

And that is one ever the primary drivers of that growth of business.

Great.

Thanks, Mark.

And then just lastly, if you could give us an update on how things are progressing in Canada, that would be great.

Good.

It's a great -- it's obviously a very important business for us.

The transition has gone well.

They are fully integrated as a subsidiary now of ours.

I'm not going to get into it again, setting a precedent of breaking out business, but I will tell you they are doing quite nicely.

And we're quite pleased with how they're doing so far.

Great.

Thanks, Mark.

Look forward to seeing everybody in November.

Good.

Look forward to seeing you.

Our next question will come from Joe Altobello with Oppenheimer.

Thanks.

Good afternoon, guys.

First question, I just wanted to go back to the gross margin for a second.

Dale, you talked about the productivity program and fixed cost leverage.

But, it just seemed like it was much higher both year-over-year and sequentially than I was looking for.

Is that just because the sales base is so much bigger this quarter that the fixed cost leverage was that much greater?

Yes.

Certainly that's one of the components.

We have -- obviously the third quarter was a record quarter for us.

It's the best revenue quarter ever.

That generated a lot of fixed cost leverage.

If we look at the improvement in gross margin, fixed cost leverage was probably about half the improvement on a year-over-year basis or on a sequential basis.

And productivity in the channel mix being the other half.

The productivity program continues to progress very well.

The team is driving tremendous cost improvements throughout the business.

And, we're very pleased with the productivity program.

It's still tracking slightly ahead of schedule.

And there are the negatives.

The segment mix of more US ,less international, does drive a little bit of pressure.

And on a year-over-year basis, chemicals does create some pressure.

Even though they've been stable for about six months, there is still year-over-year pressure there.

So, we've been able to get very good improvement across the business.

Got it.

Okay.

And then in terms of your longer term target, you talked about 50% gross margin, and you're just about there now, and a 25% operating margin as a target.

I thought that was about a four-year target, and this, I guess, is year one of that.

Are you still on target to get to that 25% EBIT margin by, let's call it, 2012 or 2013?

Well, it was a four year-target to get to 25%.

And actually, it was a four-year target to get to 50% on the gross as well.

But, it was a very different environment.

So, with chemicals being a little bit easier than they were in 2008 and much higher volume, we've gotten there much faster.

And, I'll reiterate what Mark said before, that there's not a magic alarm that goes off when we hit 50% that says we have to do something.

That was a long-term target with assumptions that some of those assumptions are not as bad as was assumed back in 2008 when we said that.

That gives us some flexibility to continue to maybe be a little bit over 50% and drive the kind of investment that we think we need to help drive the international growth in the business, the 25% operating margin target, that was a four-year target going out to kind of the 2013, 2014 timeframe.

And I would say we're well ahead on that target and pleased with our performance.

And we'd like nothing better than to get there sooner, but we're not going to project that yet.

Got it.

Okay.

And then just one last one.

I think you talked about doing some consumer research, particularly on the international side.

International today is about, what, 30% of your sales.

What could that number be three, four, five years out?

I think that-- the thing that the consumer research has shown and that we'll discuss more when we're together in the sixth month, is there is very significant potential internationally, in Europe and in Asia.

And that the penetration that we have in those countries is significantly lower than it is in the United States.

And that there is no fundamental reason why it cannot grow quite significantly.

And that's what we'll share with you.

And also the path to what needs to be done in order to make that growth is also quite clear.

At the same time, however, we believe there's enormous opportunity for growth in the US.

So, I'm not projecting in percentages.

Relative size of the two businesses, I think that both sides, both the domestic business and the international business, have significant growth potential.

So, whether the ratio of their sizes changes, I don't know, because they'll both grow.

I see.

Okay.

Great.

Thank you.

We'll now hear from Keith Hughes with SunTrust.

Thank you.

You talked earlier about 200 new doors.

Were those domestic, international?

Any kind of color on that would be helpful.

Yes, that was domestic, 200 new doors to domestically.

Internationally, we had -- looks like international in the third quarter, it was kind of flattish.

Flattish.

And what kind of doors in the US?

Are the specialty sleep or what type of retail?

A mix of specialty sleep and, I'm not sure how to categorize the other one, kind of a mixed retail environment.

And in terms of advertising, the number you referenced earlier, is that what we're going to be seeing per quarter in the future?

The $25 million?

Yes.

I would think that if we keep growing the business, we'll see higher advertising.

