Tempur Sealy International Inc (TPX) 2011 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Tempur-Pedic fourth quarter 2011 earnings conference.

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

Later we will conduct a question and answer session and instructions on how to participate will be given at that time.

(Operator Instructions) And as a reminder, today's conference call is being recorded.

Now I would like to turn the conference over to Mr.

Barry Hytinen.

Thank you, Matthew and thank you to everyone for participating in today's call.

Joining me in our Lexington headquarters are Mark Sarvary, President and CEO.

And Dale Williams, Executive Vice President and CFO.

After prepared remarks we will open the call for Q&A.

Forward-looking statements that we make during this call are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Investors are cautioned that forward-looking statements, including the Company's expectations regarding sales and earnings, involve uncertainties.

Actual results may differ due to a variety of factors that could adversely affect the Company's business.

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

These factors are 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 statements speaks only as of the date on which it is made and the Company undertakes no obligations to update any forward-looking statements.

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

And now, I would like to welcome Mark Rupe, our new Vice President of Investor Relations who joined us earlier this month.

Last year, I took on additional responsibilities as Senior Vice President of Global Business Development in addition to IR.

And over the last year, our business development initiatives have ramped, and Mark's hiring will allow me to be fully dedicated to this area.

As many of you know Mark has covered the company as a sell side analyst for many years and was twice named best on the street by the Wall Street Journal for his coverage of home construction and furnishings.

Mark reports directly to Dale Williams and he is joining us on the call today.

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

Thanks Barry.

Good evening everyone and thank you for joining us.

We were pleased with the performance throughout 2011 and the fourth quarter was a good end to a very strong year.

Fourth quarter sales were up 25% and earnings per share increased 27%.

For the year, sales were up 28% and earnings per share increased 47%.

In a few moments, Dale will provide details of the fourth quarter and full year financial results, as well as our 2012 guidance.

But first I'd like to talk about the progress we made on our key strategic initiatives in 2011, and discuss the key drivers for the company in 2012.

Just as a reminder, our four strategic initiatives are, number one make sure that everyone knows that they would sleep better on Tempur by investing in brand marketing.

Number two, make sure that there is a Tempur mattress and pillow that appeals to everyone by expanding and strengthening our product line.

Number three, make sure that Tempur is available to everyone by gaining broad high quality distribution.

And number four, make sure that we continue to deliver the best sleep by investing in R&D and consumer research.

We have made progress on all of these initiatives in 2011.

Sales growth was strong, both in the US and overseas, and we have gained share domestically and around the world.

This growth was driven primarily by the success of our new product and our increased investments in advertising, as well as by continued expansion and distribution.

The new cloud collection continues to grow in the US, and has been very successful in its first year of launch internationally.

The contour collection which was launched in 2011 in the US has also exceeded our expectations.

We increased our brand advertising to record levels with our total investment in 2011 almost $150 million.

The Ask Me campaign in the US continues to be successful, with communicating the benefits of Tempur and it's a flexible platform that allows us to focus communications as appropriate.

The Weightless campaign which we launched in Germany, France and the UK has also proved successful, driving incremental volume in each of these countries.

We've also gained substantial distribution, doors and slots both in the US and overseas.

As the Cloud line ramps internationally, we increased number of Tempur slots with our retailers in every market.

So, now let's turn to our strategic focus areas for 2012.

We were very excited about the next stage of our plan to become the world's favorite mattress and pillow brand and to continue on our path toward our $2 billion goal.

We will continue to implement the four initiatives of our strategy and specifically in 2012, we will broaden our product range, increase our consumer communication, raise advocacy with our retail customers and gain distribution.

First, our new products.

There are consumer segments that we do not currently address and one of our four initiatives is to use R&D to ensure there is a Tempur mattress and pillow that appeals to everyone.

So, as we did with the Cloud collection, we've identified another major opportunity to expand our appeal and meaningfully grow our business.

The $1,000 to $2000 price band represents a large market segment that we currently do not address in a meaningful way.

In fact, in the US, this segment has the same dollar value as all the segments above $2000 added together.

So, I'm excited to announce that we will be introducing a three-bed line with varying feels priced at $1,499 per queen set next week at the Las Vegas bedding show.

The introduction of this line, effectively doubles the size of our addressable market.

