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Operator
Ladies and gentlemen, welcome to Tempur-Pedic third quarter 2011 earnings call.
(Operators Instructions).
Now I'll turn the call over to Barry Hytinen Senior Vice President.
Please begin.
Barry Hytinen - SVP
Thanks, Tyrone, and thank you to everyone for joining us on 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 expectation regarding sales and earnings involved uncertainties.
Actual results may differ due to a variety of factors that could adversely effect the Companies' business.
The factors that could cause actual results to differ materially from those identifies include economic, competitive, operating, and other factors discussed in the press release issue today.
These factors are also discussed in the Companies SEC filings, including the Companies annual report on form 10-K under the headings, special note regarding forward-looking statements and risks factors.
Any forward-looking statements speaks only as of the date on which it is made.
The Company under takes no obligation to update any forward-looking statements.
The press release which contains a reconsolidation of non-GAAP financial measures to the most directly comparable GAAP measures is posted on the Company's website at www.tempurpedic.com and filed with the SEC.
Now with that introduction, it is my pleasure to turn the call over to Mark.
Mark Sarvary - CEO, President
Thanks, Barry, good evening, everybody, and thanks for joining us.
Today I'll provide an over view of our performance on the third quarter and an update on our strategic focus area.
Dale will then provide a detailed review of the financial results as well as our updated financial guidance.
we are pleased with our third quarter performance globally.
Sales were up 30% from last year and earnings per share were up 45%.
Tempur continues to gain market share both in the US and Internationally, primarily as a result of our strategic investments in new products and brand advertising.
Gross margin improved 140 basis points year-over-year a result of our productivity programs favorable mixed and fixed cost leverage.
And the improvement in gross margin allowed to maintain our commitment to significantly invest in marketing ,while still expanding operating margin to 220 basis points to 25.2%.
Having said that our gross margin in the third quarter was lower than in the second quarter and Dale will provide more details on that when he talks about our financial results.
Now, I would like to provide an update on our strategic initiatives.
Firstly, our commitment to ensure that there is a Tempur Mattress and pillow that appeals to anyone.
In our International markets the Cloud launch is progressing very well.
The line is now in distribution with all markets with the UK being the last major geography to start shipping.
Retailer and consumer feed back remain very positive and we believe the cloud collection is highly incremental.
We anticipate that our cloud business will be an important contributor to our international markets overall growth during 2012.
In the US the roll out of the Contour collection was completed on schedule in advance of the labor day shopping period.
This line is designed for those consumers with a preference for the original Tempur feel.
And offers an improved product with a broader differentiation within the line compared to the product it replaces.
Again, we are very pleased with the response this line has received both from retailers and consumers.
Additionally, in the US we have showcased our new pillow traditional line in August at the Las Vegas bedding show and began shipping this quarter.
These pillows supplement the very popular iconic Tempur molded pillows.
These are filled pillows designed to appeal to consumers who prefer a more traditional pillow, one that is more huggable.
A broader range is a key component of our strategy to ensure greater distribution for our pillow products.
Last week, from a new product perspective was I mentioned on our second quarter call we have several new product concepts in various stages of development.
Over the coming 12 to 24 months we'll introduce exciting new products that we anticipate will drive considerable growth and market share gains in the premium space by meeting the needs of large consumer segments that we currently do not address.
These new products cut across all of our lines and geography.
We are in the final stage of development for a new line we expect to introduce in January at the Las Vegas show that we are very excited about, and we look forward to showing it to many of you in person.
As our investors understand, due to the competitive nature of future product introductions we'll make no further comments on this topic during the call.
The next strategic imperative is making sure that everybody knows that they will sleep better on aTempur.
In the third quarter we increased our marketing by over 55% a nearly $40 million.
Enabling us to build a Tempur brand and increase the breadth of our product range.
In the US our investment in marketing is paying off well.
The "Ask me" campaign continues to expand.
Most recently with the message that a Tempur Pedic is available for a range of consumer preferences from soft, to firm, and everything in between.
We tested increase levels of advertising in 29 of our key markets and there we saw an appreciable step up in sales of those markets.
We expect to expand this test during 2012.
The North America business as a whole experienced increased 19% growth in mattress units and we are confident that is largely due to the effectiveness of our advertising.
we are also pleased on the return of marketing investment in our International markets.
As a reminder in 2011 we are implementing a strategic investment in advertising to raise awareness in several of our largest international markets concentrated in the UK, Germany, and France with additional investment in the several smaller markets.
We have seen an unambiguous lift in sales volume in these markets, and our retailers are enthusiastic about the consumer response.