We've said all year that our goal is to get advertising back up to 9%.

We're not quite there.

We've been chasing revenue all year.

It's a good kind of problem.

So, we still are tracking below the 9% of revenue, and over time we'll get there.

All right.

Thank you.

Thank you.

From William Blair, we'll now hear from Jack Murphy.

Thanks.

I'd just like to start by asking about the quarter, how it trended.

And in particular, did you see much difference between the beginning of the quarter, toward the end of the quarter in international?

And was there any particular month, July for example, that might have been weaker in the US and then recovery toward the end?

I would say both domestically and internationally we saw pretty typical seasonality.

And what that means is we tend to have a good July and you see a little bit of ramp in the business going into Labor Day and then it traditionally softens a little bit post-Labor Day.

And what we saw in the US business was very typical of the normal seasonality that we've seen in the business.

And conversely, I would say what we saw in Europe was pretty typical from a seasonality also, where certain countries, they have their vacation months.

Some countries it's July, some countries it's August.

They're all back to work and they're all home in September.

So, September tends to be a little bit stronger internationally in the third quarter, and that leads into kind of the peak period for the international business, which is 4Q.

Okay.

Just wanted to follow up on some of the discussion earlier on commodity costs.

Obviously, you said that commodity costs were a drag year-over-year.

But, I was wondering if you could give us a sense of what type of benefit relative to guidance that commodity costs might have been, given you were expecting sequential increases that didn't happen.

Well, I think that we had said that we were expecting to get kind of a low- to mid-single digit commodity increase.

If that's -- it may have been a small portion of -- I didn't look at it that way.

But, that probably contributed a little bit of upside to the gross margin performance this year.

Not a dramatic upside versus what we were expecting.

Okay.

And finally, just sort of a big picture question for Mark, and maybe you're saving this for the meeting, but as it relates to the research for Europe and international, could you just give us a sense of sort of the timeline on that research and development?

And maybe what point you think we would hear something specific around a new product, and how that might fit into sort of brand architecture for Europe as is different from the US?

I think you are asking -- I think November is going to be when we'll talk about that.

And I think that the implementation of it is going to start, it's essentially starting, but it'll start in the beginning of next year.

As I said a little earlier, it won't be every country at once because, as you know, the situations in each country are different and the steps we have to take are slightly different.

But you said an interesting word there, the architecture.

The architecture, which has been very important here in the US, is something that we're going to make as important in the rest of the world.

And it has been a significant change in our ability to speak not only to the consumer, but also to our retailers to make it easier for them to display and communicate our products, and even for our internal people from the research and development and marketing point of view, to focus how they're doing it.

And, while there are differences and we'll talk about it between Europe and Asia and the US, there are great similarities.

Okay.

Thank you.

(Operator Instructions).

Our next question will come from John Baugh with Stifel Nicolaus.

Thank you, and congratulations.

On the advertising spend, is it similar of the rate of sale in Europe or Asia versus the US?

Or is it lower and you plan to go higher based on your feedback?

Traditionally, we've spent at a little bit higher rates in the US than we do internationally.

And certainly, we would expect -- based on some of the early feedback from the research in terms of the opportunity, that's one investment area that Mark mentioned that we do need to step up the level of brand advertising that we're doing around the world.

And I think the number was $3 million, correct me if I'm wrong, on your strategic consumer research.

Is that correct, and is that going to evenly fall in Qs three and four.

And then what line item again is that in?

I'm sorry?

What line item is that in?

G&A, yes, the number was about $3 million.

It was at the start of last quarter.

We said it would be fairly balanced between Q3 and Q4.

It might skew a little bit more to Q3 at this stage based on the progress that's been made.

But there still will be some spend in Q4.

Good.

And my last question, maybe for Mark, there seems to be some thought out there, I'm not saying this is my thought, but that you've had such a great year with Cloud, that you can't comp that.

In other words, that the initial sale rate is so high and then in subsequent years it will fall off.

I've certainly not seen that pattern in the mattress industry in general and not seen that pattern with you.

So, I was wondering if could comment specifically on that.

And then also if you had any -- and I know you wouldn't give us any specifics -- but do you have any significant product rollouts planned for the United States in 2011?

Let me do them in the order that you asked.

I think that the two key things to think about when you think about the rollout of Cloud is that first of all, from a simple point of view, we didn't have complete rollout of any for the whole year.

So, if you just take the proportion of the year, where we have them fully distributed versus this year, there is a natural growth by that.