We spent the last two years developing this collection, and it's the most researched product we have ever launched.

It is both consumer preferred to the competitive set and vastly incremental to our existing product portfolio.

Initial retailer feedback has been very positive and we expect to gain considerable incremental slots.

Now while we know you will have likely have many questions, we are going to save the rest of the details for Las Vegas.

Internationally, we will be continuing the successful rollout of the Cloud collection.

And in both the US and overseas, we expect distribution gains both in the form of additional doors and additional slots.

Secondly, we will increase our Brand advertising globally.

We continue to see that investments in advertising are effective and have a positive ROI around the world.

Further, we find that increasing rates of advertising drives increased share and profitability.

In 2011, we tested heavy upmarketing in 29 local markets in the US and saw very positive result.

In 2012, we will significantly expand the test, and monitor the results, and if it works as expected, we will ramp the program across the country.

Additionally in 2012, we are increasing our investment in brand advertising in Germany, France and the UK, and introducing TV campaigns into additional markets including Japan, Italy and Australia.

And our confidence is high that advertising there will a very positive impact on awareness and sales in these new markets, just as it had in Europe last year.

To maximize the success of our new products and our advertising, we are also very committed to ensuring that our retailers remain strong advocates of the Tempur line.

We previously announced that we will be taking price increases on selected items within the range, and in Vegas we will be announcing a new promotion structure, both of which will increase dealer profitability from selling Tempur product.

In addition, we have found that in those markets where retailers integrate their advertising with our national campaign, the results of both us and the retailers are dramatically improved.

During 2012, we will work with retailers across the country to create and run impactful advertising that is integrated with Tempur national advertising.

Lastly, a couple of contextual comments before I hand over the call to Dale.

The environment we are operating in remains challenging.

Clearly the macro environment particularly in Europe is uncertain.

And our retailer feedback both in the US and around the world, indicates the traffic levels remain inconsistent.

Our plans are based on a series of initiatives, including a new product offering in the US which has yet to be sold to a single consumer.

Therefore we will remain flexible and we will review our plans and be prepared to adjust accordingly throughout the year.

Having said that, we remain focused on driving meaningful growth for many years to come.

We have a small but growing share today, and we will continue to build on that with our investments in marketing and new product introductions.

In a few weeks at our Investor Day, we will discuss our new five-year plan.

With that, I will now hand the call over to Dale.

Thanks, Mark.

I will focus my commentary on the financials and our 2012 guidance.

Let's begin with an overview.

In total, fourth quarter net sales were $367 million, an increase of 25% over the same period last year.

On a constant currency basis net sales increased 24%.

North American sales were up 26% and International segment net sales increased 25%.

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

Now by channel, in North American retail, net sales were $225 million, an increase of 25%.

The North American direct channel increased by 44% to $21 million.

International retail sales were $94 million up 28% and up 23% on a constant currency basis.

By product, mattresses were up 26% driven by an 22% increase in units.

North American mattress sales increased 24% on a 14% increase in units, reflecting favorable price and mix.

In the international segment, mattress sales increased 33% driven by 36% unit increase.

On a constant currency basis, international mattress sales were up 29%.

The modest decline in AUSP was related to our new futon product in Japan and associated floor models.

Total pillow net sales increased by 16% on 11% increase in units.

North American pillow sales increased 15% on a unit growth of 10%.

International pillow sales were up 17% on a 12% increase in units.

On a constant currency basis international pillow sales increased 13%.

Sales of our other products which include items that are sold along with the mattress, were up 28% in total and up 36% in North America and 10% internationally.

Gross margins for the quarter was 52.1%, up 20 basis points year-on-year and down 30 points sequentially.

On a year-over-year basis gross margin improved related to the following, favorable mix, improved efficiencies in manufacturing related to our productivity program, and fixed cost leverage related to higher production volumes.

These benefits were largely offset by higher commodity costs and the costs associated with US shipments to support our Danish manufacturing facility.

On a sequential basis, gross margin declined as we shipped slightly more product to Europe from our US factories than initially anticipated, as our international sales continued to trend higher.

However, as of the end of the year, we are no longer shipping product to Europe.

Our European factory is now producing at record levels, and capable of fulfilling our international growth plan.

Our fourth quarter operating profit was $85.8 million or 23.4%.

