Tempur Sealy International Inc (TPX) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen.

Welcome to the Tempur-Pedic second 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 with instructions following at that time.

(Operator Instructions)

As a reminder, this conference is being recorded.

And now, I will turn the conference over to Barry Hytinen.

Please begin.

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

Joining me in our Lexington headquarters are Mark Sarvary, President and Chief Executive Officer; and Dale Williams, Executive Vice President and Chief Financial Officer.

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 is it made.

The Company undertakes no obligation 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 filed with the SEC.

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

Thanks Barry.

Good evening everyone and thanks for joining us.

Today I'll provide an overview of our performance in the second quarter and an update on our strategic focus area.

Dale will then provide a detailed review of financial results as well as our updated financial guidance.

We're pleased with our second quarter performance, both in the US and internationally.

Sales are up 30% from last year, and earnings per share were up 65%.

In the US and in all the countries where we have reliable data, Tempur outgrew the industry.

Our market share is growing globally.

Gross margin improved by over 400 basis points year-over-year, a result of favorable mix, a continued focus on productivity programs, and fixed cost leverage.

The gross margin improvement allowed us to maintain our commitment to significant investment in marketing while still expanding operating margins to 24%.

As a result of our strong performance in the first half of 2011, and our expectations for the remainder of the year, we are increasing our financial guidance, and Dale will provide details later.

Now I would like to provide updates on our strategic initiatives.

First, the progress that we've made to ensure there is a Tempur mattress and pillow that appeals to everyone.

In our international markets, the Cloud launch is progressing nicely throughout much of Europe, and is beginning in Asia.

And we are receiving very positive feedback both from retailers and consumers.

In the US, we are seeing positive trends in the early days of the Contour rollout, which began distribution in June.

Contour is a newly designed line that replaces our Tempur collection for those consumers who prefer the traditional Tempur feel.

The Contour is planned to roll out quickly; likely complete in advance of the Labor Day shopping period.

Also, late in the year, we will be increasing the prices of the Contour and the Contour Select.

Also in North America, the Cloud Luxe completed its initial distribution and continues to perform very well.

Beyond mattresses we are excited by the potential for our pillow business.

We have integrated the findings of new consumer research into our pillow development, and at the Las Vegas bedding show next week, we will introduce a range of new pillows and a redesign of the existing line.

The redesigned products maintain what consumers have always loved about our pillows but improved upon them.

And our new pillows provide more traditional look and feel, and will be available in varying degrees of softness.

I'd also like to comment on our mattress product development pipeline, details of which are obviously confidential, so I won't provide a lot of detail; but I would like to provide a brief update to our investors.

Through our ongoing consumer research we've identified several large market segments where our existing product line does not fully address certain consumer needs and wants.

And we focused our R&D team against these opportunities.

Across a range of different initiatives, product development is in varying stages, with some efforts well-developed and in the final stages of consumer testing and commercialization, and some still in the laboratory phase.

As we look into 2012 and beyond, we expect to introduce several new concepts to drive considerable growth and market share gains.

The next strategic imperative I want to provide a progress update on, is making sure everyone knows that they would sleep better on Tempur.

In the second quarter, we increased our marketing investment by more than 50%.

This increase was both a continuation of our US initiative, which we've been doing for some time now; and also our international initiative, which we kicked off a few months ago.

Those of you who attended our investor conference last year, will remember that we have good levels of distribution and our largest overseas markets, comparable with the US; but much lower levels of awareness than we have here in the US.

This year we have invested in advertising to raise awareness in these larger markets.

And although it is still quite early, we're quite pleased with the response we're seeing.

In those markets where we have made significant increases in advertising, our brand awareness is growing.

And also our web traffic is growing which is an important indicator of awareness and interest.

But most importantly, retailers are telling us that consumers are coming to their stores and asking for Tempur.

Obviously we are watching this very carefully.

But early results are promising.

The last initiative I'd like to update you on, is making sure that Tempur is available to everyone.

This quarter, we opened slightly more than 200 stores globally, and are currently in the process of opening several new accounts.

In the US this year, we've continued to gain slots with the Cloud rollout.

And in our international markets, we have achieved considerable growth in slots.

The Cloud launch is gaining traction overseas.

And as it rolls out, retailers are implementing the we call the collection assortment, meaning that they are carrying a portfolio of Tempur products that includes representative items from each of our 3 international collections -- Tempur-Original, Tempur-Sensation and Tempur-Cloud.

Finally, and also focused on our objective of ensuring that Tempur is available to everyone, we are pleased to announce that we have converted our third-party distributor in South Korea to a wholly-owned subsidiary at the beginning of July.

