Tempur Sealy International Inc (TPX) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tempur-Pedic first-quarter 2011 earnings conference 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 conference call is being recorded.

I would now like to turn the conference over to your host Mr.

Barry Hytinen, Senior Vice President.

Please go ahead.

Thanks Allie, 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, Executive Vice President and 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 Tempur-Pedic.com, and it is filed with the SEC.

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

Thanks, Barry.

Good morning everybody, and thanks for joining us.

Today, I'll provide a brief overview of our performance in the first quarter, and then provide an update on our strategic focus areas for 2011.

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

We are very pleased with the first-quarter results.

Sales and profits exceeded our prior expectations in both our North American and international segments.

Sales were up 28% from last year, and earnings per share were up 55% with operating margins of 23%, driven by our continued focus on productivity and fixed cost leverage while making significant investments in marketing.

Our sales growth was significantly ahead of the industry in the US and in many of our major overseas markets.

So, we continue to expand market share worldwide.

We believe this out-performance was directly related to the implementation of our strategic initiatives.

The first of these initiatives is to make sure that everyone knows that they would sleep better on Tempur.

And, during the quarter, we increased our investment in advertising by nearly 60% with considerable growth both in North America and in our key international markets.

While it is still early, all these marketing campaigns are showing positive results, and, in particular, our brand awareness campaign in Europe is progressing well.

For example, an important leading indicator of sales is website hits, and we have seen web traffic rise considerably in the US, but also in the UK, France and Germany, all markets where we have increased our advertising.

In the US and in Europe, retailers report that consumers are volunteering that they have seen Tempur advertising and are asking specifically for our brand, and our measured brand awareness is tracking at record highs.

In the second-quarter and throughout the year, we will continue to test and evaluate ways to make our consumer communication even more effective.

The second strategic initiative that drove our growth this year was making sure that there is a Tempur mattress and pillow for everyone.

We continue to expand our product range both in North America and internationally as we work to ensure there is a product in our portfolio that appeals to everyone.

In the US, the Cloud Luxe mattress continued its roll out, and we've been very pleased with its performance.

Some of our retailers report that it's their best-selling mattress, which is striking for a $4500 king set.

Obviously, this is helping Tempur-Pedic and our retailers improve average ticket.

Another factor helping drive average selling price is our commitment to the Tempur Ergo Adjustable System.

We began advertising the Ergo for the first time earlier this year combined with a nationwide promotion, and together with a focus on driving incremental distribution and retail training we have seen our attach rates improve significantly and we see a lot of opportunity for further attach rate improvement.

This quarter we will begin rolling out the Contour collection, our newly designed, traditional Tempur feeling mattress line.

We expect this to be a fast rollout into nearly all US accounts within just a few months, and based on initial reactions, we are optimistic that we will gain incremental slots during the process.

We are expanding our product range significantly overseas as well.

At the end of March, we began the distribution of the Cloud collection internationally, an effort we expect to take 12 to 18 months.

As a reminder, the Cloud collection is our softer feeling mattress line.

It is now on retail floors in Germany and some of the surrounding markets, and we recently introduced the product line to our French and Spanish dealers.

While it is early in the launch, retailer interest and initial consumer sale through are encouraging.

And now, turning to our commitment to ensure that Tempur is available to everyone, we expanded our retail distribution in the US during the quarter, gained incremental slots from the Cloud launches and we opened a handful of new accounts.

And we also gained doors and slots internationally, where will grow distribution throughout the year.

We're also continuing to execute on our own store growth plan in China where we project significant growth over the next several years.

In summary, we have had a very good quarter, and we are expecting that we will have a good year overall.

In the longer run we remain confident that there is enormous potential for Tempur-Pedic.

We will continue to make significant investments in marketing ,as this will be critical to capitalizing on the considerable market share opportunity we see for our brand.

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

Thanks Mark.

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

In total, first-quarter net sales were $326 million, an increase of 28% over the same period last year.

North American sales were up 37% and international sales were up 11%.

On a constant currency basis, our international sales were up 8%.

By channel, in North American retail, net sales were $208 million, an increase of 45% .

Internationally, retail sales were up 11% to $76 million.

On a product basis, mattresses were up 29% driven by a 14% increase in units.

North American mattress sales increased 36% on a 20% increase in units.

The increase average unit selling price reflects improved mix and pricing as well as fewer floor models in 2011 as compared to the prior year.

For the second-quarter, with the Contour launch that Mark discussed, we expect average US price to be modestly impacted by the deeply discounted floor models.

In the international segment, mattress sales increased 12%.