In addition we are able to monitor the effectiveness of advertising by tracking web traffic during periods that we are on the air and again we've seen a significant lift as a result of the investment.
First, I would like to update investors on the goal to make sure that Tempur is available to everyone.
This quarter we opened approximately 150 stores of which roughly half were in the US.
Throughout 2011, we have gained slots with both the Cloud rollout in our International markets and the Contour rollout in the US.
So in closing, we had a strong third quarter in a macro-environment that remains challenging both in the US and Internationally.
The mattress industry as a whole is significantly below historic norms and is growing very slowly in most geographies and not at all in others.
Nonetheless, we project significant growth for Tempur-Pedic in the fourth quarter an in the years ahead.
We will continue to invest in technology, in product innovation and in building consumer awareness of the Tempur brand.
We remain committed to becoming the world's favorite mattress and pillow brand.
With that I'll hand it over to Dale.
Dale Williams - EVP, CFO
Thanks, Mark.
I'll focus my commentary on the third quarter financial results.
In total third quarter net sales were $383 million an increase of 30%.
On a constant currency basis sales were up 26%.
North American sales increased 30%, and International sales were up 28%, on a constant currency basis our International sales increased 15% reflecting the positive response to investments in marketing of new products.
By channel, the North American retail net sales were $257 million an increase of 30%.
Internationally retail sales were up 37%, to $86 million.
On a product basis total mattress sales were up 28%, driven by 18%, increase in units.
North American mattress sales increase 28% on 19% increase on units.
The increased average unit selling price reflects favorable pricing mix.
Partially offset by increased floor model discounts.
In the international segment mattress sales increased 31%.
On a constant currency basis, international mattress sales were up 18%, and mattress units increased 16%.
In total pillows were up 12%.
driven by a 3% increase in units.
North American pillow sales increased 5% on an unit growth of 2%.
International pillow sales were up 21% on a 5% volume increase.
On a constant currency basis, International pillows sales increased by 9%.
Sales of our other product category which includes items that are normally sold along with a mattress were up 42% reflecting continued improvement on ergo attach rates in the US.
Gross margins for the quarter was 52.4% up 140 basis year-on-year, but down 50 basis points sequentially.
I'm disappointed the margin rate was not up more but the reasons behind this were mostly transitory.
While the underline trends in our margin continue to be strong in the third quarter we made some strategic investments which lowered our overall gross margin.
These investments included an IT system upgrade at our European manufacturing facility, new product launches, and a program that provides sales associates to purchase their own Tempur Sleep system.
All of these are supportive of long term growth plans and provide a foundation for future growth.
At the same time we are experiencing unprecedented levels of demand for new product launches Internationally.
This demand in combination with some productivity issues arising from the upgrade resulted in unacceptably low levels of inventories in some international markets so rather than risk extensive back orders we began shipping products from the US to Europe and incurred incremental shipping costs.
Despite the support from the US plants and significant improvement in productivity by the end of the quarter, our international business ended the third quarter with a record backlog.
To ensure the best possible levels of customer service we'll continue to ship to Europe in the fourth quarter.
Now let me give you a break down of the key drivers of our gross margins.
On a year-over-year basis, the gross market improvement related to our on going productivity programs generated improved sufficiency's in manufacturing and distribution.
(Inaudible).
cost leverage related to higher production volumes, partially offsetting these benefits with higher commodity costs and discounts related to new products introductions.
On a sequential basis the modest decline in gross margin resulted from the impact of productivity related to the Danish manufacturing facility, higher commodity cost, floor models discounts related to new product launches and the retail associate sales program partially offsetting these items were improvements related to our ongoing productivity programs and fixed cost leverage.
Looking at operating expenses we increased our advertising investment, by 170 basis points reflecting our commitment to ensure that everyone knows they will sleep better on Tempur.
In our sales growth we drove 80 basis points of operating expense leverage despite our increased investment in brand awareness.
Our operating margins expanded by 220 basis points to 25.2% interest expense was $3.3 million .
Net income was $61.9 million up from $44.2 million last year.
EPS was $0.90 up from $0.62 last year.
Now I will turn to the balance sheet for a brief review.
We generated $75 million of operating cash flow and have $103 million of cash on our balance sheets.
The majority of our cash balance is in our International markets.
Receivable were up reflecting higher sales, while our DSO were down approximately three days from the third quarter of last year and flat sequentially.
Inventory decreased 3 days sequentially principally reflecting the completion of initial distribution of the Contour line in the US.
Our inventories days were down considerable more in the international markets especially for new products.
Turning to our share re purchases we bought 1.34 million share in the quarter at a total cost of $80 million.