South Korea is a strategic market where we see potential for growth over many years.

To summarize, we had a great quarter, and a great first half for 2011.

And we confidently expect the 2011 will be a record year.

But we continue to take the long view.

We see a enormous potential for our Company in the years to come, and so we will continue to invest in building consumer awareness of the Tempur brand, and in technology and innovative new products, as we strive to fulfill our ambition to become the world's favorite mattress and pillow provider.

With that, I will now hand over to Dale.

Thanks Mark.

I will focus my commentary on the second quarter financial results and our updated 2011guidance.

In total, second quarter net sales were $342 million, an increase of 30%.

On a constant currency basis, sales were up 25%.

North American sales increased 29%, and international sales were up 34%.

On a constant currency basis our international sales increased 18%, reflecting the positive trends Mark referenced related to investments in marketing and new products.

By channel, in North American retail net sales were $227 million, an increase of 31%.

Internationally, retail sales were up 35% to $72 million.

On a product basis, mattresses were up 30%, driven by 19% increase in units.

North American mattress sales increased 28%, on a 20% increase in units.

The increased average unit selling price reflects favorable price and mix, partially offset by our closeout and increased floor model discounts.

In the international segment, mattress sales increased 37%.

On a constant currency basis, international mattress sales were up 20%.

International mattress units increased 16%.

In total, pillows were up 25%, driven by 16% increase in units.

North American pillow sales increased 19%, on a unit growth of 18%.

International pillow sales were up 31%, on a 14% volume increase.

On a constant currency basis, total sales internationally increased by 15%.

Sales of our other product category, which includes items that are normally sold along with a mattress, were up 32%.

Gross margin for the quarter was 52.9%, up 420 basis points year-on-year, and 60 basis points sequentially.

On a year-over-year basis, the gross margin improvement related to a variety of factors, including favorable mix; our ongoing productivity programs generated improved efficiencies in manufacturing and distribution, and fixed cost leverage related to higher production volumes.

Partially offsetting these benefits were higher commodity costs and new product launches.

On a sequential basis, the improvement in gross margin is primarily driven by favorable mix and productivity, offset by higher commodity costs and new product launches.

Looking at operating expenses, we increased our advertising investments by 150 basis points, reflecting our commitment to ensure everybody knows they would sleep better on Tempur.

Second quarter G&A expenses include two items I would like to address.

First, we benefited from the settlement of certain tax items.

This benefit was largely offset by a second item.

As we've mentioned before, the majority of our long-term equity incentive compensation is variable, and aligned with our financial performance.

As a result of our strong 2011 performance year-to-date and our outlook, we have increased the 2010 plan to the maximum target.

In the second quarter we recorded a significant expense to catch up to this level, and will be accruing at a higher rate going forward.

Our operating margins expanded 370 basis points, to 24.2%.

Interest expense was $2.6 million.

Net income was $53.1 million, up from $33.5 million last year.

EPS was $0.76, up from $0.46 last year.

Now turn to the balance sheet for a brief review.

Receivables were up, reflecting higher sales, while our DSOs were down approximately two days from the second quarter of last year, and flat sequentially.

Inventory was up $15 million or 7 days sequentially, as planned, to support the rollout s of the Contour in the US and the Cloud internationally.

As Mark mentioned, we expect the Contour to be a fast launch, with distribution complete by Labor Day.

With that, we anticipate our inventory days to normalize in the second half.

Let me address the increase in other non-current assets.

The change reflects deferred financing costs in conjunction with our newly amended credit facility, which I will discuss really.

Turning to our buyback -- through open market purchases, we bought back 1.59 million shares during the quarter, at an average price of $61.19, for a total cost of $97.5 million.

During the 1st half of 2011, we bought back 2.91 million shares, at an average price of $54.92, for a total cost of $160 million.

Our funded debt to EBITDA ratio increased modestly, to 1.38 times, reflecting debt deployed to purchase stock.

As we have said before, our target level ratio is 1.5 to 2 times, versus our debt covenant of 3 times.

We recently amended our credit facility with changes including an extension through June 2016, an increase in availability to $770 million, an accordion feature that would increase borrowing capacity by an additional $250 million, and increased interest margin reflecting market conditions.

With a favorable outlook for sustained sales growth, expanding margins, and strong cash flow generation, combined with low capital needs, we continue to view share repurchases as the best way to return value to shareholders.

So, we are pleased to announce that our board has authorized a new repurchase program of up to $200 million, which replaces the previous other authorization.

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

With our new outlook, we are balancing our strong results through the first half, while acknowledging the macroeconomic environment is still unclear.

