Tempur Sealy International Inc (TPX) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tempur-Pedic International fourth-quarter 2010 earnings call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions).

As a reminder, today's call is being recorded.

At this time, I would now like to turn the conference over to your host, Mr.

Barry Hytinen.

Sir, you may begin.

Thanks, Joe, and thank you, everyone, for participating in today's call.

Joining me here 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 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 with that introduction, it is my pleasure to turn the call over to Mark.

Thanks, Barry, and good evening, everyone.

Thanks for joining us today.

Today, I'll provide a brief overview of our results in the fourth quarter, review performance against our 2010 strategic initiatives, and then outline our strategic focus areas for 2011.

Dale will then provide a detailed review of the fourth quarter and full-year financial results, as well as our guidance for 2011.

We're pleased with the financial performance in 2010 and in the fourth quarter, in particular.

Sales were up 20%, significantly faster than the industry, and as a result, we grew market share.

Earnings per share were up 74%, with gross margins of 52%, driven by our continued focus on productivity improvement and fixed cost leverage.

The topline growth was achieved largely as a consequence of implementing our strategic initiatives of making sure that everyone knows that they will sleep better on a Tempur, and making sure there is a Tempur mattress and pillow for everyone.

We increased our advertising investments to nearly $100 million last year, primarily by ramping our ask-me marketing campaign in the US.

This campaign has driven Tempur brand awareness to record highs, and according to Gallup's surveys, Tempur is today the most desired brand of mattress in the US.

The Cloud line of products has been extremely successful, and by appealing to a different group of consumers than the original Tempur, has greatly increased our target market, and thus, has been a key driver of our market share growth.

Late in the year, we began shipping the high-end model, the Cloud Luxe, and while early in its distribution, it's performing better than we'd originally expected and it is still only partially rolled out.

Also, during 2010, we completed the roll-out of the international Sensation mattress line.

It is our most successful international product launch to date.

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

And here, too, we made good progress in 2010.

We gained significant slot penetration with the Cloud collection in the US and with Sensation internationally.

We added key new accounts in the US and in Canada and in Europe, and we launched the new, much enhanced website in the US.

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

We have seen web traffic increase dramatically over the course of 2010.

So, now turning to 2011, we will implement the next phases of our plan to become the world's favorite mattress and pillow brand.

We will continue to enhance our product range both in the US and internationally; increase our investment in consumer communication; and broaden distribution in all geographies.

Firstly, to ensure everyone knows that they would sleep better on a Tempur, we will expand our commitment to marketing.

As we have discussed before, our international brand awareness is low; and following a significant consumer research, we are introducing a brand marketing campaign in Europe, which will be the beginning of a multi-year effort.

This campaign is already on air in our major European markets.

In North America, we will expand our ask-me campaign, which will now include -- which will now highlight the high customer satisfaction with our Tempur Ergo adjustable base.

And we are conducting consumer research to support increased marketing in Canada, where we believe our business has considerable growth prospects.

Secondly, in 2011, we will have major product launches, efforts aligned with our initiatives to ensure that there is a Tempur mattress and pillow that appeals to everyone.

Internationally, we're going to introduce the Cloud collection.

Our consumer testing suggests its appeal is broad across the world.

This week, we unveiled the line at the major German trade show in Cologne, and we are very pleased with the extremely positive feedback that we got there from the retailers.

The roll-out will begin late in March and will continue for the next 18 months across Europe and Asia.

And next week, at the Las Vegas Bedding Show, we will introduce a major new US product line known as the Tempur Contour Collection.

You will remember that the US range is split today into three collections -- Tempur Original, Tempur-HD, and Tempur-Cloud.

The Contour will replace the Original.

Like the Original collection, these new products are designed to appeal to consumers who prefer the traditional Tempur feel; but this new range has been designed from the ground up.

It provides the consumer with a greater amount of differentiation within the range to choose between and much improved aesthetic appeal.

And they have tested extremely well in consumer research.

With modestly higher prices than the Original Collection, the Contour Collection will improve our average selling price.

We'll save the rest of the details for the show.

Thirdly, in 2011, we will expand account and slot distribution to ensure Tempur is available to everyone.

Especially in many of our international markets, we are underpenetrated in terms of stores per capita, but we now have a solid pipeline of potential new accounts.

In addition, we're ramping our e-commerce initiatives, both in the US and internationally, to improve the effectiveness of our direct business and also to help consumers find our products at their local retailers.

And lastly, we will make sure that Tempur continues to deliver the best sleep, with growing investments in R&D.

We use research to prioritize and focus our product development.

For example, the Cloud Collection was born from this initiative, and it was this consumer research that helped us identify big opportunities in our Original Collection, which led to the creation of the Tempur-Contour offering.

These 2011 strategic initiatives are designed to drive growth; but obviously at the same time, we will continue our focus on improving our cost structure.

We expect to expand our gross margin again this year.

And while we will increase our marketing and product development investments, we will tightly manage expenses such that we anticipate continued operating margin expansion.

One last note before I hand over to Dale.

We are still in a macroenvironment that is unclear.

We continue to hear from many of our retailers in the US and around the world that consumer traffic is still inconsistent.

So we remain on a very flexible footing, reviewing our situation constantly, and our plans as necessary.

However, as the environment becomes more predictable, we are confident that the fact that more people say they will buy Tempur-Pedic than any other brand, will provide us with a runway for growth for years to come.

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

Thanks, Mark.

I'll focus my commentary on the financials and our 2011 guidance.

Let's begin with an overview.

In total, fourth-quarter net sales were $293 million, an increase of 20% over the same period last year.

Foreign exchange rates were slightly unfavorable during the quarter.

On a constant currency basis, net sales increased 21%.

North American sales were up 31% and international sales were up 1%.

On a constant currency basis, international sales were up 6%.