During the first three quarters of 2011, we bought back 4.25 million shares for a total cost of $240 million.
Our funded debt to EBITDA ratio decreased modestly to 1.36 times despite an increase in debt outstanding deployed to purchase stock.
As we've said before, our target leverage ratio is 1.5 to 2 times verses our debt (Inaudible).
of 3 times .
We continue to view the share repurchase program as an excellent means to return value to shareholders over the long term.
So we are pleased to announce that our board has expanded our share authorization by $80 million reflecting the shares repurchased in the third quarter we currently have $200 million available under this authorization.
Now, I would like to address our updated guidance for the full year.
With our new outlook we are balancing strong results through the first three-quarters of 2011 while continuing to acknowledge the macroeconomic environment remains unclear.
When these conditions are volatile and retail customers report that traffic is variable therefore we are projecting the end of the year in a manner reflecting this uncertainty.
We currently expect net sales to range from $1.405 billion to $1.425 billion.
And we currently expect EPS to range from $3.12 to $3.17 per diluted share.
Regarding our outlook for Gross margins in the fourth quarter we anticipate a modest increase on the sequential basis.
As margins will remain challenged by incremental shipping cost related to rebuilding International inventories and a conservative commodity outlook.
We expect interest expense for the full year to be $13 million.
We anticipate the full year tax rate to be 33.5%.
We are lowering our share count projection to $69.5 million shares for the full year, which includes the net benefit from the repurchase activity through the third quarter.
However it does not assume benefits from the potential for 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 of the Company's control.
This concludes our prepared remarks, and at this point operator we would like to open it up
Operator
(Operators Instructions).
The first question is from Mark Rupe with Longbow Research.
The line is open.
Mark Rupe - Analyst
Hey, guys solid quarter.
Dale, on the gross margin, I know you cited the three things but obviously there is the one thing that is low into the fourth quarter as well.
Is there any kind of framework you can give us that would provide the magnitude of what you were expecting in the third quarter and what this did to the gross margin in the third and then the thought process on the fourth quarter.
Then lastly on that does it get resolved by the end of the fourth quarter.
Dale Williams - EVP, CFO
Just to be clear you are talking about the productivity and shipping.
Mark Rupe - Analyst
The Danish, yes, exactly.
Mark Sarvary - CEO, President
Let me put a little context on that.
We upgraded our IT system in (Inaudible).
our Danish manufacturing facility Our system there was old.
It was several generations behind.
So it was a major upgrade.
With any major upgrade you have occasionally some pickups at the start.
Quite honestly, we were very pleased with the new system.
There was absolutely no issues around the new system.
What we saw was the old system had several thousand customization to it, which the new system did not have, and it primarily effected one element of the manufacturing operation which was the cutting operation.
So that operation became a bottleneck in the factory, which impeded the ability temporarily for the factory to produce at a normal rate.
By the end of the quarter, that productivity was improved.
We were producing more in the factory than we had ever produced before.
we are also, because of the growing demand Internationally, because of the advertising and because of the Cloud, though requiring more than we've ever produced in Denmark, and so we got into a situation of being short on inventories.
We leave the quarter still well short on where we should be from an inventory standpoint to support the customer service levels that our customers have come to expect from us.
So in the third quarter the cost of the temporary productivity shortage and the cost of shipping product from the US to Europe cost us approximately $2 million.
In the fourth quarter we are actually expecting that to cost us between $3 million and $4 million.
Now we do sitting here today think everything will be back to normal.
Again, they're producing at record levels but we need to still ship from the US and ship a little bit more from the US than we did in the third quarter to be able to fulfill the backlog and to get the inventories to where we can have the proper service levels with our customers.
Mark Rupe - Analyst
Okay, that's very helpful.
So the other puts and take on the margin from 3Q to 4Q, the product roll-out stuff, is that by and large behind us with exception of maybe the UK.
Mark Sarvary - CEO, President
Yes.
Mark Rupe - Analyst
Okay, okay, perfect.
I'll get back in the queue.
Thank you.
Operator
Our next question is from Brad Thompson of KeyBanc Capital.
Your line is open.
Jason Campbell - Analyst
Hi guys this is actually Jason Campbell filling in for Brad this evening.
You mentioned some nice door gross and slot gross.
I was wondering you have been pretty popular lately.
Is there anything you've done to change maybe your training or how you're really gaining a lot of these slots the sales person awareness of your mattresses?
.
Mark Sarvary - CEO, President
Well, the slot gains have been both in the US and International.
They have been --you're correct.
We've had solid growth in the US.
We've had particularly good growth international.