The second thing is that as you know, we do extensive consumer research.

I just, literally, a week ago saw some more, and which was looking at a specific segment of consumers -- I'm not going to go into details of this -- for which we were evaluating the products.

We found that again, the Cloud is extraordinarily preferred by a group of people we hadn't guessed would be the ones who would prefer it.

And so, it brings me to the fact that we haven't fully reached anything like what I think is the potential of who it's for.

And the third thing is, as much as we have increased our investment in communication, and we are being sensible about it, we continue, as Dale said, to chase this 9%, we continue to have opportunity.

Most consumers don't know about the Cloud yet.

There's a lot of work to be done just to get that across.

So, right now, I think there's still significant potential in the Cloud.

As for the other new products, I'm not going to tell you about anything -- as you know, it's not our practice to talk about things before they're done.

But, I will say this.

You can see that our investment areas, where we put investment, has been in marketing and advertising and in consumer and product research.

And you'll see, we continue to do that.

And, we're not doing that idly.

Obviously, we we're being very thoughtful about it.

But, we're very serious about our objective to make a bed that appeals to everybody.

And so, we've got a lot of opportunity areas that we're working on right now.

John, still, I would just add that we don't believe our base product line, our core product line is fully there yet in terms of consumers knowing about it, consumers preferring it.

And our base product line, we still expect to grow significantly for the perceivable future.

And our expectations on the Cloud are no different.

We still have tremendous opportunity with the Cloud.

Great.

Thank you.

Thanks, John.

We'll now hear from Joan Storms with Wedbush.

Hi, good afternoon.

Thank you.

Congratulations.

Thank you.

Thank you.

I wanted to ask about -- just push Dale and Mark a little bit further on the gross margin, because that seems to be a major opportunity going forward as you build new product lines into the business.

In particular, when I visited the Albuquerque factory, you've sort of stuck to that 50% goal, and I know you'll probably talk about it at the Analyst Day, but can you delve any further into -- you have some commodity price increases that you're anticipating, but that seems pretty small compared to the opportunities that you have to get beyond 50%.

I think the thing about the 50%, is that we intend to make our products-- continually evolve our products.

The 50% number, as I said I like Dale's analogy.

There's no alarm going off when we hit it.

We're trying to make our gross margins as good as we can.

But at the same time, what we'll do over time is improve the functionality of the products and improve the investment in advertising.

These sort of steps don't happen quarter-to-quarter.

They happen year-to-year.

As I just said in the last question, there's many new products and innovations that we're looking at.

What the 50%-plus opportunity gives us, it allow us in the short term to do some of the things that we're really trying focus on right now, which is to make sure that people know about TEMPUR and TEMPUR Cloud.

So, we're using it at the moment and we will periodically, as the years go by, appropriately.

But, these targets are long-term, four-year targets.

I would also add, Joan, to your point there's still significant volume leverage available to the business sitting here today.

Even with the tremendous growth we've had in the business this year, we still have ample capacity to utilize in our facilities.

We can again -- our view is we can get somewhere between $2 billion and $2.5 billion in revenue without needing another facility.

So, that gives tremendous volume leverage available to the business.

The productivity program is not done.

We're not even halfway done in the original program.

So, that's going to continue, and once this original program ends, it doesn't mean the productivity initiative is going to stop.

It means there will be a new program.

And it will just keep adding to it year-by-year.

So, we will continue to drive for improved cost and improved efficiency and getting the volume leverage, which will provide tremendous benefit to offset future significant increases in oil prices if that were to come, or fuel investment in the business where we see the opportunity for investment that will provide good payback or continue driving the improved profitability.

That's a very great answer.

Thank you.

And then just a quick question on the Cloud Pillow.

How's that doing?

I heard it was sold out online for a period of time.

So, how are you doing there, producing that product?

Doing very well.

We're very pleased with the Cloud Pillow.

And watch this space.

It's doing very well.

And it's a great pillow.

It's very different than our other pillows.

People love it.

And it's selling very well.

I'm waiting to get mine.

Thank you.

Have a great afternoon.

Thank you, guys.

Thanks, Joan.

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

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

Thank you.

And thanks, everybody, for joining us.

We look forward to talking with you again next month at the investor event we've been discussing in New York.

But, thanks for joining us this evening.

Thank you.

Ladies and gentlemen, that does conclude today's conference call and we thank you for your participation.