By channel, in North American retail, net sales were $181 million, an increase of 38%.

Our North American direct channel was flat at $15 million.

Internationally, retail sales were up 1% to $75 million.

However, on a constant currency basis, international retail sales were up 4%.

On a product basis, mattresses were up 20%, driven by a 14% increase in units.

North American mattress sales increased 32% on a 25% increase in units, reflecting the positive mix that Mark referenced.

In the international segment, mattress sales decreased 1%; however, on a constant currency basis, international mattress sales were up 4%.

International mattress units decreased 2%, reflecting an inconsistent economic environment in Europe.

In total, pillows were up 18%, driven by a 17% increase in units.

North American pillow sales increased 31% on unit growth of 23%.

International pillow sales were up 8% on an 11% increase in volume.

Sales of our other product line, which includes items that are normally sold along with a mattress, were up 18% in total and 28% in North America.

Gross margin for the quarter was 51.9%, up 340 basis points year-on-year and up 90 basis points sequentially.

On a year-over-year basis, the gross margin improved principally related to three factors -- one, our ongoing productivity program generated improved efficiencies in manufacturing and distribution; two, increased production volumes to support higher sales resulted in fixed cost leverage; and three, 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 favorable geographic and product mix.

Our fourth quarter operating profit was $71.6 million, an increase of 52% year-over-year.

With significant sales growth, we drove over 500 basis points of operating margin improvement.

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

SG&A expenses included two specific items that I would like to address.

First, as we previously disclosed in mid-2008, during the depths of the recession, we recorded a specific bad debt reserve related to a customer.

During the quarter, the issue has been resolved to our satisfaction, and together with the overall health of our receivables, we recognized a $1.8 million benefit.

With this adjustment, our bad debt reserve is approximately 6% of receivables, which is still significantly higher than our pre-recession levels.

Second, during the quarter, in light of our strong performance, we accrued non-cash stock compensation expense related to our long-term incentive plan, which has a variable component.

This charge was approximately $1.2 million.

Interest expense was $3.5 million; our tax rate was 32.1%, reflecting favorable mix.

Net income was $46.3 million, up from $29.1 million a year ago.

Given our improved profitability, earnings per share was $0.66, up from $0.38 last year.

Now let me briefly summarize the income statement for the full year 2010.

Sales were up 33%.

North American sales were up 47% and international sales increased 9%.

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

Reflecting our initiatives to drive profitability, our gross margin was up 280 basis points to 50.2%.

Our operating margin was up 480 basis points to 22.2%.

Full-year earnings per share was $2.16.

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 was down three days from last year.

Inventories were up $12 million year-on-year and modestly from last quarter.

Inventory days were up three days year-on-year, and up two days sequentially, as we made the decision to temporarily increase inventory levels due to some shortages we experienced in the third quarter.

During the quarter, we generated $44 million of operating cash flow and capital expenditures were $6 million.

We lowered debt by [$29 million to $407 million], and we increased cash by $16 million to $54 million.

Our funded debt to adjusted EBITDA ratio was 1.45 times, just below our targeted range of 1.5 to 2 times.

We have evaluated the investments required to grow our -- to fund our growth as well as our capital needs.

With expected growth in sales and margins, we expect significant operating cash flow growth over the long-term.

And during the quarter, we conducted a comprehensive review of our capital structure, and concluded that it is in the best interest of stockholders to continue to return value via share repurchases.

So, we are pleased that our Board has authorized a new $200 million share repurchase program for 2011.

By our projections, if we execute on the entire program this year, we would be well within our targeted debt to EBITDA range.

Now I would like to address our guidance for full-year 2011.

We currently expect net sales to range from $1.23 billion to $1.28 billion, and we currently expect earnings per share to range from $2.60 to $2.75 per diluted share.

We project our gross margin to be up 100 to 150 basis points for the full year.

This assumes continued productivity, volume leverage, and pricing, partially offset by higher commodity costs and significant floor model placements.

While we have not experienced significant commodity cost inflation to date, our projections assume inflationary cost pressures throughout the year.

We expect geographic mix will also be a modest headwind.

For the first quarter, we expect gross margin to be down modestly on a sequential basis, reflecting the geographic mix driven by seasonality.

We expect operating expenses for the year to be flat as a percent of revenue, with SG&A leverage offset by a strategic increase in amortizing.

We anticipate interest expense for the full year to be approximately $11 million, which assumes we will refinance our existing credit facility at some point this year.

We anticipate capital expenditures will be approximately $25 million.

We anticipate the full-year tax rate to be up slightly to approximately 33.3%, reflecting increased income in the US.

We're using a share count of 70.5 million shares for the full year.

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

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

One last note before we open the call for questions.

I'm very pleased to report that, yesterday, we received a notice that the New York Supreme Court has granted our motion to dismiss the lawsuit brought by the New York Attorney General.

With that, Operator, please open the line for questions.

(Operator Instructions).

Brad Thomas, KeyBanc Capital Markets.

Was hoping to just drill into the sales guidance a little bit more, and was hoping that you could perhaps provide a little bit of color on how to think about the trajectory of sales growth in North America versus international, especially as we factor in the roll-out of the new Tempur-Contour line as well as the Cloud line internationally.

Sure, Brad.

We would expect, if we looked at the two components of the business, from a domestic standpoint, we would expect to see kind of normal seasonality as we roll into the first quarter.

The Contour line will not be shipping until in the second and third quarter.

Right now we would expect that, unlike the Cloud roll-out -- that took about 18 months and actually is still not finished, domestically -- that the Contour line will be -- roll-out will be much faster.

It will be pretty concentrated into the second and third quarter.

That's where the bulk of the floor models will be.

So, we would expect to see some normal seasonality here as we start the year, with the expansion of the Contour line coming in the second and third quarter.

Internationally, we would expect that the business will start slow.