That is as we roll out the Cloud a lot of our customers are moving from carrying essentially just the traditional line of mattresses.
They're carrying the traditional, the cloud and the sensation, what we call the collections.
This has given an significant increase in slots.
We said before that we expected over the full roll out of the cloud was to gain a net of about two slots internationally.
So it is quite important.
From a training point of view, and training of people selling in the stores it's obviously crucial for people who are in the stores, the RSA's representing our product to know the product well.
Dale referred to the RSA program where we get people to buy at a discounted rate our product so they can sleep on them.
Because we know that there is no better advocate than somebody who actually owns a Tempur bed.
And on top of that we are put a lot extra emphasis on training and calling on stores.
We continue to invest in people -- what we call feet on the street, because, again, there is no replacement for someone to call on a store, talk to them there and get to know them and explain how our beds differ and how they work and how people prefer them.
And that's true in the US, and that's true in the major countries in the rest of the world.
Jason Campbell - Analyst
Thanks and just a quick follow-up.
Have you guys updated any of your longer term door slot goals?
.
Mark Sarvary - CEO, President
No, not from the last time that we published those.
Jason Campbell - Analyst
Okay.
Mark Sarvary - CEO, President
I would expect you may have an update on that in mid-February when we have our investor day.
Jason Campbell - Analyst
All right, good quarter.
Thanks, guys.
Operator
Thank you, the next question is from Budd Bugatch of Raymond James.
Your line is open.
Chad Bowlen - Analyst
Good morning, this is Chad filling in for Budd who is traveling tonight.
Barry Hytinen - SVP
Hi Chad.
Good evening.
Chad Bowlen - Analyst
A question following up on the Danish production issue.
Your International growth and local currency was very solid again this quarter at 15%, but it did moderate a bit versus the 18% that you put up last quarter, and I think if I remember correctly, the comp was a little bit easier.
How much was the loss revenue impact from the production bottleneck?
Can you quantify how much it impacted sales for the third quarter.
Barry Hytinen - SVP
Well, we certainly would have had better revenue Internationally without the significant increase in backlog.
We have -- you can see internationally that if you look at the pieces, retail did very well.
Direct did very well.
The part of the business that was down, and down quite a bit sequentially was third party.
Now third party was related to really two things.
One, the conversion of (Inaudible).
from the third party to the subsidiary.
It was a small impact, but really the primary impact was as we were -- if you're familiar with Europe in the way that particularly the Europe side of the business works, July and August, during those months there is always some country that is on vacation for the month.
So third quarter internationally is heavily determined by September.
That's the big quarter internationally particularly in Europe in the third quarter.
So as we got into September and demand was increasing significantly what we prioritize was the orderly shipments, making sure that we had all of our customer service levels covered.
Third party tends to be a little bit longer lead time.
So it was -- we emphasized on the shorter lead times customer services items that we needed to protect the retailers on.
There was impact.
Like I said earlier, we had record backlog going into the fourth quarter.
I don't want quantify how much revenue may slipped from 3 Q to 4 Q, because of that but it was a fair bit.
Chad Bowlen - Analyst
Okay, fair enough.
And I believe you gave the door number consolidated 150 door increase.
Was it 75 and 75 International and domestic.
Mark Sarvary - CEO, President
Roughly correct, Chad, about half of it was in the US.
Chad Bowlen - Analyst
One more housekeeping for me, and I will defer to others US furniture and bedding sales in the third quarter?
Dale Williams - EVP, CFO
US furniture and bedding sales, $242 million.
Mark Sarvary - CEO, President
Yes, $242 million.
Chad Bowlen - Analyst
Thanks guys.
Good luck on the rest of the year.
Operator
(Operator Instruction).
Our next question is from Keith Hughes of SunTrust.
Your line is open.
Keith Hughes - Analyst
Thank you.
As you look at the Cloud roll out in Europe, will we start hitting the run rate pace you think you'll get to early in 2012 or will it take as the year goes along to get there?
.
Mark Sarvary - CEO, President
We think it will take the year.
Ultimately it will take more than a year.
It takes time because not only does it take time to roll out, it takes time for it to roll out to every -- as many stores in any given chain.
Also for people to get used to it.
As we'll see probably a faster roll out than we did in the US, because we are rolling out all the models together.
It will be faster than the US, but it's not going to be -- we have our expectation, and the normal experience is that it will build over time.
It will build over the next year.
Keith Hughes - Analyst
Okay, and the product that your shipping from the United States to Europe to make up for the production issues you've had, is that the Cloud or did that include other models as well.