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

International mattress units increased 4%.

In total, pillows were up 13% driven by a 7% increase in units.

North American pillow sales increased 24% on unit growth of 17% with a related ASP improvement due to favorable mix.

International pillow sales were up 3% on a 5% decline in volumes.

Sales of our other product line, which includes items that are normally sold along with a mattress were up 36%.

As Mark mentioned, we are seeing favorable attach rate trends for the Ergo bed system which is the driver of this growth.

Gross margin for the quarter was 52.3%, up 310 basis points year-on-year, and 40 basis points sequentially.

On a year-over-year basis, the gross margin improvement related to a variety of factors including the ongoing productivity program generated improved efficiencies in manufacturing and distribution.

We had favorable product mix and increased production volumes to support higher sales resulted in fixed cost leverage.

Partially offsetting these benefits was unfavorable geographic mix as the North American business continued to grow as a percent of the total.

Reflecting our commitment to ensure everybody knows they would sleep better on Tempur, we ramped our advertising investments by over 200 basis points.

Despite this investment, operating margin expanded by 250 basis points to 23.1%.

Our G&A expense reflects our ongoing strategic investments including key IT projects to scale the business given our long-term positive outlook.

In addition, G&A incorporates higher incentive compensation related to bonus and the variable component of our equity plans.

Interest expense was $2.5 million.

As I mentioned on our last call, we have initiated the process to renew our credit facility and I currently expect this to be completed in the second quarter.

Our tax rate, was 33.1%.

Net income was $48.3 million, up from $33.1 million last year.

Given our improved profitability, EPS was $0.68, up from $0.44 last year.

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

Our accounts receivable balance was up reflecting improved sales levels, and DSOs were down 5 days from the first-quarter of last year, yet up slightly from year-end.

The increase on a sequential basis reflects improving sales trends during the quarter.

Inventories were up $4 million year-on-year, consistent with new product launches and our positive outlook for sales.

We generated $56 million of operating cash flow during the quarter, and capital expenditures were $5 million.

At the end of the quarter, our funded debt to adjusted EBITDA ratio was 1.3 times, far below our debt covenant of 3 times.

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

Through open market purchases, we bought back 1.32 million shares during the quarter at an average price of $47.35 for a total cost of $62.5 million.

As of March 31, 2011, we had $137.5 million still available under the existing share repurchase authorization.

Now, I'd like to address our updated guidance for the year.

We currently expect net sales to range from $1.310 billion to $1.360 billion, and we currently expect earnings per share to range from $2.80 to $2.95 per diluted share.

Within this guidance, we expect our gross margin to be up slightly more than 200 basis points for the full year driven by our ongoing productivity plan and fixed cost leverage, partially offset by higher commodity costs and geographic mix.

Regarding the second-quarter, we expect a few factors will likely result in modest sequential decline in our gross margin rate.

These factors are; floor model discounts related to our new product launches and the closeout, and expectation for higher commodity costs, unfavorable segment mix as our sales in our international segment will be down from the first-quarter, which is consistent with normal seasonality, and consistent with our long-term plans, we are planning to advertise at a rate of at least 10% of sales for the full year.

We expect interest expense for the full year to be approximately $11 million.

For the full year, we anticipate the tax rate to be generally in line with our first-quarter run rate at 33.3%.

We are using a share count of 71 million shares for the full year.

This assumption includes the benefit of our repurchase activity in the first-quarter; however, does not assume benefit from potential further reduction in shares outstanding.

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

This concludes our prepared remarks, at this point operator, we would like to open the call to

(Operator Instructions) Our first question comes from Mark Rupe of Longbow Research.

Please go ahead.

This is actually Andy in for Mark.

Congrats on a great quarter.

As it relates to the Contour rollout, could you give us a little bit of an idea what is the margin implication as we look ahead to next year?

I think you indicated that it would be blended price increase of, correct me if I'm wrong, but in North American it would be something like high single digits, low double-digit price increase.

And then also, is that baked into your guidance for the coming years?

Yes.

This is Dale.

Related to the Contour, the average pricing of the Contour is a little bit higher than the existing Tempur line.

As we have mentioned, the introductory model is the same price as our current introductory model, but the better invest, are a little bit higher price.

This is a completely new product redesigned.

From the core, it's a little bit more expensive, but from an overall margin standpoint, the Contour will be comparable to slightly better than the existing product line that it is replacing.

So, obviously from this year's standpoint the impact of the Contour is a tremendous amount of floor models going out in a short period of time.