The economic environment in Europe, particularly, has continued to be very mixed.

And some markets have done very well and some other markets have struggled more, like a Germany or a Spain.

However, as the year progresses, we think that the investments that we will be making internationally to help drive the brand awareness, also with the roll-out of the Cloud, I think it's important to understand that the Cloud will not actually start to hit retail floors in the German markets until right at the end of March.

And that's the first market that it will go in.

And then it will -- from their rollout to other countries throughout the year.

But again, we expect that it will be probably a 18-month roll-out internationally to get the Cloud fully distributed in Europe and in Asia.

So, I think, hopefully, that helps you a little bit from a context around how we expect the revenue to go this year.

One other thing I do think is important to emphasize is, as Mark said, we have made the strategic decision to step up advertising, particularly in Europe.

And Mark mentioned in his comments, that's already started.

It started in the key markets in Europe, so you will see a step-up in terms of ad rate spend right out of the gates.

Great.

Thanks, Dale.

And then just a follow-up in terms of the sales results for the fourth quarter.

I was hoping you could just provide a little bit more color about how the Cloud line performed versus the pre-existing line of products.

It seemed that your non-Cloud products built momentum as we went through the year.

Did that continue in the fourth quarter?

And how much of that is maybe attributable to the branding versus the Cloud line in general, versus economic recovery?

I realize it's difficult to say, but any color would be very helpful.

Okay.

I would say that the overall business has been very strong all year and the Cloud has been exceptionally strong in 2010.

We expect it to continue to show significant growth in 2011, because we rolled out the Cloud in stages.

We brought out the Supreme, then the Cloud, then the Luxe.

The Cloud's latest -- the Luxe is the latest addition to that line.

We've been very pleased with the performance of the Luxe; it has done very well.

The core business has continued to be very strong and performed very well.

There is cannibalization from the Cloud, but as we've said all year, the cannibalization that we've seen from the Cloud on the core business is less than we had anticipated when we were planning the Cloud.

So we're very pleased overall with both sides of the business, in terms of the traditional products versus the new product lines.

We think that the Cloud will do well for us internationally as well, and we're very excited about what the research has shown that the Contour product line will do, as it replaces the original Tempur line.

Great.

Thanks, Dale.

I will turn it over to somebody else now.

Bob Drbul, Barclays Capital.

Just got a couple of questions for you.

First, on the full-year revenue guidance, could you just give us an expectation on -- you talked about ASPs being higher for the full year, but could you maybe quantify your expectation with a lot of the product initiatives that you have in your guidance?

Well, yes, I would say that as we look at Contour versus Tempur, technically, that's not ASP -- that's not a price increase, because it's new products, but they will be priced slightly higher than the Tempur line.

The only significant price increase of note that we have in the year is that the price increase that will go on the Tempur Cloud Supreme.

The Tempur Cloud Supreme price increase goes into effect the beginning of March.

So that will have positive benefit, not really in the first quarter, just because of the way price increases work, but it will start to benefit the business from the second quarter forward.

And yes, we've said before, the Tempur Cloud Supreme is now our best-selling product.

So, having a $300 price increase on that line at retail -- that's not exactly what the Company gets, because the price increase is shared with the retailers, but that's a nice impact.

And overall, pricing should represent a couple of hundred basis points for the Company for the year.

Okay.

And when you look at the trend of the business, when do you think there's a shot at a sequential acceleration on the revenue line, given the compare?

I don't know, Bob.

Sequential acceleration -- what do you mean?

Meaning -- from like when you look at the compares from 2010, 43% to 42% growth to 32% to this quarter, in your guidance, do you think that -- I mean, are we going to continue to sort of see a slowing of the top line?

Or do you think that there will be throughout '11 the chance for the third quarter to be faster growth than the second?

Like, what do you think the sort of -- a slowdown in the inflection point would occur on the top line?

Do you have any idea?

Yes, this is Dale.

I think what you'll see kind of as we're thinking about the year is we'll have a -- well, because of tougher and tougher compares, the US business from a percentage of revenue growth standpoint, will slow a little bit as the year goes on.

But we expect real growth and higher percentages as the year goes on in the international business, as the strategic initiatives really start to impact the performance of the international business, as the year progresses.

The advertising campaign that we've launched there and is now on air in the UK; it's on air in Germany; I believe it goes on air in France this weekend.

The advertising, particularly what we're doing to build the brand, you've got to spend it to get it later.

So that's why we've pulled the trigger and we're doing that, and we expect to see the benefits of that later in the year.

We expect to see -- I think the thing also to add to that, though, is that over a longer-term period, we expect the steady double-digit growth, obviously, in order to achieve our strategic objectives that we've talked about many times.

We've just had a period where we've had 50% growth in the US.

We're not going to do another 50% on top of 50%.

And I think what we anticipate is a -- we have a long trajectory for growth.

It's going to be steadier in this year than it was last year.

Okay.

And then just -- my last question would be, the gross margin -- you sort of blew through this quarter.

When you look it your longer-term in your guidance for '11, has anything really changed in terms of where you are with it and any maybe current thoughts on that?

Yes, I guess you're talking about our strategic model where we said our long-term goal was 50%.

Yes.

We kind of walked away from the 50% mid-year this year and said, look, that was set at a time when we were at 43%, so it looked like a stretch goal.

Number two, a big component of why we got there much faster than we expected to was that commodity prices are significantly different than where they were in 2008.

Even though they were up in 2010 and we expect them to be up in 2011, they're still significantly below where they were in 2008 when we set that target.

So, over the long-term, it's anybody's guess where oil is going to go over the longer-term, but our long-term projection was based on oil in approximately the $130 range.

And we've had significant improvement in the cost initiatives and we will continue to drive those cost initiatives.

So we're not -- we were never worried about a magic 50% and an alarm bell goes off and suddenly we've got to go do something.