Operating expenses were up, reflecting an increased investment and brand advertising to drive growth.

SG&A expenses included a couple of items that I would like to address.

As we've previously disclosed, there is a variable component in our long term incentive plans.

In light of our strong 2011 results and continued positive outlook, we took a one time charge to catch up our accrual of approximately $2 million.

Partially offsetting this charge was a favorable adjustment of $1.8 million to the earn out payment related to a prior acquisition.

Interest expense was $3.5 million.

The tax rate was 32.2%, modestly down reflecting the benefit of NOLs in certain foreign subsidiaries.

EPS was $0.84 as compared to $0.66 per diluted share in the fourth quarter of 2010.

Now I will summarize the income statement for the full year 2011.

Sales were up 28% in total, and 25% on a constant currency basis.

North American sales up 30% and International sales were up 24%.

On a constant currency basis, international sales increased 16%.

Operating margins improved 180 basis points, to 24%.

Full year earnings per share were $3.18.

Next, I will turn to the balance sheet and cash flow for a brief review.

Our accounts receivable balance was up reflecting sales levels; however our DSOs were flat from last year.

Inventories were up $21 million year-on-year, but flat from last quarter.

During the quarter we generated $70 million of operating cash flow and capital expenditures for $11 million.

We increased debt by $76 million to $585 million to partially fund share repurchases, which totaled 2.3 million shares or total cost of $128.5 million in a quarter.

Our cash balance increased by $8 million to $111 million.

Funded debt to adjusted EBITDA ratio was 1.5 times at year end, within our targeted range of 1.5 to 2 times.

Over the long term, we expect continued growth in sales, earnings, and cash flow which together with low capital needs will enable us to continue to return value to stock holders.

We are pleased that our board has authorized a new $250 million share repurchase program for 2012.

Now I would like to address our guidance for full year 2012.

We currently expect net sales to range from $1.6 billion to $1.65 billion.

And we currently expect earnings per share to range from $3.80 to $3.95 per diluted share.

We project our gross margin for the full year to be up as much as 200 basis points at the high end of our guidance range and slightly less than this at the low end.

Our gross margin projections, assume continued productivity and volume leverage, partially offset by higher commodity costs.

Also as a reminder, our 2011 gross margin was negatively impacted by 50 basis points due to the system upgrade issue I referenced earlier.

We project our operating margin for the full year to expand by nearly 100 basis points, despite our continued investment in strategic initiatives to drive long term growth.

However, in the first quarter, as compared to the fourth quarter, while we are expecting gross margins to increase slightly, operating margins will contract slightly as we start the heavy up investment in marketing.

We anticipate interest expense for the full year to be approximately $19 million.

We anticipate capital expenditures will be approximately $50 million, which includes the cost to build our new office in Lexington.

We anticipate the full year tax rate to be approximately 33.3%.

And we are using a share count of 66 million shares for the full year.

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

In conclusion, our guidance reflects that is it a long year with many new strategic initiatives and products.

Therefore we believe it is prudent to plan the year as I have outlined.

Now before we open the call for Q&A, I would like to address our recent sales trends.

In the fourth quarter we experienced improving growth rate by month.

And in the first quarter sales trends through the first 23 days have continued to be strong, and we are very pleased with that.

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

One final comment, I would like to thank Barry for his outstanding leadership of investor relations over the last seven years and we are excited about the contributions he is making in his new role.

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

(Operator Instructions) Our first question comes from John Baugh with Stifel Nicolaus.

Your line is open.

Just quickly.

Clarify that 50 basis point hit to the systems, was that a Q4 or 2011 total impact?

And then secondly, how should we think about as a percentage of revenue, I guess, the ad spend in 2012?

John, this is Dale.

The 50 basis points is looking at the full year of course that impacted Q3 and Q4.

So it's concentrated in those two quarters, mostly in Q4.

On the advertising spend, in 2011, our advertising spend was in the 10.5% range.

Right now we are planning for 2012 advertising to be in the vicinity of 13%.

And how would that break out, Dale, between US and international?

Just like the 10.5% was actually pretty balanced.

The 13% is also going to be fairly balanced between the two poles.

And is that going to be a heavy emphasis on the newly introduced product?

Or general brand marketing?

John, hi, it's Mark here.

It will be broadly focused across the range and will be -- will obviously be different by region and by geography depending on the situation there.