With approximately 7000 retailers out there, and if you assume that they have a couple of these beds on each floor, that's a lot of floor models going out in a short period of time.

That is why we have talked all year about, in the second and third quarter when we are doing this rollout, there will be a little bit of pressure there.

But once we get through that rollout, then we would expect obviously to see good performance from a gross margin standpoint.

Okay great.

It sounds like most of that is going to be related to in the second quarter.

Most of the floor model rollouts trickle off in the third quarter.

Is that the right way to think about it?

The idea is to get the bulk of them out in the second quarter, but there will be some spillover into 3Q.

Okay, and on your international advertising, could you remind us what you are doing internationally as it relates to your advertising?

And I think you're doing some TV advertising.

Is that your first time in those markets?

If you could share with us your expectations on what you're looking to see in terms of response to those ads.

It's not our first time.

We have been advertising in internationally for a long time.

The difference here now is that we have, in Europe in general, which is where we've been for the longest, we really haven't done very much advertising on TV.

We had done a bit but really not very sustained or systematic over the years.

As of now, we are materially increasing our spending on marketing as we have said on advertising in Europe, and in particular on TV.

So, we've introduced a new campaign called there called the Weightless Campaign, which it is important to recognize that while the situation in much of the rest of world, many of the markets where we compete but particularly those in Europe, we have really quite good distribution but relatively low awareness.

If we can lift the awareness, we should quickly be able to see the benefit in sales.

So, our focus is on raising consumer awareness of the brand, and we're using this new campaign called Weightless which is to introduce people who don't know what Tempur is, and that is running right now and so far has been quite effective.

We are tracking obviously sales as I mentioned in prepared comments because that is a good measure of whether people are responding.

Also, we are measuring awareness systematically too.

It is that that we are seeking to raise.

This is not going to be a one month or one quarter event.

This is a strategic change, and it will take time.

We are early in the process, but where we stand right now, we are pleased with the progress that we're making.

Okay, great.

That's helpful.

Then finally for me, could you give us an idea of how sales trended throughout the quarter, maybe on a month-by-month basis for both the domestic and international businesses?

Sure.

Really for both domestic and internationally, we were monitoring our business, we were determined what the guidance was for the year and announced that in late January.

And our guidance expectations at that time were in line with what we were seeing in January.

We saw the business improve in the second and third month of the first quarter, which was why we over performed in the first quarter, both domestically and internationally and why we have adjusted our outlook for the year.

So, we saw a step up in business in February and March.

Okay great.

Thanks a lot guys and good luck.

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

Please go ahead.

Thanks, good morning and let me add my congratulations as well on a great quarter.

Want to just follow up on advertising.

Dale, I heard you mention about a 200 basis point increase in advertising.

Could you help to quantify a little bit more on what the dollar spend was this quarter versus last year in the first quarter?

Given the acceleration that you saw in sales, did we get a little bit more leverage on advertising than you would've expected this quarter, and how is this changing your thoughts about advertising as we continue to go through the year?

In the first quarter of 2010, we spent about $22 million globally, which was a little less than 9%, roughly 8.5%.

In the first quarter of 2011, we spent just a little over $34 million.

So, a significant increase in spend and that was at about 10.5% of sales.

Hence, the200 basis point step up.

Yes, as Mark mentioned, this is a concerted strategic effort.

We mentioned this last fall at our investor day in New York.

In terms of adjustment to our strategic plans, our long-term strategic plan is to spend advertising at roughly the 10% rate.

We said this year would be 10% or more.

We saw a good response.

As Mark mentioned, particularly the way we have found that we can really affectively measure the advertising in the immediate term is what happens on the web.

So, the quick response of web hits was very encouraging to us and as the quarter progressed, we actually spent more than what we originally planned in the first quarter.

We added some extra flights, particularly in the key markets in Europe.

This is something that we are going to be monitoring very closely.

We are committed to the planned spend levels, but as we see performance, we will continue to put a little more fuel in the fire.

Great and to follow up on your comments about input prices, you did say you have higher assumptions for chemical prices.

Could you give us an update of what you are seeing and hearing from your suppliers and then what assumption for raw materials is baked into your new guidance?

Sure.

The environment around commodities is fluid, going up and down, but generally is much higher than it was at the start of the year.

At the start of the year, we said that in our plan for the year was that we would see in the high single digit increase in commodity costs for the year, and that was baked into our prior guidance.

Our new guidance, bakes in a kind of a low to mid teens increase in commodity costs.

So, we have upped the commodity costs impact on the business, yet we continue to improve the gross margin because of the strong productivity; because of the mix of the business; because from a product standpoint and the leverage from additional volume.