Industry conditions remain choppy, and our retail customers continue to report that traffic is variable.

So we think it is prudent to project the remainder of the year in a manner reflecting a level of uncertainty.

We currently expect net sales to range from $1.37 billion to $1.4 billion.

And, we currently expect EPS to range from $3.07 to $3.14 per diluted share.

We expect our gross margin to be approximately 250 basis points higher for the full year, driven by favorable mix, ongoing productivity programs, and fixed cost leverage, partially offset by higher commodity costs.

We expect interest expense for the full year to be approximately $12 million.

This projection includes the changes to our interest margin cost, and our amended facility.

And we anticipate the full year tax rate to be 33.5%.

We are lowering our share count projection to $70 million for the full year, which includes the net benefit of our repurchase activity through the second quarter.

However, it does not assume benefit from the potential for further reduction in shares outstanding.

As a reminder, repurchases made in the second half would have less benefit on the full year, given their weighted average impact.

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

This concludes our prepared remarks, and at this point operator, we'd like to open the call to questions.

(Operator Instructions) Our first question is from Brad Thomas of KeyBanc Capital Markets.

Thanks, good afternoon and congratulations on a nice quarter.

Wanted to just, first, ask about the Cloud launch internationally.

Mark, you mentioned it was progressing nicely.

I was wondering if you could provide a little bit more color in terms of what you're seeing in terms of slot growth in the markets that you've rolled out the product and what level of sales lifts you have seen in those markets?

We are generally getting not quite -- 2 slots extra from the rollout of the Cloud.

With the 3 products we are getting generally 2 new slots.

It's still early.

So, it's hard to tell exactly what is the level of incremental.

Frankly, it looks pretty good.

It looks very similar to what we saw in the US.

The relative proportion of business is coming from the Cloud and from the old products, is comparable to what was so with the Cloud here and that is something on the order of 50% incremental -- it's too early to say if that's absolutely going to be the case but --

And then in addition to the slots growth, are you seeing a similar lift in terms of your sales in the stores that have had Cloud added to them?

We are getting the additional slots and the sales and we're getting from that are driving incremental sales, and the answer is yes.

Yes we are getting incremental sales.

Great and then just a follow up on the outlook for your input costs.

Last quarter, when you gave guidance, oil was at $115 a barrel and had been trending in an upward direction.

We're now lower than that and it hopefully seems to be a little bit more of a benign outlook.

And your closer to the point where you would have an idea of what your chemical capacity to the end of the year.

What's your expectation at this point for raw materials?

Actually, our outlook for raw materials hasn't changed much.

Our third-quarter raw materials are basically locked in at this point, and there's always a slight delay on the upside on the pricing.

So, the price increases that we got kind of late in the quarter were what we were expecting to get.

As we sit here today, if oil continues to stay at a more moderate level we would hope to possibly see some benefit later in the year.

But we haven't seen any downward pressure yet.

Or downward opportunity on chemical pricing.

Our outlook for that has not changed.

We were able to delay it a little bit, so we had a little less impact in the second quarter and chemicals than we were expecting.

But those chemical prices are in place now.

It certainly -- we'll work everyday to try to knock them back down, if oil stays with a more moderate level.

But it's not always, as we have often said, our chemical prices are not always moving directly with oil.

Thanks a much guys and congrats again on a great quarter.

Our next question if from Budd Bugatch of Raymond James.

Good evening Mark, Dale and Barry, this is actually Chad pinch hitting for Budd.

And let me add my congratulations as well on another great quarter.

First question, Mark I think in your commentary, you alluded to obviously market share gains in the US as well as internationally.

We have a pretty good feel for what the overall market is doing here in the US, but could you give us a sense for how you're up 18 and local currency compares to the overall market or at least some of the key overall markets that you're rolling out Cloud in?

We look across the markets as major markets quite frankly most of them are flat or down.

If you look at Germany, the UK, certainly, France, it is a very tough environment out there.

Spain -- it really is tough.

We are doing quite well compared to an industry that is really not doing very well.

Obviously the whole economy and Europe is suffering.

Our other businesses and Japan and Australia, there too, while not as terrible as it is in Europe, there's weak environment, and we are doing better.

In Japan, it's really quite bad.

So I would say that the compare, if you look at how we are doing relative to the US, here, at least there is growth in the industry.

In the rest of the world where we're competing, there's very little or none or negative.

Okay.

And turning back to the US, you alluded to a choppy macro environment and commentary from retailers that traffic is gotten more variable.

Have you seen any signs of slowing?

Can you give us a sense of how things progress through the quarter?

What business trends look like in early July?

Let me start and then I think Dale has got a bit more detail.