In the US, we will -- the new product will be featured in the advertising but we will go into the details of that in Vegas.

But the broad answer to the question is, it will be across the range and it's obviously a very important part of our strategy going forward.

Thanks for taking my question.

Thank you.

Our next question in queue is from Brad Thomas with KeyBanc Capital.

Your line is now open.

Wanted to just follow up on the revenue guidance for next year.

I was hoping you could provide a little more color on your expectations for the North American segment versus international and what you've baked in for FX?

Brad, right now we believe that from an overall standpoint we are going to see actually fairly balanced growth this year.

We think the US will continue to perform.

The international business growth rate has picked up.

Right now we are thinking it is going to be fairly balanced.

From an FX standpoint while FX was a help for most of 2011, it was the amount of benefit that we got from FX declined as the year went on.

Our expectation for 2012 at this stage is that FX will be neutral.

And if rates were to stay basically where they are right now, that's where it would come out.

Great, and in terms of the guidance also, Dale, can you give us some color what you are factoring in, in terms of raw materials and what the run rate looks like right now based on what you saw in the fourth quarter?

Yes.

As usual, when we are planning a year, we try to assume at least on a commodity side that we are going to see price increases because that's something that's completely out of our control.

Right now what we have built into our guidance would be that we would see a mid to high single digit impact on commodities.

How that would play out versus 2011, it would currently -- you would expect a little bit more impact in the first half than in the second half because we saw increase -- inflationary commodity prices as 2011 went on.

The first half was lower than the second half on commodity costs so we would expect a little bit more impact of that in the first half as compared to the second half.

That's great.

If I could just ask, Mark, one last question here.

I know you want to save discussion on the new line until next week but when I think about when you guys rolled out the Cloud the first time, the biggest question was cannibilization.

And I was hoping you could talk a little bit about what you have done to try to make sure this new line does not cannibalize existing sales?

Right.

You were right the first time.

I don't want to talk about this until we get to Vegas.

Please, we will see you in Vegas and we will take you through it.

It is obviously something that we thought about a lot.

And I think when you see the product, you see how it's positioned and marketed, you will understand what we have done but it's not something I want to go into on the call today.

Fair enough.

I look forward to seeing you next week.

Good.

(Operator Instructions) Our next question comes from Budd Bugatch with Raymond James.

Your line is open.

Just on the gross margin, if we could get a little more quantification of the items that may be affecting you sequentially from third quarter to fourth quarter?

What they did because you had I think, Dale, expected gross margins to be up sequentially in the fourth quarter?

Yes, we did Budd.

We thought at the time that we did the third quarter call that we would see a slight improvement in gross margins sequentially.

If you recall, at the time we said that we thought that the cost impact of supporting the international business from the US factories would cost us $3 million to $4 million.

Basically in our planning we had $3 million baked in.

It ended up, because as you can see the international business performed really well in the fourth quarter, ended up being a little over $4 million.

But again I would emphasize that by the end of the year, the shipping had stopped.

The productivity of the Danish plant is at record levels, and we are very comfortable that the Danish plant now will support all of the growth plans for the international business for years to come.

Okay.

Congratulations on that.

Normally in your filings I think you provide segment gross margins and operating margins and I suspect the K has been done or all of the audit is done.

Could you possibly give it to us before the filing?

Maybe what the percentages were for international versus domestic or do we need to wait for the filing?

Yes, I think it will be easier to wait for the filing.

I don't have that sitting in front of me but we will be filing our K in the next several days.

Okay.

And finally, just make sure I have got the numbers right.

If you do 13% advertising to sales ratio, it looks like advertising on pure dollars will be up around $60 million year-over-year to something like $210 million.

Is that the plan?

That's in the neighborhood, yes.

Nice neighborhood.

Thank you very much.

And good luck and see you in Vegas.

That is right.

It's a very important number.

It's a very important part of our strategy.

And the only thing that I do want you and everybody else to understand is that, like we do everything else.

We test, test, test.

So, this is the result -- this is our plan as we stand here today.

We've tested everything in both the US and the markets that I referred to and overseas.

And as we roll this out we will continue to test.

But this is our best plan or our best expectation but it is going to be something that we will discuss at the investor conference in February.

So, hopefully we will see you there and we'll take you through it in more detail.