So, we are able to sit here today and expect a larger impact from commodities than we thought at the beginning of the year, and still be able to further improve our gross margins.

Great.

Thank you very much.

(Operator Instructions) Our next question comes from Keith Hughes, SunTrust.

Please go ahead.

I had two questions.

First, you talked about in the prepared remarks that mix was a contributor to gross margin in the quarter.

I want to dig into that more deeply.

Was that within mattresses, pillows?

Can you give us specific examples of where that was the case?

Yes, Keith.

Let's talk the big one first.

As Mark mentioned, the Cloud Luxe is performing extremely well.

The Cloud Luxe is a very high margin product for us.

It is a better than fleet average product.

So, as the Luxe has gotten into distribution and has shown strong performance, the Luxe in itself is a key driver of the product mix benefit.

We have seen some positive mix in pillows.

Cloud pillow continues to perform extremely well.

That's a little bit higher price point.

Little bit higher margin than our average pillow.

So, we are seeing good performance across the business.

Also, the Ergo attach rate, while it's lower margin than a mattress or a pillow, it is a better margin product than a flat foundation, a much higher price point.

The Cloud Luxe and the Cloud in general, are raw material costs any different between it and the other SKUs and mattresses?

The chemical composition is a little bit different in the Cloud.

It is a different formula.

So, slightly different, but not dramatically different when we talk about the price increase impact that's impacting all of our formulations.

I know it's a different formulation, but the cost is similar to what we see in the other mattresses?

Yes.

Okay.

And then final question, you had mentioned also in the prepared comments on the brand recognition, specifically within Europe at a all time highs.

How do you measure that where you stand and where you are trying to go?

Any details on that would be helpful.

The way that we measure it is that we measure it.

We have a systematic measuring process that we've had in place for some time now.

We put in place a sort of baseline, so that we can measure the effectiveness of the advertising going forward and into the countries, but where we are is relatively low.

We've got a long way to go, quite honestly.

That is well understood and it is what we are doing.

We're not going to share the exact numbers, and frankly we're 3 months into this process.

It is very, very early.

As I said, the results are encouraging.

It is hard to say it's done yet, but it certainly appears as though there's a response and it's even in such a short time response that can be measured in awareness.

But it is very early and we have a long way to go.

By comparison to the US, where we have really essentially in terms of the awareness almost 100%, we've got a long way to go in Europe .

Keith, I would just add the awareness measurement, we've instituted a monthly tracking measurement in Europe where monthly we are getting feedback in terms of awareness, so that we can see the impact of the advertising as quickly as possible.

Okay.

Thank you.

Our next question comes from Budd Bugatch of Raymond James.

Please go ahead.

Let me add my congratulations on the quarter, and on the performance.

A couple of questions if I could.

One, productivity, Dale you talked about the efficiency in the manufacturing and talked about the fixed cost leverage, could you parse that a bit for us in terms of which was more important, and what we might see going forward and how that work geographically?

Yes.

From a geographic standpoint, we are seeing a little bit more volume leverage in the US.

Obviously, the US business is growing faster.

And, volume leverage is a key.

I'm not going to break it down exactly into the various components, but volume leverage is a key contributor to the continued product or gross margin improvement, as you would expect.

We continue to see very good productivity performance across the business.

As we said earlier, the productivity plan that we had in place for this year, even with the increased commodity cost, the productivity program is performing better than the original plan, so that even with the increased commodity cost, our productivity program is taking care of the increased commodity costs as we currently see it.

So, that is where the upside leverage is coming from.

The volume is coming from positive product mix, et cetera.

We saw a very strong increase in ASP in the first quarter, principally caused by mix.

The price increase on the Cloud Spring really had very little impact on the first quarter that will be of benefit as the year progresses.

One of the other things that jumped out at me, though it's a small part of the business, it seems indicative, the international direct business looks like it was up against on probably restated currency numbers 80% or so?

Let me explain that.

We put a note in the press release, but it's something that might be looked over easily.

We did an analysis here at the end of the year in terms of the economics of our different channels, and we had been including, internationally, the stores that we own, for example in China.

We have some of our own stores in Japan.

We have a store here or there in Europe.

Those were included in retail, but we determined, particularly as we are starting to ramp toward stores in China, that it didn't make sense to have those stores listed in retail anymore because from an economic standpoint, those stores look more like our direct business.

So, we've shifted the reporting of stores that we own out of retail into direct, so you see a huge growth in direct internationally.

That is a reallocation of these owned stores.