Dale Williams - EVP, CFO
It is primarily the Cloud but there are a few other of the traditional tem Tempur products that are being shipped.
Keith Hughes - Analyst
You did that out of Virginia?
Dale Williams - EVP, CFO
A lot of that production is coming out of Albuquerque.
Keith Hughes - Analyst
Thank you.
Operator
Thank you, our next question is from Eric Hollowaty of Stephens.
Your line is open.
Eric Hollowaty - Analyst
Thank you, just a real quick question on the remainder of the European rollout.
Could you just refresh us on what remains to be done.
I believe you said the UK, has that started already or when do you represent that will be completed if we could just revisit the update on that.
That would be great.
Mark Sarvary - CEO, President
The UK started in the last few weeks.
So it's literally started in the last few weeks so it is literally rolling out as we speak.
And it's available pretty much everywhere for all intensive purposes it's everywhere.
But it's rolling out, and it still takes times for it to get to all the different customers.
Eric Hollowaty - Analyst
Right.
And Mark could you remind us on how large that market is vis-a-vis your International markets.
Mark Sarvary - CEO, President
We have not done that in the past, Eric.
Eric Hollowaty - Analyst
Not even on a relative basis.
Barry Hytinen - SVP
Certainly the UK is an important market for us.
It's one of the larger economies in Europe, and we believe the Cloud will do very well there.
In terms of breaking down we don't break down our International business by country.
Eric Hollowaty - Analyst
Great, thanks very much, and good luck.
Barry Hytinen - SVP
Thanks.
Operator
Thank you.
Our next question is from John Baugh Stifel Nicolaus.
Your line is open.
John Baugh - Analyst
Thank you and good evening, Mark, Dale, Barry.
Real quick, on the gross margin guidance for Q4 did I hear you right, you said it's going to be up sequentially from Q 3.
Dale Williams - EVP, CFO
Yes.
John Baugh - Analyst
And yet you're going to incur more gross margin hit relating to the shipping cost and productivity there so I'm curious, though, even if I throw in, say, $3 million of cost for those items, $3 million to $4 million, the flow-through number I get on your guidance is about 25% of EBIT from increased sales and you're running closer 30% to 35% for the year.
You mentioned higher raw materials perhaps, it just lost color on what else may be going on in there.
Dale Williams - EVP, CFO
Chemical costs are up.
It would be nice to see some relief in chemicals, but until we see it, we are not going to count on it.
Obviously as we talked all year, chemical costs are up this year.
They went up at the end of the second quarter, so they're at a higher run rate than they were -- significantly higher run rate year-over-year than they were in the first half, and sequentially they're higher.
We do have some additional step-up in marketing plans for the business.
And while we do expect gross margins to improve from 3 Q to 4 Q, the improvement will be mooted a little bit by increasing the trans Atlantic shipping of product, of support rebuilding the inventory levels Internationally, but we think that we'll get through that as we get through the balance of this quarter.
John Baugh - Analyst
Dale, where would that step up in marketing occur, both here and International markets.
Dale Williams - EVP, CFO
Yes, predominantly Internationally.
The fourth quarter is internationally the peak quarter for the year.
It's different than here.
Here it's softer, but internationally it's higher, so we'll ramp up that spin internationally.
John Baugh - Analyst
I know you're not guiding on anything on 2012 yet, but is there any way to tip your hand about how you are thinking on marketing spend in 2012?
Thank you.
Dale Williams - EVP, CFO
We stepped up our marketing spend this year almost 200 basis points as we get into 2012.
Like we say we are not providing guidance at this stage we are still in the planning process from a marketing standpoint you would think we would at least maintain the percentage marketing rate that we are using this year.
John Baugh - Analyst
Thank you.
Good luck.
Operator
Thank you.
(Operator Instructions).
Our next question is from Joshua Pollard of Goldman Sachs.
Your line is open.
Joshua Pollard - Analyst
Hey, thanks for taking my call.
First I want to ask a housekeeping question around how you guys are calculating the sales when they show up in North America versus International.
The sales that were actually shipped from North America but sold in Europe, do those show up in North America sales or international sales.
Barry Hytinen - SVP
International.
Joshua Pollard - Analyst
Could you say that again.
Barry Hytinen - SVP
International.
Joshua Pollard - Analyst
Great.
My second question was you also talked about the Danish issue.
I'm trying to understand, and it's not clear to me whether or not that would creep into 2012, and whether or not that change your long term, whether or not 2012 would be an anomaly to your summer long-term goals to cutting additional costs out of the cogs line.
Dale Williams - EVP, CFO
Sitting here today we don't expect it to continue into 2012.