Our view is the gross profit is going to be what the gross profit is going to be, and we're going to keep driving to improve it.

And most importantly, because that will help us fund what we view as the strategic importance of stepping up the advertising spend.

Does that help?

Thanks.

Yes, very helpful, thank you.

Budd Bugatch, Raymond James.

A couple of questions, if I could, a couple of clarifications.

When you talked about the roll-out of the Contour line and you're going to replace, as I understood it, the Tempur Collection, which is five SKUs or four when -- just when you're looking at Queen size, are you replacing all of those SKUs at the (multiple speakers) --?

(multiple speakers) -- you're one for one, Budd.

It's essentially we're replacing three of them -- the Advantage, the Classic, and the Deluxe, with three Contour products.

Okay.

So the BellaFina stays and --?

The BellaFina stays.

I got you.

Okay.

And you can roll that out, you think, in second and third quarter, get that all done?

Yes, that's our plan.

It is an aggressive plan.

And it's a big plan, as you can imagine, but we've given it a great deal of thought and we believe it can be done.

No, I think that's a pretty exciting plan.

I think that could be very interesting to see.

I look forward to seeing that.

Budd, this is Barry.

Since you referenced the fifth in that collection, which is what we call the Original, which is only available in the smaller sizes, as you know.

We are not changing that at this point.

So that would stay as well.

Okay.

That makes sense as well.

As you look at cost, I want to make sure I understand -- can you quantify, Dale, and maybe I missed it, what the cost impact was or is going to be going forward?

What are you seeing?

On specifically what element?

Let's talk commodity first, and then you are going to raise advertising, and I know that's going to offset efficiency or leverage in SG&A, but I don't think we got a quantification or how much you spent on advertising this quarter or how much you plan to spend all of next year.

Okay.

We are expecting, on the commodity cost, as I said, we have not seen significant impact yet, but our expectation -- there's been several price increases floated out there.

Nothing is settled yet.

But our expectation for the year is that we'll see commodity cost increases in the mid- to high-single digits over the course of the year.

And it could be a little bit more, it could be a little bit less; only time will tell.

But our expectation is probably closer to high-single digits than mid-single digits is more likely, given the current environment around oil and various chemicals.

So that's that expectation.

On the advertising standpoint, we had targeted for the last several years to spend about 9%.

We had never quite achieved that.

We were trying to get there; we were under-running.

We did get fairly close to that in the fourth quarter -- we were at 8.9% of sales and advertising.

With the strategic initiatives, we would expect to step up that advertising further as a percent over all the revenue.

For next year, we're looking at kind of a 10-ish number, and that's a little bit higher than what we had talked about before.

But as we've continued to study and evaluate and, as importantly, test the new advertising concept for Europe, we believe that it's the right thing to do and we'll fund that with expense leverage and other lines, as well as continued gross margin improvement.

And how does that advertising look US versus -- or North America versus Europe?

Yes.

It will be a little bit higher internationally than it will be in the US --

As a percentage.

-- as a percent of revenue.

But it's important that we're doing this in international because it is -- that is, as we've said for some time, a very important strategic part of our plan, which is to grow the awareness because that's something that's restricting us back in Europe.

But in the US, too, we've done testing on the effectiveness of advertising.

And we've been quite pleased with some of the results of some comprehensive testing that we've done.

So we will continue to invest and increase our investment in advertising in the US.

Okay.

And just to the revenue issue that Bob and Brad tried to address, you've had, obviously, great performance year-over-year in the first couple of quarters domestically; you had a good performance in international at the beginning of the year.

And then currency kind of took some wind out of those sails.

You've now got a new initiative internationally.

Can you kind of give us a flavor of how you think those increases will move quarter-by-quarter to an 11% to 16% overall number?

Let me just put a bit of color and then Dale will maybe give you a bit more.

I mean, I think the thing is that it's -- in our business, the growth is relatively even across the year; it's not like it's a massive from one end to the other.

But both the new product launch initiatives happened in the second quarter.

And so that's going to drive that.

And advertising is going to take time.

I mean, I think the thing is in America, it can respond quite quickly because we are essentially pushing on an already primed pump.

But in the rest of the world, it takes time to build awareness.

So we must all recognize it -- it's going to take time to build awareness.

And once you have the awareness, then you have the intention to purchase.

And it takes a little time.

So we are seeing it relatively even but slightly biased to the backend.

That makes some sense to me.

And finally -- the pricing, you've announced, I think, today, a $300 price increase on the Queen at -- in the Supreme, Cloud Supreme -- is that my understanding?

That's correct.

That's correct.

And that's the only price increase that you've got to announce at this time or is there any additional?

That's the only price increase that we have announced to the retailers at this time.

And just -- this is a little tricky question, but you raised that price, I think, $300 in May, if I remember right -- maybe it was $200 or $300, I can't remember --?

It was $300 back in May, yes.

Was it -- is it just because the Supreme is so far underpriced relative to where it needs to be or compares to other parts of the line that justifies the price increase?

It's more a balancing.

I mean, it's more of a laying -- a spreading out -- if you look at the price range -- the prices of each of the three elements of the Cloud, it effectively is -- they're more evenly spread at this rate.

I agree.

Okay.

Thank you.

But post- the price increase, the three models will be equal distant apart.

Okay.

Great.

I got that.

Thank you very much.

(Operator Instructions).

Keith Hughes, SunTrust.

My question on the US mattress we saw a nice mix shift here in the quarter.

Is that something, given your read of 2011, we will see consistent in the quarters in 2011?

And was the Cloud Supreme the primary driver of that?

Yes, Keith, this is Dale.

We did see a nice mix shift -- actually it was the Cloud Luxe that was the primary driver of that.

One of the interesting things that we saw with the Luxe was -- A, it's not fully distributed yet, so we're pretty excited.

As Mark mentioned in his comments, the Luxe was performing better than we had expected.