So, we have given you in the release also, the prior year numbers are restated to this new basis, but, on that restated basis, you see a big growth in direct and that is because of ramping stores in China, some increase in stores that we had through the year last year in Japan, and sporadically here or there across Europe having a store being put in place.

So, that is more the stores in place internationally as opposed to web traffic or web-based sales internationally?

Correct.

Internationally, except for in the UK, we don't have the direct business that we have here.

Okay.

One of the other members that jumped out was healthcare not doing as well.

What can you tell us about that, and what may be a focus going forward to try to improve that performance?

You're right, the medical business is down, and the medical is something of a catchall in the sense that it is different in the different parts of the world.

For example in the US, it is primarily our supplying major hospital bed manufacturers whereas in Europe, it is the sale of normal Tempur mattresses through sort of semi-pharmaceutical type retailers, and they're sometimes subsidized by the government.

From country to country, the medical business is quite different.

And one driver of the decline overall is because increasingly consumers are finding that the price advantage of going through these pharmaceutical retailers is not significant and they are going to regular retailers.

Having said all that, it is an area that in time we will focus on.

It is something we think there is more opportunity and we will focus on.

Quite candidly, at this minute we have bigger fish to fry.

We are putting our focus in other areas.

It is something that we will turn to at some stage.

Lastly for me Mark, you had said that you are gaining incremental slots through Contour and I guess the discontinuation.

I think the only bed that I see in the stores now that is being closed out is the Classic at this point in time, and I thought you were going to replace two other models if I remember right, the Deluxe and the Advantage.

Right.

The Deluxe will be closed out as well, and you will see that too.

The Advantage is, as Dale said, the Deluxe and the Classic are being replaced with the Select and the Signature, two new Contour products that are different both in terms of their core and their cover.

The Advantage is being replaced with a product, which is going to be called the Contour, which has the same core as the current Advantage, but a different cover.

So, what we are going to do there is we're going to replace the covers on the floor models and therefore there won't be a closeout on that.

Right now your only closing out the Classic, right?

And so, when do you start to see the discounts or the close outs on the other two models?

They both are right now.

You should see it any day.

Okay.

Thank you very much.

Our next question comes from John Baugh, Stifel Nicolaus.

Please go ahead.

Thank you.

Good morning, and congratulations likewise.

On the advertising, the Weightless campaign in Europe, will that also be done in any areas outside of Europe, number one?

And then number two, as you rollout Cloud through the world, will there be any product-specific advertising around Cloud throughout the world?

First of all, Weightless will I say Europe because Europe is much of our business, but Weightless will be used in other parts of the world, for example China.

So, it will be used in other parts of the world.

What we see it as is it's a good ad for the purposes of introducing people who are not familiar with the brand to what is the promise of the product.

It does work in other countries and we will use it.

We are, and we will continue to use it in other places.

At the exact other end of the spectrum, in countries where the brand is well known, the news or the importance of the new communication is the fact that we now have the Cloud line, which this is the news to the consumers.

So, for example, in Benelux which is one our most developed European markets, we are advertising the arrival of the Cloud because the consumers there are familiar with Tempur.

So, it is being used more broadly, but in every country we are evaluating what the status of the consumer awareness is, and what the most relevant piece of communication that we should use, and then we are using whichever one is the right from our portfolio of communication vehicles.

Then staying on advertising for a second, is there a long range of number, and let's just talk US here, where the awareness and whatever metrics you are measuring, hit a level where the incremental ad spend is not as effective.

If so, where is that in the timeline from today?

What might a more mature ad spend as a percentage of revenue be in the United States once you hit that level?

This is -- that they big theoretical question.

But the fact is that clearly there comes a stage when the incremental value of incremental dollar is not worth it, and we're well aware of that.

However, quite candidly, we're not there yet.

Remember that one of the things I said before was that our aided awareness is very high, which means that if you say to somebody - - do you know Tempur-Pedic, they say - - yes, I do.

But un-aided awareness, which is tell me the name of a mattress brand, while higher than it's ever been, is still lower than what we would like, and that is the one that's correlated to purchase intent.

So, we want un-aided awareness to be higher than it is, and we will continue to invest in that.

As we have said, our long-term strategic objective is a 10% spend on advertising, and it is a rule of thumb type of target, but that seems appropriate.

At this moment, in this quarter and for this year, we are expecting to spend a little more than that because we are still moving up the path.

Once we get to the level of brand recognition that we would want, we theoretically would be able to ramp down, and probably will.

But bear in mind, that what that then changes to is communicating news.