Like we said, the thing that the US is doing is trying to help support rebuilding the inventory levels Internationally.
Fourth quarter, as I said a just a minutes ago, is the peak quarter in the year internationally.
So at a time of record revenues, and getting behind the eight ball, if you will, getting behind the curve, the US is helping the Denmark plant get caught back up from a service-level standpoint.
We expect everything to be back to normal, Denmark to be able to support the international business as we go into next year.
It might be a positive thing if it can't because that would mean demand exceeds expectation.
From a production standpoint its coming up to speed very quickly and every week there are doing record productive models.
Joshua Pollard - Analyst
Where is your capacity utilization in Denmark, and is this something that you guys will need to address as you think about capital expenditure in 2012 and or 2013.
Dale Williams - EVP, CFO
Right now capacity utilization in Denmark is at 50%.
You may ask why are you having trouble producing, like I said the system changed caused one operation to be a bottleneck.
We are working to change the process around that one system to make it more efficient and we believe once we get through this transaction it will be much more efficient than it used to be.
The other thing, though, is that capacity is a machine capacity of the overall plant with the growth and demand we are having to add shifts in Denmark.
To add people requires finding people, the right kind of people that you want to hire, getting them on board, getting them trained, and then getting them productive.
So in a growth scenario, once you hit a point where you add the need to add a shift, you take a temporary backyards step from overall productivity standpoint as the new people come on, get trained and become productive themselves and then you see the productivity go back up.
But from an absolute capacity standpoint we have sufficient capacity in Denmark as we ramp up employment to support the International business and international growth plans for many years.
Joshua Pollard - Analyst
And if I could sneak one last one in there on your new product introduction and the effect that it had on gross margin, could you quantify that, and also give us a framework for thinking about how new products should consistently effect your gross margin, Mark called out 2012 in a year where you expect to have even starting in January, another roll out.
I'm trying to understand as I think about the 2012 numbers, how I should expect that obviously to impact revenue but also the gross margin.
Dale Williams - EVP, CFO
I think the important thing to keep in mind, generally because of the time frame of how we introduce products or historically introduced products is usually always something that is rolling out.
The thing that is unique this year was on the contour rollout.
It was an extraordinarily compressed as words are escaping me, it's an extraordinarily compressed time frame.
It wasn't a new product line addressing a new need.
It was a product line replacing an existing product line.
So therefore the time frame -- we rolled out to all the stores in basically three months.
So it was a very compressed floor model roll out which is why we expected to have more than usual impact of floor model discounts in the third quarter and we did have the floor model discount impact that we were expecting.
That is a little bit of an unusual situation like the Cloud rollout Internationally you're seeing floor model discounts flow throughout the year as we roll out market by market.
When we did the Cloud in the US the floor model discount was spread over approximately 18 months.
Here we took roughly the same number of floor models and put them out in three months it was a very concentrated thing.
As we get into next year and we have new product, the next new product roll out it likely would not be so concentrated because it would be a new platform rather replacing existing platform.
Does that help?
Unknown
That is very helpful.
Thank you very much.
Operator
Thank you our next question is from Joe Altobello of Oppenheimer.
Your line is open.
Joe Altobello - Analyst
Thanks, good afternoon, guys.
Just a couple of questions.
First in terms of competition did you see any impact from icomfert at all in the quarter.
It doesn't seem like that was the case given the strength in North America, but wanted to see if you were see any of the (Inaudible).
Secondly on that same front, what kind of distribution gotten and has it overlapped with yours at all?
Mark Sarvary - CEO, President
We are not going to talk specifics about a specific competitor, as we normally don't.
Obviously there is always competition in the industry.
That is all of whom overtime introduced products that are comparable to ours.
We had a growth rate of 30% in the US this last quarter so we are pleased with how it is going.
We anticipate one of the things that we see is that growth of specialty market is very significantly.
All indications are that it will continue to do so.
We are not surprised to see other people come in but we see enormous potential for growth but the big driver of that is a portion of the users will be specialty in general and Tempur (Inaudible).
We see growing for some time to come.
Joe Altobello - Analyst
Okay, Mark, Thanks.
That's actually helpful.
Secondly in terms of new products you mentioned we would see a number of them in the next 12 to 24 months.
Is there a particular price point that you feel is an opportunity, and on that same front would you consider an entry level price point below contour or are you guys committed right now to the premium end.
Mark Sarvary - CEO, President
I'm not going to talk about specific products, but I will say this, as I said in the prepared comments I don't want to talk in specifics about new product because we are going to talk in great detail in January about it.
The thing I would say though is we have a product plan that goes out for three and a half years, and we have product launches scheduled out for three and a half years.