It's a very important part of what's driving the strategy going forward, both in terms of growth and in terms of continuing to build upon what is already a very strong brand.

I agree.

Congratulations and we will see you in Vegas, Mark.

Thank you very much.

Our next question comes from Leah Villalobos with Longbow Research.

Your line is open.

I was just hoping you could talk a little bit more about the recent trends?

You mentioned some recent strengthening here toward the end of the fourth quarter and beginning of the year?

Is there anything specific that you are seeing that's driving that?

Yes.

It's hard to dig underneath it.

Certainly there was a promotion in the fourth quarter that seemed to do well.

But we did see both domestically and internationally on the domestic side we saw improving trends in the business as the quarter went on.

Internationally, we saw very good trends throughout the quarter as -- through the third quarter we were seeing the international business pick up.

That continued through the fourth quarter.

In terms of the first -- the start of this year and we are 23 days in.

We are very pleased with how the business is performing again on both sides.

Both the international business and the North American business are performing well.

But it's early in the quarter.

This can be a fluctuating industry.

We don't take 23 days lightly but we also don't project it out forever.

Sure.

And then just in terms of door count, could you give us an update of where you ended the quarter and what your assumptions are for 2012?

On the domestic side furniture and bedding doors we ended right about 7,500.

So we were up a few hundred, almost 250 doors in the fourth quarter.

And internationally, we ended at almost 5,300 doors.

So internationally again up almost 100 doors in the fourth quarter.

For 2012, we don't give specific door guidance anymore, but we would expect both internationally and domestically to continue to see some expansion of doors, the overall door growth internationally last year was actually fairly limited.

That was a combination of the difficult environment in Europe.

There was quite a bit of culling so there was a bit of a netting going on.

So we didn't -- overall we didn't add a ton of doors over there.

Frankly because of the environment and the uncertainty and in that kind of environment you want to make sure that your existing retailers are performing very well and are very healthy and we are very comfortable with that at this stage.

But over time we do expect a lot more door opportunity internationally than what we did in 2011.

Okay.

And when you say over time you think that that begins in 2012, or are we looking beyond 2012?

The biggest uncertainty is what's going on over there.

Our business is performing very well, but the overall macro environment in Europe continues to be a question.

So we will see how it plays out.

But we do expect over the next several years to add quite a few doors internationally both in Europe and in Asia.

Okay.

Great.

Thanks.

I look forward to seeing you next week.

(Operator Instructions) Our next question is from Joshua Pollard with Goldman Sachs.

Your line is open.

Let me just clarify one thing.

Does your new guidance incorporate the impact from your new product launch?

I just wasn't sure if that was the case.

Yes, it does, Josh.

Okay, great.

And then your pricing expectations for 2012, is there any chance you can give us some more clarity on where you expect pricing to go for your base product?

I'm not sure if you guys want to look at it on the same store sales basis just given than you are introducing a lower price point product?

We are making a variety of pricing adjustments to -- across the range of different products and it doesn't apply to every product and it doesn't apply to some of the key price points like the $1,999 and $2,999 and so on.

It is a spread across the whole range and those price increases together with the new product and everything else are all incorporated into both the top line and the gross margin assumptions for the full year.

And then when you guys think about 2012 and the store level advertising, can you just dig a little bit deeper about what you guys are planning to do on that end and if that's a change in strategy versus what you guys -- what your approach was in 2011?

It's not a change in strategy.

What we are finding as I said is where retailers and we were advertising in an integrated manner it works very well.

We've tested that throughout the country and it works very well.

From one side to the other.

And it's something that we are going to continue to focus on.

And it's something as I said that we are going to expand this year, that we are going to continue to test as we expand.

But it's also something that we will talk about in the context of the overall advertising in the investor day.

So again, it is something that I would like to talk more about in the context of the whole picture when we are all together in New York in a couple of weeks.

Okay, great.

Thanks.

Our next question is from Joe Altobello with Oppenheimer.

Your line is open.

Just a couple quick ones.

First, in terms of the new mattress line, obviously you don't want to go into too much technical detail ahead of Vegas.

But, could you just give us a sense of the timing of when we will see those in stores in the US and overseas?

The new product will be in stores in the US in the second quarter.

And at the moment it's not planned to roll out over seas this year.