Let me give you a top line.

The second half of the quarter we saw little bit of strengthening relative to the first half of the quarter.

So, it kind of got better.

But I think the point that you picked up on was quite right, which is there has been a choppiness.

Retailers are saying that literally from day-to-day they'll have a good day than a bad day.

They'll have a good weekend and then a bad weekend.

We've heard this from retailers across the country and we see it from our results.

Choppy is the right word.

And while our -- so far this quarter, trends are consistent with what we have been seeing, we continue to see choppiness.

Dale, is there anything you want to add?

No, I think that covers it.

Okay.

And last 1 for me, I guess within the US, could you tell us what the US furniture and bedding sales were during the quarter?

And is there any variance between what you're seeing from full line furniture stores versus bedding specialists?

The furniture and bedding sales in the quarter were $212.6 million.

And in terms of bedding specialist versus furniture, we've seen strengths on both sides.

Okay.

Thanks guys for taking my questions.

Congratulations again, and good luck for the rest of the year.

(Operator Instructions) Our next question is from Mark Rupe of Longbow research.

Hey guys, congrats as well.

Just on the rollout of the Cloud international.

You commented, kind of maybe from a macro level, from a higher level.

But is there any kind of learnings that you found on the market-by-market basis as you've rolled this out?

I know that each of the markets are very different, but is there anything that's surprised you 1 way or another on the Cloud rollout?

You are quite right to say that each of the markets different.

That is true.

And I think that they are different for a variety of reasons.

One of the fundamental reasons that they are different is because almost without exception, every country has a unique retail environment.

So, that the German retail environment is not at all the same as the French and not at all the same as the UK or Italian and so on.

How we -- the method that it rolls out and the challenges and so on are different by every country, and we've had to customize our -- how we've launched it in each country.

What is interesting is that obviously, the Cloud bed is a Tempur bed that has a softer initial feel.

And, we had expected a greater degree of variability in how appealing that would be in different countries.

A lot of countries -- people perceive that some countries prefer to sleep on firmer beds than others, for example.

And we found a lot less variability in that than we had thought.

So, what people profess to like the best and what they actually like the best -- what they actually like is more consistent across the country.

There are some outliers, China is different, but fundamentally across the main European countries, there's more consistency in consumers preference than I would've guessed.

Okay, perfect.

On then on the media spend, I know you cited a fairly significant increase.

Was it weighted a lot more towards international?

Is there a number you can point to?

Our overall media spend in the US, we saw media spend increase about 43% on a year-over-year basis.

Internationally we increased it 84%.

Like we said, we are investing internationally.

How much are we invested in the US?

The total media spend for the quarter was right about $36 million, and that was about $10 million international and the balance in the US, so it's a -- we have stepped up investment here as well as internationally.

And we are seeing very positive results from that, actually in both segments.

Perfect.

And then you called out a price increase on the Contour and the Contour select.

Correct me if I'm wrong, but is that incremental to what you had previously thought on rolling out when you rolled it out?

We hadn't communicated it before but we'd always anticipated doing it.

The prices that we introduced that were essentially consistent with the product they were replacing.

Now that that replacement is essentially all that through, we are going to make sure that the products are priced comparably with the other lines.

Most notably the Cloud.

Okay, perfect and then just lastly, you called out some new concepts you are looking for 2012.

Without going into details, did you mentioned that it was across all product offerings and all regions, is there one particular area that you see might have the most meaningful hole to fill, if you will?

I don't want to go into great details.

First well, I don't want to go into great details for obvious reasons.

Secondly it is a broad rush.

A, it is broad and B, it is not a single thing.

Perfect, thank you guys, good luck.

Our next question is from John Baugh of Stifel Nicolaus.

Thank you and my congratulations as well.

I was just curious on the contour rollout, and the impact it had on Q2, whether that's -- you could quantify that and will the impact be lower in Q3 than Q2?

We've got about 40% to 45% of the rollout of the Contour done in Q2.

It's a little bit higher rollout in Q3.

However, the overall impact of the program will be moderated a little bit, because obviously Q2 on top of the rollout you also have the discontinuance of the old Tempur line.

So, you have the closeout going on, now it's spilled over a little bit into July.

And certainly, you can still find the while supplies last, but we are basically out of those now.

So, from an overall standpoint, Q3 will see a little bit more impact of Contour rollout with a little less impact from the closeout.

However, as I stated before, chemicals are going to be up.

So, I wouldn't be looking for a big growth in the gross margin here in Q3.

Okay.

And then on the --, Dale on the compensation, you mentioned that in Q2 spiking.

Does that catch you up for the whole year?