One of the things is that once consumers are aware of the brand, then the next job is to make sure that they are continually aware of the new news from the brand.

But it is a moving target with some years away from where we finally intend to end up.

Okay.

Thanks.

Lastly, and I don't expect you to tell me all of the products you've got planned here, but the IMAX theaters seating caught my attention.

I'm curious, how you could convey to us how you think about non-mattress, non-pillow opportunities globally either in terms of size or market?

Are you going automotive, you going to go home furnishings?

Any kind of help to think about that would be great.

Thank you.

You're right I'm not going to tell you, but, in all seriousness, of course you are right.

At some stage, it will be appropriate for us to move beyond the range that we're at, but frankly we are not there yet.

We have got a lot of opportunity with the product range for the categories in which we compete right now, and that is going to be our way primary focus for the foreseeable future.

Ultimately, we do believe there is expansion beyond, but not in the planning cycle that we are talking about right now.

I would just add the IMAX item in particular, the capability of doing that goes back to the entrepreneurial days when we were doing a lot of different things.

We got out a lot of those adjunct, peripheral opportunities when the Business decided to focus on its core.

This situation with the IMAX in Boston was a unique opportunity that we found compelling, and we had the capability because we knew how, we still had the molds, et cetera.

So, we could very easily make those seats, and what we make is just the Tempur material for the seats, we don't manufacture the whole seat.

Thank you.

Our next question comes from Bob Drbul of Barclays Capital.

Please go ahead.

Thanks.

Good morning.

Just a couple of questions for you.

First, on the industry when you look at your sales results versus the industry, can you give us a little bit of quantitative numbers around your market share gains, and the trends in specialty premiums?

What do you think is happening in the industry thus far this year?

Yes, we can, Bob, just to a degree.

At this stage, we don't have full industry data for 2010 yet.

We have the ISPA sample, which represents somewhere in the neighborhood historically of 70% of the industry, but we don't even have the full industry data for 2010 yet.

However, as we look at 2010, we think we gained quite a bit of share from an overall industry standpoint.

For 2011, so far all we have is January and February ISPA data.

We don't have March get.

I'm not sure exactly when it will come out.

Typically would come out sometime in the next week or so.

So, looking at January and February, that monthly data is only the total mattress market.

There's no split between spring and specialty, but sitting here today looking at how the industry performed in January and February, we continued to take tremendous amount of share.

We continued to be a significant portion of at least the ISPA reported growth of the industry.

Realistically, what we believe is going on we are seeing a strong growth in the industry in premium, and even stronger growth in terms of our share of premium as well as specialty share premium.

We are actually curious to see the full 2010 data ourselves.

Okay, and then as you look at the expanded distribution in the US, and some of the international distribution expansion that is underway.

When you look at your door count in the US, I think you had talked about 500 to 1500 additional doors.

Is that still a good number in North America?

And on the international side, I think was it the largest having bedding retailer Dreams you guys added them as a distributor.

Where are the other sort of big opportunities in terms of chains on the international rollout and door count, et cetera?

Domestically, we still believe that we have a lot of growth opportunity in terms of doors, and we added some doors in the first quarter.

As Mark mentioned, we added a couple of key new accounts which had some sizable door numbers.

And so, domestically, we are just a little over 7000 in the furniture and bedding stores now.

Internationally, as you mentioned, we added Dreams ratings last year, which was the largest bedding retailer in the UK.

We have opportunities in almost every market to expand our distribution.

We're not going to name names.

We generally try not to do that even with existing customers much less new customers; however, we do have targets in each country.

We do have prospects in each country, and the ones that we think make sense to give us the right level of distribution, the right depth of distribution in each country, and retailers that our brand fits with in terms of having a good reputation and having a good premium business.

What's important and it's kind of interesting to recognize that country by country, the structure of the industries are quite different.

In terms of the proportion of total sales that are owned by large chains is very different from one country to another, particularly when it comes to products that are premium.

So, the strategy that we have for each country is customized to that country, and the target customer type is customized to that country.

Great.

Thank you very much.

Our next question comes from Joe Altobello of Oppenheimer.

Please go ahead.

Most of my questions have been answered.

Just a couple of quick ones.

First, in terms of the industry, Dale, you talked it a little bit, but you also mentioned that your trends in the quarter improved in February and March, and I was also pleasantly surprised to see overall growth, particularly in North America we accelerate the first quarter.

To what do you attribute that to?

Obviously, market share gains have been going on for quite some time, but is it more advertising or is there something else going on that really drove that reacceleration in February and March?

It's a combination of things.