Okay.

Great.

In terms of the market opportunity you mentioned that this increases your adjustable market by about 50%.

How does that compare to what you guys thought with Cloud going in?

Well, actually it's 100%.

The way to think about this is if you imagined that the size of the market -- I mean, this is not precise math.

I'm not going to -- but if you think about it like this.

Approximately half of the population prefers a soft mattress and half prefers a firm mattress.

So, when we introduced Cloud we essentially went for the other half of those people who were in the price range of Tempur-Pedic but who until then did not have a product that appealed to them because they didn't have a soft one there was only a firm.

So, we consider that to be a doubling.

If you consider now what we are talking about we are doubling that doubling.

So, we are essentially -- if you compare it to the size of the market that we were addressing prior to the introduction of the Cloud, we are in broad terms addressing a market that is four times as big as the market we were addressing.

Got it, that's helpful.

And just one last one.

In terms of the competition, you've obviously seen a ton of new beds in the Visco arena.

Doesn't seem like they've much of an impact on you guys thus far in terms of market share.

Have you seen any evidence that they are helping the overall pie to grow in terms of Visco at this point?

Well, obviously we have had competitors of different types.

Visco, Latex and so on over the years and we will continue to and this is a tough market with some good competitors in it and they will continue to introduce product.

So, this is what we anticipate.

As you said, from our point of view we have grown quite nicely this year.

This year and this quarter and we have seen share gains throughout the period.

What I think is the fundamental thing that we are seeing is that consumers are increasingly prepared to pay a premium for a product that will enable them to sleep better.

And so what's happening is that what we are seeing and we think it's a pretty fundamental shift is that the consumer is coming to this premium price product.

And that is what's driving our growth and I think obviously it's attracting other people as well but it's driving our growth.

The way we look at how to capitalize on that opportunity is by continuing to innovate with products that have greater differentiation and preference with consumers.

And as you know, all new products that we introduce are tested against not only our existing products but also against the competitive set.

So what we look to do is to capitalize on this fundamental trend by continuing to have products that are both genuinely differentiated and preferred by consumers.

We are quite excited about the situation as it stands right now.

I got it.

Just one last one.

In terms of the gross margin on the new line, how does that compare to your fleet average?

First of all we're not going to talk about the new line at all until Vegas and secondly we don't break out margins by line.

Okay.

Great.

Thank you.

Next question in queue comes from Bob Drbul with Barclays Capital.

Your line is open.

The question I have is when you look at the Cloud in the first year in Europe, how is it performing there versus the first year domestically?

Well, the Cloud has performed extremely well in Europe.

I think that the way that we rolled the Cloud out was different in Europe than how we rolled it out in the US.

The market size is different.

There is a slight difference in preference around firm versus soft.

And the US versus Europe.

Europe skews a little bit firmer.

It's not night and day difference but it does skews a little bit firmer.

But every market that we put the Cloud in, the Cloud did very well.

The Cloud on the international side of the business has done pretty much what we saw in the US.

It has significantly expanded our market reach.

It's really helped grow the business and then combination as Mark said in his comments, the markets where we had a combination of the Cloud and the advertising, we saw a really dynamic growth because as we built consumer interest, they were more likely to have product in the store that they liked because we had three different feels.

So it really -- the advertising and the Cloud together really built on each other well.

And I think it's one of the things that is in some ways even more important in international than it is in the US is the fact that people perceive, the average consumer perceived that there was only one Tempur.

And this was a very much another Tempur.

And what has been exciting is about how fast it has rolled out but also as a result how much of a benefit it has gained in slots.

Because what people -- what the retailers in international or in Europe in particular focus on is what we call the collections which is the original Tempur, the Cloud and the sensation.

And this has been a very important see change in sort of strategic perspective on what Tempur is.

And my second question is, I guess five or six years ago you guys did the original that was at $1,200.

And how much of a percentage of sales did that generate at that point in time and how would that really differ versus what you are doing today at the $1,500 price point?

The original was the product that frankly was candidly just an existing product that then was the spec in order to sell it for a lower price.

It was never very successful.

I would encourage you to come to Vegas and see what we have done here.

This is a completely different thing.

And the degree of product development, research and development, new product or new technology invention, and the consumer research is unparalleled.

So, I would really encourage you to come to Vegas and see it.