How do we think about modeling Q3 and Q4 year-over-year on that line item?

Basically, on the 2010 All Temp program, by stepping up to the max payout, the charge we took in 2Q, which you'll find in the queue when it's published tomorrow, was about $1.8 million.

However, that gets us current through the second quarter.

Catch up for 2010 and the first half of 2011.

We would see an ongoing increase in the accrual rate on that particular program of about $300,000 a quarter.

Great.

Thank you, good luck.

Our next question is from Bob Drbul our Barclays.

Good morning, good afternoon.

Sorry, long day.

Couple questions I have for you.

First, on the international side, can you talk a little bit about the [exa] Cloud, how you are doing internationally?

Some of the historical products?

Well, the growth is coming from the Cloud.

Or part of the growth is coming from the Cloud, but by no means all it.

And a lot of the growth that was coming, we are attributing a great deal of the growth that we are getting, which all, by nature, comes from what you're calling the historic business, is driven by the advertising.

So, we're actually seeing quite good growth in our older products, as well as the Cloud.

I think it's important to remember, Bob, but the Cloud rollout is still progressing.

We got into the Germanic regions right at the end of the first quarter.

So, in the second quarter, those were the primary countries, Germany, Austria, Switzerland, Benelux.

Those were the primary countries selling the Cloud.

As the quarter progressed we got it into southern Europe, Spain, France, Italy.

But not a lot of impact from those countries in the second quarter.

Okay.

Can we talk a little bit in terms of the gross margins for in the third quarter from a mix perspective?

When you look at what you guys just delivered in terms of gross margin in the mix benefit, should there be much of a change for the rest of the year on mix?

Well, there's a slight change, because as we are -- as we get past the rollout of the Contour, the margin on the Contour is a little better than what it's replacing.

The Cloud Luxe continues to perform very well.

That's the two primary mixed drivers that we will see in the back half.

But beyond that, not a huge change in mix.

Are you seeing any price resistance throughout any portion of the portfolio?

On the price increases?

No, we haven't.

No.

Our next question is from Joe Altobello of Oppenheimer.

Thanks, good afternoon guys.

First question is just a quick one.

We've now fully anniversaried the Cloud launch the US, correct?

The Cloud Supreme was launched in the 4th quarter of '09.

The base Cloud was launched in the first quarter of 2010, so it's been fully anniversaried.

The Luxe though, was launched late third quarter, early fourth quarter of 2010, so we haven't anniversaried the Luxe yet.

Okay.

Perfect.

And then in terms of the pockets of opportunity, I think Mark referred to earlier, I understand he doesn't want to go into too much detail there, but a longer-term question, is that all in bedding?

Or are there other opportunities for the Tempur material beyond just mattresses and pillows, for example?

There are opportunities for the Tempur material beyond bedding.

But frankly, there's enormous opportunities in bedding and that's where we are focused first.

We still have a very small unit share.

And so we see enormous potential for growth within the bedding industry.

And that is where our focus is.

Okay got it.

And one last one in terms of new product launch scheduled for 2012, would those be incremental to your existing SKUs or would they be replacing older lines?

I'm not going to go into details at this stage.

Okay and actually I lied, just one more if I could.

Most of the growth recently has come recently from slots or new slots as well as higher priced products.

Your door growth obviously has slowed in recent years.

Is there a thought to re-accelerating a door growth are we going to continue to see additional slots as the key driver of that?

If I may, while what you say is true, the slots are growing.

We think of it another way.

We think of what percentage of the consumers were coming over.

And the reason that the slots grows is because the retailer is justified to carry additional products, additional Tempur products, because an appropriate proportion of their sales come from that range.

But what that means is we are getting more consumers to buy our products.

And so the question, really, the way we think about it is, what proportion or what targets of consumers are we not yet meeting the needs of.

So I would say that yes, there's likely to be more slot growth but I would say that the productivity per slot is still something we are very focused on.

That's helpful, thank you.

(Operator Instructions) Our next question if from Jon Andersen of William Blair.

Good afternoon thanks for taking my questions.

I was just wondering if you could refresh my memory on the geographic mix.

Are your margins higher outside North America the inside North America?

And as the international business presumably growth rate accelerates, or we saw begin to accelerate in the second quarter, does that become a favorable driver of gross margin, as well?

Yes John, just a quick recap.

Internationally, our gross margins are higher than they are in the US.

And operationally, it varies a little bit, quarter to quarter.

But they're 600 to 800 basis points higher internationally from an operational standpoint.

Now, that's driven by two things, like most consumer product companies.

Our are prices are a little bit higher internationally.

The other thing that drives that is the products themselves.