The advertising is helping and obviously advertising is cumulative; the longer you do, it continues to build.

So, that is one important part.

The other thing is the Cloud is continuing to be a very important driver, and Dale mentioned the Cloud Luxe, our new product, is doing really well and frankly a little better than we had expected.

We also ran an effective promotion, a nationwide promotion on the Ergo base, which again, lifted not only the sales of Ergo, but the sales of beds.

It contributed to our overall volume.

And the advertising and other things that we are doing, drove people to the web too, which has also lifted our direct business.

So, there wasn't one thing.

It was the combination of the different things that we've been focused on over the last 18 months or so.

Great, thanks Mark.

That was very helpful.

Secondly, in terms of pricing, you mentioned the pricing you took on Cloud Supreme.

What is the appetite right now amongst consumers and retailers if commodity costs continue to rise for additional price increases later this year?

Certainly, we are confident in our Business.

We are very confident in our ability to take price if we were to determine that we needed to.

We just raised the price on the Cloud Supreme, and it was not a factor in the marketplace on that product.

And as we introduced the Contour, the two higher end, the better invest Contours are higher priced than the products that they are replacing.

At this stage, we are not concerned about that from a market reaction standpoint.

So, I think that we are in a little bit of a unique position particularly given the breadth of our range and the depth of our range where we can opportunistically take a price here or there if we felt like we needed to because of commodity costs.

But as I mentioned earlier, right now as we sit here, we are seeing over performance in our productivity programs which are right now compensating for the increased commodity costs where our current commodity cost expectations are quite a bit higher than what they were at the start of the year.

Our productivity program is compensating for that.

Got it.

Okay.

Perfect, thank you.

Our next question comes from Eric Hollowaty of Stephens Corp.

Please go ahead.

I wanted to dig into China for a moment.

Could you refresh us on a number of stores that you have there now, and how you're thinking about the ultimate opportunity there in terms of number of stores?

We have not actually shared the number of stores that we have, and we aren't going to at this stage, but it is a relatively small number although growing quite fast.

We think that there is an opportunity in China to get a substantial number of stores across the country, but we are relatively early in that process right now.

That's really all we can say about it at this stage.

Sure, understood.

Maybe then if you could help us understand, what's your approach to positioning of the brand there?

Are you seeing what we would call a luxury brand, or if you could help us get our heads around how you position the brand relative to the competition?

That would be great.

Clearly, we are a luxury brand.

We're a premium.

We would be perceived to be super premium.

But at the same time in China, the stores that carry or the malls in which our stores are, carry many brands, and many of them are super premium.

So, there are in China a lot of very large, what they call furniture malls, which carry many, many brands, most of which are Chinese, but by no means all.

Many are them are European and American where they are selling super products that are in the same ballpark of price as ours.

So, we are super premium, but we are not alone in the retail outlets where we are, and these are very big malls.

Okay, great.

That's very helpful.

Thanks very much, and good luck.

Our next question comes from Jon Andersen or William Blair.

Please go ahead.

I just wanted to come back to the distribution opportunity for a minute, and the door count.

As you look forward and continue to add doors both in the US and outside the US, do you believe that the new doors have the potential to be as productive as your existing doors or would you expect some cannibalization or lower velocity through those?

And if you expect them to be as productive, why would that be?

In simple terms, I think the answer is yes.

We do expect them to be essentially as productive.

Remember we have about 3% market share.

We really have only a small portion of the total in America.

We really only a small portion of the total market.

So, we have the opportunity to go well beyond where we are and insofar as consumers don't have easy access to our products.

One of our key strategic initiatives is to make sure it's available to everyone.

Getting the appropriate more distribution is important, and we will do it, and what we have seen is that the productivity is as high.

In Europe, and in China and in Asia in general, we clearly have opportunity to open more stores because we are not fully penetrated as we should be.

So, we at least expect the productivity to be consistent.

Okay, thanks.

In terms of the demand both in the quarter and the outlook for the year is ahead of initial expectations, I know you have quite a bit of excess capacity in aggregate.

I'm wondering if there are any constraints within individual plants, any of the 3 manufacturing plants, or on specific product lines?

No.

From a capacity standpoint, we have ample capacity in all the plants.

Obviously, the Denmark plant is serving the international business.

The international business growth rates for the last couple of years have been significantly less than the US growth rate.

Within the US, the production at the 2 facilities in the US is relatively balanced, so they both still have ample capacity.

I will just reiterate, we have said for quite a while now, with our it existing capacity, we could have support revenue in the neighborhood of $2.5 billion.