In the US and Internationally.
A
nd what's quite exciting each of these product platforms are ones that address consumer needs that we have been able to identify that are materially incremental to what we have already supply.
we are quite excited about it, and we see this as something that one of the things that we have continually done as well as invest in advertising is invest product development not in just product development as much as material and technology so we are in position to create products that meet different consumer needs.
It is really quite an exciting time right now.
And we'll see the first waive of that in a couple of months.
Joe Altobello - Analyst
Okay.
Thanks guys.
Operator
Thank you, the next question is from Peter Keefe from Piper Jaffray.
Your line is open.
Peter Keefe - Analyst
Good afternoon, everyone.
I want to get a little more color on the mixed benefit that you highlighted that impacted gross margin.
As we look back at Q2, I think that was highlighted as the number one gross margin driver here it look like it was a little bit behind the manufacturing efficiency I was wondering was there a slight deceleration in the overall positive impact and could you provide more color on what drove the over all benefit.
Dale Williams - EVP, CFO
It continues to be very good, but we also started lapping when we started rolling out the Lux last year.
So through -- we started shipping the lux in the third quarter, second half of the third quarter last year, so it was providing significant positive mix uncontested if you will through out the year, and then in the third quarter is started lapping itself.
So you get a little less mix from the lux, but the lux continues to perform extraordinarily well.
We also expect from a mixed standpoint, and whether you want to call it price or mixed, it's actually a combination of the two, the contour versus the Tempur original line, three products replacing three products, a little higher price for the new contour line that it was replacing.
You don't see the full impact of that in the quarter because of the floor models going out on the contour.
Peter Keefe - Analyst
Okay.
that is helpful, Dale.
Another gross margin-related question.
On the commodity costs, I'm guessing there has been step down on your role chemical costs over the last three months since you last spoke to us.
Could you help us think about how that might look in the coming quarters, and when, if the current prices were to hold, when we might actually see the commodity costs head winds go away and it turns even into a slight tail end.
Dale Williams - EVP, CFO
Our commodity costs are up in the third quarter from where they were in the second quarter, which is what we expected.
With oil moderating and staying moderating for a while, the upward pressure on the commodity costs seems to have eased but we are not seeing reductions yet.
Hopefully those will come.
And it's something that is hard to predict because it's not just related to the price of oil.
It's the price of the commodity chemical that we buy can we related to the percentage mix of oil and gas and heavily influenced by supply and demand.
There are a lot of things that factor into supply and demand, and we would be hopeful, if oil stayed at a moderated level, to ultimately see some give-back on the commodity increase that were driven by oil driving up earlier in the year.
Until it happens we can't predict it.
Peter Keefe - Analyst
All right, congratulations on the results, and good luck through the rest of the year.
Dale Williams - EVP, CFO
Thanks.
Operator
Thank you, our next question is from John Anderson of William Blair.
You're line is open.
John Anderson - Analyst
Thank you for taking my question.
Europe is a bit of a blind spot I think for US investors for us clearly, and you had good organic growth there in the quarter, but the growth did decelerate sequentially on a somewhat easier comp.
I guess taking out the impact of the productivity issue in Denmark we would have expected acceleration there.
I am wondering if you could talk about the bigger picture what you are seeing in Europe in terms of industry trends, and if you're seeing trends fairly stable or deteriorating, and any commentary in a premium segment would be helpful.
Thank you.
Mark Sarvary - CEO, President
First, there are two big messages, and then I'll go into detail.
The first message is our business Internationally is growing quite nicely.
And in Europe in particular where we are investing in advertising.
we are quite pleased with the results.
The second big message is the market, in the mattress market in the geographies that we are investing is not good.
There has been quite -- obviously the macro-environment is not good and the industry is not good.
we are growing despite a significant head wind.
It continues to respond well this investment in advertising was predicated on the fact that we have very good distribution in many of the larger geographies but relatively low awareness.
The hypothesis that supported our decision to invest in Europe was if we could raise awareness, we should lift sales.
We can now say that really does work.
It has worked and it will continue to work and we'll continue to invest behind it.
This quarter was impacted to some extent by the delivery constraints, but overall in a difficult environment we are doing quite well.
From a macro-point of view you read the same newspapers that I do, every day we wonder what is going to happen in Germany, France, and the UK, Spain and so on with what's going on.
So there is bound to be some macro-effects.
But the fundamental and long-term opportunity, we are very confident about.
John Anderson - Analyst
That's helpful.
One last question on gross margin.
You cited mix as a positive in terms of the influence of gross margin year-over-year sequentially.