As we've often said, people in the US like big, thick, fat mattresses.

People internationally don't.

So, for even a comparably priced mattress it might be likely to be thinner, and the international markets therefore less material in it, so we have the nice combination there internationally where we've got a little bit higher pricing, as well as a little bit lower cost, because there's less material in the product.

Yes, as the international business growth rate picks up, obviously, we are still in a position where the US growth rate on a constant currency basis is growing faster.

So, right now we are really experiencing negative mix.

But should the day come, when the day comes that the international growth rate starts exceeding the US growth rate, that will be an additional benefit to overall Company margins.

Thanks, that's helpful.

And where are you currently in terms of capacity utilization?

I think last time I'd heard it in the low 40s.

And any update on the progress against the multi-year cost savings or productivity program would be helpful.

From a capacity standpoint, we are still, I'd say in the mid-40s, I don't have an exact number in front of me.

But that feels right, based on where we were tracking and the volume growth we've seen.

On the overall productivity program, as I said, that's been a key driver of our gross margin growth.

Productivity initiatives cover a gamut of areas.

It's not just -- we are not talking here just labor productivity.

We are talking machine productivity, we're talking throughput productivity.

A key driver is yield.

You start with a certain poundage of chemicals and how much good product you get out the back.

And then we've made tremendous progress over the last several years in terms of improving yields.

And then it also invokes the whole supply chain.

In terms of getting more efficient distribution network in terms of getting more efficient purchasing.

So the productivity program has been a tremendous boost to the business from a cost management standpoint, and gross margin improvement standpoint, and it's got a long way to go.

Originally it was set up as a four year program, the program is not ending anytime soon, it's now part of the fabric and framework of the business.

Okay.

And on the Ergo adjustable base, I think you began some advertising for the first time earlier this year.

I think you've garnered some incremental distribution and done some training in store.

Are you continuing to see positive progression in terms of the attach rates there and how would you characterize the opportunity there going forward?

We are and it is a focus and we are focusing on training particularly for the retail sales.

The people who are the sales teams and the retailers.

And it's paying dividends, consumers are increasingly buying adjustable bases, or Ergo bases the Tempur-Pedic beds.

It's 1 of these things were consumers are -- we have very, very high satisfaction rates, consumer satisfaction rates of people who by our beds.

People who by our beds with an adjustable base have, in fact, even higher satisfaction rates and they are very satisfied with the bases.

These adjustable bases are very powerful thing for the consumer but they're also obviously good thing for the retailers are and for us in terms of increasing the value to the customer.

And so we are focused on it and it continues to grow and it is something that has been important in the first half and we'll continue to be.

Perfect, 2 last one if I could.

Mark, I think you mentioned Cloud beginning to roll out in Asia.

I just wanted to make sure I heard that right.

And if there's any color you can provide us there in terms of your update to your China plans, that would be helpful.

Thanks.

Yes, it is rolling out in Asia.

It's in Japan and it's in Australia and it's in China, too.

It is rolling out there.

And it is -- and doing well.

It's as early of a stage as it is in the rest of Europe, but so far so good.

Thank you very much.

Our next question is from Joshua Pollard of Goldman Sachs.

Hi, my first question is how much higher are the anticipated margins on your new and redesigned pillows versus the current Company average?

Compared to our current pillows, the new pillows are in the same ballpark as what we currently have on pillows.

Pillows our highest margin product category.

So, hard to get much better than that.

But they're in the same ballpark as what we currently get on pillows.

And as you look at your overall products, is there any anticipation that with this new pillow product, pillows as a percent of total sales could actually pick up?

Or is there enough product and pricing changes from a sales perspective, you guys wouldn't expect much of a change?

Pillows are an important thing to us for several reasons.

One, because people love our pillows.

And 2, as Dale said, they're a good, they're a high margin product.

One of the things that'd particularly good about pillows is that people who own a Tempur-Pedic pillow are much more likely to buy a Tempur-Pedic mattress.

So, we see them is a very good seeding tool from our marketing point of view.

So, we're keen to get the number people who have Tempur-Pedic pillows to grow.

And that is part of the initiative that we'll be launching in Vegas next week is to broaden the range.

Maintain the margins, but broaden the range to appeal to a wider range of people, so that we can get -- obviously so we can sell more, but also so we can continue to see people's affiliation with Tempur-Pedic.

So, it will grow.

It is our expectation that it will grow as a percentage.

But I wouldn't see that it's going to change the dynamics of a business on its own.

It's not something that's going to change the models in the near term.

That's very clear.

Two more very quick ones.