There is some canalization with the Luxe, but what we see it cannibalizing a little bit is the Cloud Supreme.

And so that's a very positive cannibalization to go from a $2,300 mattress to a $3,600.

So we'll take that cannibalization all day, every day.

So that's really -- the Luxe really is the prime driver of the mix shift that we saw.

Okay.

And I assume, given it's just launched, that we should see this for at least several more quarters, correct?

Yes, I think that we will continue to see positive mix in the business with the Luxe coming out.

You'll see price improvement on the Cloud Supreme going up.

As the year progresses, as we mentioned before, the Contour is -- the new Contour products are a little bit higher priced than the Tempur products were.

So we've got some positive mix elements driving throughout the year.

Okay.

And to review, the three Contours that are coming out are replacing the Advantage, the Classic and the Deluxe, correct?

Correct.

Okay.

Alright, thank you very much.

John Baugh, Stifel Nicolaus.

Just a couple of things, quickly.

First, Dale, on the upward single-digit raw materials -- would that, though, blend out to something more like 5% if the increases came in March, April, May?

Or was that a blended number you were giving for the year?

That's a blended number of what we're looking at for the year.

Okay.

And then on the Supreme entry, is it a 50/50 split with the retailer?

Are you getting more, are you getting less?

It's not exactly.

We're maintaining the retailer margin, I think, on the Supreme.

I don't know the exact number.

The retailer gets more than 50% -- I don't know if it's 55 or what it is.

But we -- the retailers -- we've always said the retailers get 50 to 55 points a margin, so that price increase tends to get split based on what the existing margin levels are.

And then would you say Luxe is 70%, 80%, 90% rolled out by the end of the December quarter?

It's more like 50% rolled out.

It's probably 50% of where we think it will get to.

Is that in terms of slots then?

Yes.

Okay.

(multiple speakers)

It's not an exact science, because you don't know it -- we always -- it's not going to get to the same level of penetration as the Cloud, for example -- I mean, as the Supreme, for example.

As we said, it's doing well.

In fact, it's doing a little better than we had expected.

So what the ultimate roll-out is going to be, we don't yet know.

But I would say we're approximately halfway through.

When you say it's doing well, Mark, are you referring to velocity of the slots you have?

Are you referring to getting more slots than you thought?

Both?

I'm talking primarily in that context -- about velocity of the slots that we've got.

And relative velocity compared to other products at that price point.

Okay.

And my last question is just on the share buybacks.

If I'm not mistaken, you didn't do anything in the fourth quarter.

Obviously, the stock was going up dramatically, which is a good thing, but I'm just curious what philosophy there was in the fourth quarter and then how that may or may not relate to '011?

And then what your thought process is on maintaining a sort of 1.5 or 1.7 leverage ratio.

Because if you don't buy in more than 200 million, I think you'll actually see that number shrink again.

Yes, in terms of the fourth quarter -- first, I'll say we're never going to talk broadly about our repurchase strategy other than the fact that we have and plan to continue to repurchase shares.

I will say in the fourth quarter, as we got into the fourth quarter, we were, as I mentioned in my comments, we decided that we needed to do a very comprehensive review of our capital structure -- which we did, and we had a lot of different people involved in that; got a lot of different looks at it from different organizations.

And so we had already spent $250 million last year.

We had already bought 11% of the Company, over 8 million shares.

So we thought it was okay to work through the strategic review of our capital structure.

And it came out that we determined that the 1.5 to 2 times debt to EBITDA leverage ratio was the appropriate ratio.

We had set that up initially, really, as a gut feel and as trying to maintain a level of cushion to our credit facility.

After extensive analysis, we think that's the right level for the business.

So as evidence of that, the Board has authorized a new program starting off with a $200 million authorization.

But your point is, yes, to long-term maintain that with the growth rates that we project, it means we have to continue to buy a lot of stock for a long time.

Alright.

Congratulations.

Thank you very much.

Mark Rupe, Longbow Research.

Hey, guys, great quarter.

You guys said in your commentary that you had a, I think it was, a solid pipeline in new door adds, account adds.

Just curious to see what the Q4 ending was and what kind of the expectations will be for 2011 on that front?

Sure.

Domestically, furniture and bedding doors were about right at [6,750].

Internationally, we were at about [5,200].

So both of those from the prior quarter were up a little bit.

Great.

Okay.

(multiple speakers) And as far as pop's going into '11?

(multiple speakers) -- Mark, we're talking -- I mean, there is in the US, but it's particular -- the place where we have the greatest percentage increase potential is some of our European and Asian markets.

Okay.

Okay, perfect.

And then as far as the pricing strategy on the international Cloud product, has that changed at all?

No.

Okay, perfect.

Thank you, guys.

Good luck.

Joe Altobello, Oppenheimer.

I just wanted to first off start on the guidance for '11 on the sales side.

If you look at this year, you're applying a range from low to high of about $50 million.

Last year coming into 2010, I think if you look at your guidance, you had a range of about $20 million.

So are we to interpret that as meaning that you got less visibility coming into this year as you did last year?

No, actually the opposite, Joe.

If you recall last year, we basically said, look, across 2008 and 2009, we really had no clue what was going to happen.

And so we had developed a guidance philosophy of whatever the last quarter is, we're going to multiply it by four.

So that's how we started the year last year.

And the tightness of the range last year was intended to -- and I think we even said on the call -- it's a tight range because we're just not sure.

And therefore, the tightness of the range was symbolizing uncertainty that we really didn't know and felt like having a broader range made it look too scientific.

Throughout the course of the year of 2010, as we talked about guidance, as we raised guidance each quarter, we were communicating to you that we were getting back to our old guidance methods of modeling the business and building it up from a slot/store model because that was starting to make more sense to us.