I kind of thought you had a strong organic growth rate in North America in the third quarter and slower Internationally and I was under the assumption that the international business tended to be higher margin for you .
Would that not have been a head wind, perhaps, just clarity on that would be
Dale Williams - EVP, CFO
Mixed could cover a number of things.
It could cover the mix of the products and also a factor of geography mix.
Yes, the growth rate of the US versus the growth rate Internationally gives a negative geographic mix.
We had a strong gross in direct which gives us a positive (Inaudible).
mix.
Mix covers a lot of things, obviously geography mix was a negative but we look at mix across a number of different categories.
John Anderson - Analyst
Okay, got it.
Actually one more if I could squeak it in.
The acquisition that you made, I think it was under $5 million in the third quarter, was that buying the Korean operation.
Mark Sarvary - CEO, President
Yes.
Dale Williams - EVP, CFO
We announced that as a subsequent event in our Q -- I think we announced it on the July call.
That was buying in the Korean operation.
John Anderson - Analyst
Thank you.
Congrats on the third quarter.
Dale Williams - EVP, CFO
Thanks.
Operator
Thank you, our next question is from Jessica Shawn of Barclays Capital.
Your line is open.
Jessica Shawn - Analyst
Hi, I was wondering if you guys could talk about the attach rates for the ergo adjustable products for a minute.
I know you said the attached rates did improve.
I was wondering if you're still seeing a large difference between the US and Internationally, and what do you think accounts for that.
Mark Sarvary - CEO, President
Well, we don't give the exact number but the ergo rate continues to improve significantly in the US.
No sign of slowing in that.
That's a very positive thing.
It's something that we are putting a lot of emphasis on.
We have advertising running that is associated with it.
We have training specifically associated with it, and it's no doubt it continues to grow.
We really are getting -- Internationally it's growing, too.
We believe that we can get a very significant growth rate there, too.
Jessica Shawn - Analyst
Okay, but it's still in the US, would you say it is still lagging.
Mark Sarvary - CEO, President
(Inaudible).
I am sorry I misunderstood the question.
There are some countries in Europe where attach rates are very high, but on average it's higher for us in the US than on average Internationally.
Jessica Shawn - Analyst
Okay, then my second question was about the improved efficiency in the manufacturing and the impacting on gross margin and how much longer you think it will continue to positively impact it.
If there was still a long ways to go or if most of the improvements are in place.
Mark Sarvary - CEO, President
That's certainly not the way we are planning.
We do believe there is -- sort of fundamental to our plan is we build in an expectation of efficiency improvements every year and we have a five-year plan that we are working on and every year we update.
So no, we believe there are productivity improvements that we can see for a long way to come.
Jessica Shawn - Analyst
Okay, thanks a lot.
Mark Sarvary - CEO, President
Thank you.
Operator
Our next question is from Mark Rupe of Longbow research.
Operator: Your line is open.
Mark Rupe - Analyst
Hi, guys, just one follow up here.
I know it is a small piece of the business but US business, is there anything funky going on in the quarter.
I know you have that new roll over coming but it looks like it didn't grow nearly as fast, I know the comp was hard from last year, but is there anything going on there with the new roll out, maybe people waiting for that or anything.
Mark Sarvary - CEO, President
It is a slower growth.
If you look at it an absolute level it still was a record sales of pillows this last quarter, but it's compared to a big roll out last year from one big customer that we had.
So we are up against what you would call a funky comp.
Having said that we believe the growth of pillows is a big area of focus which is why we are putting the emphasis behind it.
That's why these new products rolling out now is very important.
We believe there is potential growth beyond what we are getting.
Mark Rupe - Analyst
Okay.
Just real fast, on the 29 markets that you cited that you tested some heavier spend, was the duration of that during 2011, how significant it was, and then is 29 the number, was there a potential to do more than that in 2012 and beyond.
Mark Sarvary - CEO, President
That was an extended monitored test through the bulk of the year.
It was very good, very conclusive and we'll expand it.
We'll do it thoughtfully and we'll pick our markets one by one, and there will definitely be more than 29 next year.
Mark Rupe - Analyst
Thank you, guys.
Good luck.
Thank you ladies and gentlemen, this is the q and a portion of today's conference.
I would like to turn the call over to management for closing remarks.
Operator
Thank you, ladies and gentlemen this ends the Q&A portion of today's conference.
I would like to turn the call over to management for any closing remarks.
Mark Sarvary - CEO, President
Thanks again everybody.
And we look forward to talking to you again in January when we will review the fourth quarter and the full year.
Thanks for joining us this evening.
Operator
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.