We still have quite a ways to go before we get concerned about capacity utilization.

Terrific.

Just one more quick question on the Luxe.

Is the rollout complete now on the Luxe, or is there still more to go?

And also, are you seeing cannibalization from the Luxe that is going to be in line with your expectations, or maybe less so, and who is the Luxe taking share from?

The Luxe is mostly rolled out now, but there is still more opportunity for rollout but it is mostly rolled out.

It is, as we said, doing well.

It does cannibalize clearly, like any product, to some extent from within our line.

Interestingly, if anything, it's cannibalizing from lower priced products.

So, we are okay with it doing that.

Clearly, in aggregate, much of the growth in the Luxe is coming from other premium products in the marketplace.

Terrific.

Thanks a lot, and congratulations.

Our next question comes from Tony Gikas of Piper Jaffray.

Please go ahead.

Thank you for another great quarter.

A couple of quick questions.

On the rollout of the Cloud in Europe, I know you commented a little bit, it appears to be off to a good start.

Maybe just elaborate on the initial weeks that the product has been out relative to the trajectory of sales here in the US when it rolled out last year, or relative to your expectations?

Just a little more color there.

Second, as it relates to your consumer, seems to be pretty healthy at this point.

Do you think that there is still a lot of pent-up demand from the slowness that we saw back in 2008 and '09, or do you think that there is really some sustainability in the business over the next couple of years?

And then I have a follow-up.

Let me do the Cloud first in Europe.

First of all, honestly Tony, it is too early to talk about sell through at this stage, it really has been on the floor for literally weeks.

Too early to tell.

I think the best indicator that we've got right now is due to reaction, which is always a good indicator although not perfect of what the reaction is going to be.

The dealer reaction in Germany and Austria, and Benelux has been very positive, very positive indeed.

The distribution that we are getting is at least as good as we hoped as quickly as we hoped.

So, so far so good in the German-speaking countries.

In France and Spain, we've just shown it with the retailers, and again, very, very positive reaction, and again we are very confident we are going to get good very good distribution very quickly.

So, they are very good indicated.

The one thing I will say, though, is that in Europe people claim to prefer firmer beds.

So, when we are modeling how we think, or what shares is going to give, we recognize that it is not the same as the US, and it's going to be hard to tell.

All that said though, what people say they like to sleep on is not necessarily the same as what they actually end up buying.

So, we're learning from it as we go, but it's too early to say from a sale through point of view.

But from an initial reaction, it's certainly meeting our expectations.

As far as the consumer pent-up demand is concerned - -

Let me take a crack at that one.

From a pent-up demand, it's hard to completely gauge, obviously, but if you look at the run rates for the whole industry prior to the recession, you saw run rates for several years in the low 20s.

The industry peaked near 25 million units, and then it started gradually backing down.

And then obviously in 2008 and 2009 we had dramatic downdraft in terms of unit in the industry.

Last year, we saw an improvement in industry units, again based on the ISPA sample, we don't have the full industry data.

We saw upper single-digit growth in units last year for the industry, but the overall units were still well below what the norm was even taking out the ramp-up to the peak in 2005.

Industry was running at 21 million, 22 million units a year, and it has been well below that for 3 years now 2008, 2009 and even though 2010 was better, it's still well below what we would think is a normalized run rate.

So, that would tell us that there's still tremendous pent-up demand out there.

The price point of that demand that's pent-up is anybody's guess, but what we are trying to do is pull everybody to Tempur-Pedic.

Okay.

We're having success with that.

Great.

Last question then, your consumer seems to be feeling better and opening their wallets, new products working, marketing campaigns are very effective, execution has been great.

What's keeping you up at night right now?

What would be your leading one or two concerns looking at the balance of the year?

First thing I will say is nothing keeps us up at night because we sleep on Tempur-Pedic.

Commodities obviously.

We are focused on commodities.

We are focused on the fact that we are all watching the macro environment in Europe and in the US both of where we have significant macro economic issues that decisions have to be made from everything from debt, taxes and everything else.

So, that clearly that is one concern.

Beyond that, there's no other systemic thing that is keeping us awake other than we are in a very competitive industry, and we have very good competitors.

It's always going to be necessary for us to continue to perform in order for us to continue to develop, and we are very conscious of that.

Okay, Thank you.

Good luck.

That's all the time we have for today's call, and I will turn it back to the Company for any closing remarks.

Thank you, and thanks everybody for joining us today.

We look forward to talking to you again in July when will we will review the second quarter.

Have a good day.

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

You may all disconnect and have a wonderful day.