And so that type of guidance tends to lead to a little bit wider ranger.

now, historically, we have run with a revenue range on the guidance somewhere in the neighborhood of 40 million; but as the numbers get bigger, we think it makes sense from a percentage standpoint that that range may widen a little bit over time as we continue to get bigger, because we're looking really kind of at percents.

Okay.

That's very helpful, thanks.

And then in terms of the guidance for this year, the key gating factor or determining factor of where you end up in that range -- is it how successful the Cloud launch internationally is?

I would say that that's -- that is an important thing.

And clearly, the growth of international is an important component and it is a driving part of our strategy.

But clearly, the growth in the US is going to be a bigger component of the overall business.

And remember, the Cloud in the US is not a historical thing; it's a very live thing, because first of all, we have the Cloud -- the most -- the lowest level of the Cloud range only really got launched fully in the second quarter and in the second half of the second quarter.

So we have about a half a year of that.

And the Luxe has only really just hit.

So Cloud is still very important in the US.

The Contour is going to be -- the rollout of the Contour is not going to be an insignificant thing.

And the continued growth of the advertising, which -- remember that we have this continued mismatch between the number of people who say they intend to buy -- who are aware of it and intend to buy a Tempur, and those who are going to -- it's capitalizing on that across our whole range.

It's going to be very important.

So international is important.

And in international, the Cloud is going to be important.

But as important in international is going to be the building of awareness, particularly in countries like Germany and the UK, and in France, where we have good distribution -- we have good product range; we just have very low awareness.

So the Cloud is important, both in international and in the US.

Obviously, the US, just by sheer size, is the most important thing.

But the growth in international is going to come from the Cloud and from building awareness.

Okay.

So it's a key driver, not the key driver, in essence?

Correct.

Okay.

So going back to your analyst day, you mentioned that you want to be a $2 billion company by 2014.

If you work off of 2010 as a base, that implies about a 16% CAGR.

To look at your guidance this year, you're guiding to 11% to 16% growth.

So if we assume the midpoint of that range, that would then imply that you expect an acceleration in topline growth beyond 2011, is that fair to say?

Well, if you -- yes, if you want to say that, okay, 11%, to 16% midpoints -- say 14%, 13.5% -- if we grow at 13.5% to hit $2 billion in 2014, yes, we'd have to see an acceleration later.

What we are committed to and fully believe in the $2 billion 2014 plan.

It's still four years away, though.

And the guidance range is our best view today in terms of where the year will go.

And if we're at the high end, we're right on that track; if we're at the low end, we've got to pick it up somewhere.

But we just -- it's January 20th; we've got to see how the year goes.

Okay.

Fair enough.

Just one last one in terms of the timing of the share repurchase.

Last year, you mentioned, Dale, that it was really first-half heavy in terms of the timing of the repurchase.

This year, is it going to be the same thing?

Or is it going to be a little more rateable throughout the year?

Well, that's still being determined, but the general view is that we'll be a little bit more -- even though this is a $200 million authorization is set up that way -- I'm not going to say what it reflects, but roughly, it reflects what we delivered in cash flow in 2010 -- a little bit more than that, but you have to remember that some of our cash flows occurs internationally and we can't use international cash for share repurchases.

So it would imply that we will use some debt to do the share repurchase on top of normal cash flow.

So the general view on repurchases is it will be a little bit more rateable but in terms of what is the exact plan of how we will implement this, that's still being decided.

Okay.

Great.

Thank you.

(Operator Instructions).

Joan Storms, Wedbush Securities.

Great quarter, you guys.

So I had a question on the gross margin guidance.

And we sort of drilled down that a little bit, but originally it had been 50% and you had given the three-year plan.

Can you drill down on that a little bit more about how with R&D and manufacturing efficiencies, how you can get beyond that 50%?

Well, we ended the year -- for the full year 2010, we were at 50.2%.

The fourth quarter, we were at 51.9%.

So if you look at our gross margin guidance for next year, that would imply that we would be somewhere in the high 51's for the full year next year.

So our expect -- mid- to high 51's for the full year next year.

So the way that that comes is, as I mentioned, we're going to have positives in terms of volume leverage as we continue to grow the business; we're going to have continued positives on the cost productivity initiatives; we're going to positives in terms of pricing and product mix; and we expect, at least for 2011, to continue to have some negative geographic mix, where the US business will continue to be a little bit bigger percentage of the overall mix of the business; as well as we are expecting a tougher commodity environment in 2011.

So those things all balanced out, say, we should be 100 to 150 basis points better over the full year 2011 versus 2010.

Okay.

And I was wondering if you could give just a couple more details.

So you have Germany rolling out in March and I don't know what France -- so, how does that progress throughout the year on the international side?

Like, when do you start doing China?

Because that's your Asia contingent, I guess.

In Europe -- we're going to go to Europe first and then -- Germany is first, France -- I don't not want to go through every one of the details, but it is in the major European countries first.

The UK will be a little later than the others.

It has a slightly different material so it's a slightly later timetable.

But Australia also in the second half of the year.

In China, remember in China, they don't have Tempur, never mind Tempur Cloud.

So we've got a lot of roll-out potential just with what we have.

Our roll-out in China is going to be driven by the expansion of distribution.

So China, which is a major focus for us, is very different in how we're achieving it than it is in Europe.

So it will, as we said in the comments, it's going to take about 18 months for it to be fully rolled out -- roughly the same amount of time it took in the US.

But it's going to be country by country.

The biggest (multiple speakers) --

That was -- the US was your quickest roll-out to date on a new product, so that's pretty interesting.

No, on each product individually.

But because of the way we rolled out the Cloud in the US, one product, then another product, then another product, from start to finish, it's roughly 18 months.

Each product in and of itself was a very fast roll-out.

Internationally, we're rolling out three products all at once, but it's staged by country.

I can talk to you more about that offline.

Thank you very much.

Eric Hollowati, Stephens Inc.