One, on commodity costs in the first half, could you just quantify how much your total commodity cost was up first half 2011 versus first half 2010?

Yes, in the first half, commodity costs were up in the mid-to upper single digits.

On our last call, I said for the year we were expecting it to be up in the low double digits for the full year.

Obviously that is expecting an increase, much higher commodity costs in the back half.

As I said earlier, we've seen those commodity costs come in, but we are also hopeful, not expecting, that we will be working diligently to try to improve that, since oil has moderated a little bit and seems to have stabilized a little but.

Last question.

Is there anyway you could actually quantify the impact of the Tempur product model closeouts in the quarter?

Not a lot.

There is a minor discount that was shared between us and the retailers, but it wasn't a big impact on the quarter.

Our next question is from Keith Hughes of SunTrust.

Thank you.

Just 1 question.

You were speaking earlier about other product -- other areas to address with product.

Given your focus internationally, are we going to the next several years see more international only products?

Or is it going to be a global approach to what you introduce?

In general, we are becoming -- it is going to be more of a global approach.

For the simple reason that we want to make sure that our R&D people are focused on getting the against things which have the biggest bang for the buck.

So those -- there are a lot of things that we can -- are looking at and pursuing.

We're going to put on primary emphasis on those things that have the widest applications.

That's the first proof.

There are, as I said in my comments, the collection in Europe is slightly different than the collection in the US.

Overtime, I anticipate this will become more similar.

But, it is not something we are going to rush to do.

But, now we have good business models, a good range of products in both areas.

But, for the future, in the longer run, I see it coming together more.

And 1 other 1, historically, you've really not got down to the low end of the industry in the United States in terms of the price of products.

Has that view changed at all?

Obviously from time to time and we've always said the premium part of the mattress industry is where we've always focused and it is still a very big part and we still have a relatively small share.

So, we see enormous opportunity in the premium mattress industry in the US and the same is true in the rest of the world.

Really, that hasn't changed.

Okay, thank you.

Our next question is from Bob Strauss of Gilford Securities.

Hi guys, congratulations on the quarter.

Just a couple of questions here, a lot has been asked already.

Dale, just first, I just want a quick number.

On the R&D spend in the quarter, what was that?

>I don't have the right in front of me here.

Ask your second question and I'll come back to it.

Okay, that's fine.

And Mark, there was a question earlier asked about the Cloud rollout into Asia.

I recall, if correct, your expectations for your Cloud rollout in Europe was a little bit different in that in the US.

So, I would ask what is your Cloud expectation rollouts for Asia as compared to your experiences in both now Europe and the US?

Asia is obviously a very broad thing.

Australia, I would say, is essentially similar to the US.

I mean, it's not exactly and for any Australians on the phone, I apologize.

But my point is, in broad terms as a market, we would -- our sales in Australia are very comparable, in terms of their mix to what they are in America.

Japan is obviously a differ market.

Obviously a lot of people in Japan sleep on futons to this day.

I mean a very large proportion, so our sales are quite different in Japan.

Much greater proportion of pillows and so on.

However, the Cloud is being well accepted.

So far it's very early, but I see it doing quite well.

In China it's a bit different.

People their sleep a very different things and so the Cloud is there and doing okay.

I anticipate, at this very early stage, that it's not going to be as big of a business there as our base business.

It's too early to say.

If you ask me right at this minute, that's the perception at this minute.

Rob, on R&D, for the quarter R&D was $2.6 million.

Thank you.

And Mark, that kind of leads me to the next question just to understand Europe a little bit more.

When you consider what you're doing behind the scenes in your R&Dprogram, what are you thinking about when it comes to Asia and all of those different consumer preferences that you just described?

I guess I'm still thinking primarily product segment wise, mattresses and pillows.

Not beyond that.

And we -- as I said to an earlier question, we are obviously focused on those things.

Given that we have limited resources and we want to focus on the things that have the biggest bang for the buck.

We are going to be biased towards things that can be applied broadly across the globe.

There are examples of things and things that we do have on our docket, and I don't want to get into detail, which have particular focus in some areas of the world.

And that may well -- from time to time, that may make sense.

But I think the biggest learning that we've all had over the last few years is that there is more similarity than there is difference.

And so there's more value here in focusing on those things we can do generally, especially when it comes to developing new technologies, then there is for doing things country specific.

And then I guess 1 of the previous comments I think that you had stated was regarding some survey work, or maybe it was focus groups, and maybe it was in relation to the Cloud rollout in Europe, where you said something like, what people thought that they like to necessarily come true when they actually purchased a mattress.

And thus, I think the Cloud has outperformed even your expectations in Europe.