Hey, guys, great quarter.

Most of my questions have been answered, but a few follow-ups.

At your Investor Day, you talked about driving higher attachment rates for products like the Ergo, and at that time, I think you said attachment rates in the US for Ergo were around 20%.

Was wondering how you're feeling about that and the ability to continue to generate improvement on that number?

And if you care to quantify what you think the improvement might be over a specific timeframe, it's always appreciated.

The -- thanks, Eric -- the Ergo Attach is a very significant part of our plan for next year.

In fact, I mentioned it in my prepared comments, but I didn't in the comment about what's driving growth -- that is one of the drivers of our growth.

That is one of the kind of -- in our model, one of the drivers of our growth in the US is the increased attachment rate, is something that every one of our sales team has a specific focus on and so on.

And it is something that is -- it is really a -- it's really a win-win-win.

Because it's obviously good business for us.

Very good business for our retailers because it makes the value of a customer that buys the bed with an adjustable base, effectively, twice as valuable.

And the -- from a consumer point of view, the satisfaction rates of people with Ergo beds are amazingly high.

So it really is a good thing for all participants.

We will be launching in Vegas, which is next week, next Monday, a new advertising campaign.

We will be premiering a new advertising campaign, which we're going to be running throughout the year, which is a version of the ask-me campaign based on the Ergo.

And it is a powerful, powerful ad, again, using real consumers.

But I think that this is an area where we see significant growth.

In the fourth quarter, our attachment rate -- I'm not going to give you exact numbers and I'm not going to give our exact targets, but I will tell you that in the fourth quarter, our attachment rates were materially above the -- were above the 20% that we'd said we'd seen before.

And our expectation for this year is that they're going to be above the fourth quarter.

Do you think that that was -- was it just a matter of focus that you saw that improvement in the fourth quarter?

Or was there something unique about the sales mix or rather that led to that improvement?

It was a couple of things -- it was three things, I think.

First of all, we launched the lower price Ergo.

So we broadened the range of people for whom they could afford the product.

So we had the Ergo Advance and now we have the Ergo Basic as well.

So we have two products; that was one thing and that gave us -- that broadened the attachment rate.

The second thing was that we made it a big focus of every one of our sales guys working with the customers, to make sure that the customers understood the value of what this was.

And the third thing was that the unarguable truth is that the biggest driver of growth of Ergo attachment rate is the confidence of the person selling to the consumer.

A person who is a confident salesperson -- I'm talking now about the customers -- our customer sales people, the RSAs -- when they're confident of selling it, it is extraordinary how much better they do than the person who isn't.

So what you'll find in a single chain or single store even, one person having twice the attachment rate of another, just because of their confidence.

That confidence takes time to build.

But we've seen it now in enough of the world and enough customers that we know that this is a thing that can be built.

And so that third factor just builds over time.

And that will continue to build this year as well.

Okay.

That's great.

Could you remind us, in the international markets, I recall you saying at your Investor Day that you have a price premium in your -- I'm not sure if it was all international or just Europe, but it's basically a vestige of history that you have this variance with higher pricing there.

Could you remind us roughly how much that is?

Or is there any way to quantify what that variance is by market?

Not to be precise.

It is a higher margin.

It's -- you know --

It's coming from the pricing in?

Yes.

And it comes from the world where we were essentially different companies selling (multiple speakers) --.

Okay.

It also comes from the sizing also.

Because in Europe, we predominantly sell singles.

Here we sell kings and queens, and if you look at the price difference between a king to a queen or a queen to a single, the margin can be a little bit higher on a single.

Right.

Okay.

Great.

One other last one -- and this might be a little bit difficult to convey, but it's no secret that this barbell style recovery has been playing out.

You're obviously positioned at the higher end of that barbell.

If you were going to try to quantify on a scale of 1 to 10 the amount of pent-up demand for mattresses at the higher end that still exists, as we're coming out of the recession here, 10 being a tremendous amount and one being that we're -- you feel like we're kind of back to a normal run rate of what we would see within that segment of that market, would you give your thoughts on that?

I'm just trying to get a sense for how far along that recovery continuum at that higher end we are.

Because it seems like that higher end has certainly sprung back quite a bit more vigorously than the middle part of the market.

You were right when you said it's going to be difficult.

(laughter) The -- look.

There is a degree of pent-up demand, that we know.

Because the run rate of sales of mattresses in the country as a whole is down and has been for several years.

So there's no reason to believe that Americans stop buying so many mattresses and that's a forever thing.

So there is a pent-up demand.

And it is more biased toward the high end.

Because if a person is at the low end, they're more likely to be buying it because they absolutely have to have it and it's sort of independent of whether they wish they -- whether they can afford it -- they just must -- have to have it.

So there is a pent-up demand, and it is at the high end of the barbell.

But it is a much discussed topic.

And we just don't -- quite candidly, we haven't really factored that number into any of our models.

Because it's just too -- we don't know, is the honest answer.

There is something.

How big is it?

I don't know.

And when is it going to get released?

I don't know.

Okay.

So, well, that's helpful because then would it be fair for us to take away that if there were to be a material rebound in that or unleashing of that pent-up demand, that that could very well provide more upside to numbers beyond your guidance range, or at least help you achieve that top end of your guidance range?

Yes.

I mean, it's hard to know what's implied in our [base assumptions], it's sort of a continuation of trends.

How much is the -- obviously, by the way you framed the question, the answer to that could be yes.

It's hard for me to say whether it is or it isn't.

Do you know what I mean?

(multiple speakers) It could be.

I don't know.

Of course.

Yes, I understand.

Alright, guys.

Thanks very much and good luck.

John Anderson, William Blair.

I just wanted to ask a question about the Contour.

Maybe you're saving this for the trade show next week, but I'm trying to better understand perhaps what the consumer insight was that spawned this -- when you think about the Cloud, the clear insight around 49% of domestic consumers who prefer a softer mattress.