When you think about that experience, if I have that right, and you continue to do your focus work and your focus group work and your surveys, how do you then consider how consumers are responding to these surveys if you know there's a little bit of movement and opinion versus what they actually would like?

It's an interesting -- and you're right and you did remember right.

The fundamental breakdown is if you ask people to use words to describe what they would like.

Because some people and particularly in the US, will say they love a bed that is soft and embracing and they really feel wrapped around by.

Almost hugged by.

In Europe, people would say I don't like a bed like that at all, I want a firm bed.

So, if they're using words they describe a bed in a way that is what they think they would like.

And we do this all the time, if you put a sheet over bed and ask people to lie on it and say rank that on a points out of 10, their scores are very different to what they've said in words.

And so, what we increasingly do now with our testing is to not ask people in words.

We conduct extensive research now, where we have beds all covered with white sheets, and we have large groups of people testing them and the ranking them on a rating.

And then asking them what they think they like and then try to correlate what people say they think and what they actually like.

And we are enhancing that by actually getting sensory work done by people who are trained in this, who can actually systematically describe the difference in how beds feel.

It's actually a more complicated problem than you would have guessed.

In any case, it is something we are very dedicated to and what we are not doing is taking at first blush what people say they prefer.

Thank you and just the last question.

Regarding the new pillow rollout that you're going to have at the Las Vegas show, is that rollout going to be stepped through countries or is that going to go globally and blanket the world?

Initially that's going to be a US focused launch.

The thing that we are going to show at Vegas -- remember there are trade shows around the world.

The Vegas 1 is an American 1 and this product line is initially focused on the US.

Perfect, thank you so much for answering the questions and go look in the future quarters.

Our next question is from Joan Storms, of Wedbush Securities.

Good afternoon, just a couple quick questions.

On the marketing, obviously your campaigns in the US, you have built upon the askme and then did some work with more specific product including the Cloud and then the Ergo.

I was wondering if you give us any hints on where the evolution of that marketing campaign may be going or where you maybe looking at going forward?

First of all, we do at this stage intend to evolve that campaign.

We like that campaign, it's doing very well for us.

It really captures the core message that we want to communicate, which is that we are encouraging people, to ask other people to ask on the web about Tempur-Pedic because obviously the recognition that recommendation they'll receive is one of our core asset.

We are, in fact, creating new spots and, frankly, I don't want to share them.

Forgive me, I don't want to share them with you right now.

They're going to be tied to some of our focus areas for promotions in the fourth quarter.

Forgive me, but I don't want to share them right now.

Okay.

And then just a housekeeping question, if you don't have it now then we can talk off-line, on the 200 doors, with most of those big international, can you break out how many opened in the first half?

And then I can figure out the second half?

Joani, you heard that slightly differently, I think.

We opened about 50 in the quarter internationally and the rest were in the North American segment.

So it was 200 in the quarter?

Yes.

Okay.

And for the year?

Projection?

We generally don't give projections on doors, Joan, from a standpoint of -- because it's so fact and circumstances determine them.

But as Mark mentioned, we are in the process of opening some additional accounts and we kind of update that on a quarterly basis.

Great, thank you very much and congratulations.

Our next question is from Eric Hollowaty of Stephens Inc.

Date, can you help us think about growth rates in North America versus international going forward?

And, is it likely that we could see international segment sales growth in percentage terms outpace North America by perhaps the end of this year?

How should we think about that?

Well, what we said at the start of the year and really we haven't changed that outlook, was that we expected in the first--for the year, the US would grow faster than international would, for the year.

But we expected the international growth rate to improve and ramp throughout the year, but because the pay back on the marketing investments that we are making and with the launch and rollout of the Cloud, it gets to more and more markets and has more impact.

So, our expectation was that we would see an increase in growth rate in the international business, but for the year this year, we were looking for the US business to still outgrow the international business.

In the future, beyond this year, we would love to see the international business continue to see a ramp in its growth rate and we think long-term the potential is that we could start to see a gradual shift back in terms of balance of revenue.

Right now we are running about 70% US or North America and 30% international.

Not too many years ago, it was more 0.6, 0.3 and when I came to the Company 8 years ago, it was almost 50-50.

Over the long, long-term, we would expect international with some of the market opportunities that are out there and some emerging markets to outpace the US business in latter years.

Great, thanks for a much, good luck.

Thank you.

This ends the Q&A portion of today's call.

I would like to turn the conference over to the Company for any closing remarks.

Thanks.

Thanks everybody and we look for talking with you again in October when we will review the third quarter.

Thanks for joining us this evening.

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

This concludes the program.

You may now disconnect, and have a wonderful day.

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