When we shift gears and think about the Contour, is there any color you can give us on what benefits this may offer relative to the existing Original beds?

Thanks.

I'll give you a brief answer, but we will cover it in more detail at the show.

But fundamentally, the Cloud does appeal to people who are at least -- many people who like the Cloud did not like -- do not like the feel of traditional Tempur.

However, many people who like the feel of traditional Tempur much prefer it to Cloud.

And remember, that's been our basic product for -- the core of our product line for 15 years.

So we have a very large proportion of the population who really likes Tempur and really likes the feel of it.

The two things that -- two of the major things that underpin why we've done this relaunch is that we had not -- the products had been created essentially one at a time.

And we had never stood back and looked at what was the range of products that we needed to provide to the consumers, who -- of those consumers who preferred this feel, the Tempur feel, what breadth of offerings in terms of range of different feels and levels of comfort -- or levels of softness and support that differ from the different -- in that range.

The first thing -- the difference between our different product lines is the immediate feel when you lie on the bed.

That is constant from all that different -- for each feel, for each family, for each collection.

But then within those collections, they're of different feelings -- different structures that create different levels of comfort and different types of feel.

So one thing was that we recognized that we didn't have a big enough range.

And we've broadened that range.

The second thing was that we hadn't really done anything with the aesthetics of the product for a long time, essentially almost since it was introduced.

The Cloud research showed us how much we could make a big difference with -- and then we were very thoughtful about how we designed the Cloud and it was tested with consumers very carefully, just from an aesthetic point of view.

The same has now been done for the Contour.

And we have found that the combination of the change in aesthetics and the improvements in the feel or the broadening of the range of feel, has given a dramatically improved customer interest.

We have been quite -- well, we'll see what happens in the market, but we've been quite excited with the consumer research.

Okay.

Thanks.

That's helpful.

Are you still on target?

I think you talked about an expectation for two incremental slots or somewhere around two incremental slots in the US by the time you've fully rolled out the Cloud.

Can you just give us an update on your expectations there?

Are you running in line with that, ahead of that?

We're not complete, because the roll-out is not complete, but we're online with that.

We're on track for that.

Okay.

And my last question is just on the four-year productivity program.

At this point ending 2010, you're kind of halfway through that on a time basis.

And I'm just wondering at this point, where you are in terms of the overall benefit delivery -- 700 basis points, and how much we have to look forward to over the next couple of years?

Thank you.

Yes.

Two years in, we're ahead of what the original plan was, but that doesn't mean that we'll have less productivity over the next several years.

It means that we'll just keep driving for more.

And once the four-year -- quote -- four-year program ends, it won't be over; we'll just keep driving new programs.

The key is, on this is, you've got to think to the future.

You can't just think, okay, I've got to take some percent of costs out this year because you get too short-sighted in your thinking.

Yes, there are certain things that you can do on an annual basis that drive improvement on an annual basis, but to drive the kind of improvement that we were looking for, you have to think two, three years out, because some of them can be major structural changes; some of them can be formulation changes, that you -- not only once you think you've got it right, then you have to test the heck out of it to make sure that you're not altering the product in any meaningful way.

So we have to be always thinking two, three, four years ahead in terms of major cost initiatives.

So, in our view, this is a continuous program.

It was originally set up as a four-year program to drive that out-of-the-box thinking, but it's not going to stop.

Okay.

Thanks.

Tony Gikas, Piper Jaffray.

A couple of questions -- couple first for Dale.

Do you know the timing of the refinancing of the debt?

And then could you also repeat the operating expense guidance for Q1?

I wasn't sure if you were comparing that year-over-year or quarter-to-quarter.

And then the third question I had was -- could you just characterize the growth for the domestic business in calendar '11 versus the international business?

I mean, will we see much stronger growth on an international basis?

Okay.

On the debt side, our facility goes to June of 2012 -- through June of 2012.

I'm not going to tell you exactly when we're going to refinance it, but essentially, you want to take care of that either before or shortly after it goes current.

So kind of a mid-year timing in terms of looking for that to be done, is a reasonable expectation.

And the second question was related to -- (multiple speakers)

(multiple speakers) The guidance --

(multiple speakers) Operating expenses?

Operating expense guidance, yes.

My commentary on operating expenses was for the year that as a percent of revenue for the year 2011, it would -- operating expenses would be kind of flat, where we would see leverage in G&A; we would see some leverage in others selling, but those were going to be offset by higher advertising expense.

In terms of for the first quarter, I think that what you'll see is maybe a little bit deleverage in operating expense, because we're putting the pedal to the metal on ramping the international advertising.

As we said, it's already running -- it's running in the UK; it's running in Germany; it starts in France this weekend.

So advertising spend in the first quarter, driven by the European launch of this new advertising, is going to see a step-up.

And then grows domestic versus international?

Yes.

In terms of the profile of the growth, we typically would -- we would expect to see a little bit higher growth domestically than internationally across the year, across the full year, although much more balanced than what we saw in 2010; where across the year, international was 11% and domestic was 47%, we would see them being much closer in revenue growth, but still probably a little bit weighted to the US.

And, for example, in the first quarter, you'll see normal seasonality -- you should see normal seasonality in the US, which will drive growth, but then you'll see normal seasonality internationally, where the first quarter is down.

So, from a 4Q to 1Q standpoint, we would expect to see modest overall sequential growth.

And throughout the year, what we should see is the US slowing a little bit on a percentage growth basis, and international business picking up as the year goes on because of the growth initiatives there.

Okay.

Thank you, guys.

Great job.

Good luck.

Okay, everybody, thank you very much.

We look forward to talking with you again in April when we will review the first quarter.

Thanks very much for joining us this evening.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program and you may now disconnect.

Everyone have a great day.