Thanks very much Mark.

The next question in queue is from Keith Hughes of SunTrust.

Your line is open.

You had referred in the prepared comments to a different dealer incentive structure, I believe is the way you phrased it.

Could you give any more details what that means?

I am not going to go into great detail on this again and I sound a little bit like a broken record.

I will talk about it more in Vegas.

Here is the bottom line, is that as we have over time increased our gross margin which we have systematically year after year, we have tried to make it sort of a win-win game for us and the retailers.

And making sure that as we grow and as the share of the market, not only do the retailers share in that growth from the top line but also from a bottom line perspective.

And so we are looking at ways and we have done this before, but we are, once again with the modification for the way the promotions are going to be structured.

It is going to enable us to give retailers greater profitability from selling Tempur which is exciting and is part of what we believe is part of our long term win-win process as we grow over time.

I'm not going into more detail than that, but I will be happy to do it in Vegas.

Okay.

And that's for 2012, the new program; is that correct?

Yes, that's right.

And, Dale, for 2012, you had broken up as you were giving the details of the guidance, did you say something on gross margins for 2012?

Yes, we expect gross margins to be up about 200 points, 2012?

200 basis points.

Okay.

And then final question.

And then the margin to be up about 100 points.

And then final question on the increased advertising you mentioned earlier, is there going to be a new campaign besides the Ask Me campaign or just further development of that?

Well, first of all remember the Ask Me campaign is the American campaign.

There is one in the rest -- there is a variation of that in most of the rest of the world.

And that's because there is a different status of knowledge about the product in most of the rest of the world.

But the Ask Me campaign still has very good legs.

We will continue to evolve it.

As I said in the prepared comments, not only is it a good tool, not only does it work well, it is customizable and we can change it to incorporate new messages.

And we found that it was quite powerful when we introduced Cloud for example or the Ergo beds.

So, we will continue to use it.

At some stage we will move some and we will change it, but it will take a lot of thought and as you can imagine a lot of research before we are going to do that.

Because this has been a real winner.

All right.

Thank you.

The next question comes from Eric Hollowaty of Stephens Inc., your line is open.

My questions have been answered.

I will see you in Vegas.

And in that case we will go to Peter Keith with Piper Jaffray.

Your line is open.

Dale, just someone had just asked about gross margin with the 200 basis points.

I just wanted to clarify something you said in the initial comments.

Sounds like the drivers to that will be the manufacturing efficiencies offset by some higher input costs.

Were their any other components that I may have missed?

For gross margin in 2012, the drivers are as you said the, basically our productivity initiatives continuing to drive impact in the business.

We will also see some improvement from volume leverage, where we are talking about reasonable growth here in that more volume through the factories gives us volume leverage.

As Mark mentioned there is a price increase that will be -- it's not a -- as big a impact as we have seen in the last couple of years but it will be a small positive benefit of price.

On the flip side, the primary negatives that we are dealing with right now is our expectations around commodities.

And that's just, we try to take a negative view on commodities every year as we start the year and that served us well over time.

Okay.

So it looks like I guess within that, are you then anticipating that mix will be somewhat accretive overall to your gross margin for the year?

Mix is a component of gross margin and right now we think that the mix is overall been a fairly neutral.

For 2012?

Yes.

Okay.

And then what about just to stay on that same theme for Q4, it sounds like it was one of the key margin drivers.

What were the main components of that mix benefit?

On the mix benefit, essentially on a year-over-year basis you had last year we were rolling out the Cloud Luxe and now the Cloud Luxe is well established.

It's a product that performs very well in the US market.

So Cloud Luxe is certainly a positive mix driver in the business.

On the international side we saw actually a little bit of negative mix because units were growing faster than dollars, but that was related to a new futon product that was rolling out in Japan.

Okay.

And is the Contour line playing into mix at all?

Because that replaced the--?

Absolutely.

Shouldn't have forgotten Contour.

That absolutely is a positive mix driver.

The Contour is performing very well.

As Mark said, it has exceeded our expectations.

But the Contour itself as a line is a little bit higher priced than what it replaced.

So, that is a positive mix driver that we have seen in the 3Q and 4Q also.

Great.

Thanks for the feedback and look forward to seeing you next week.

Our next question is from Jon Andersen with William Blair, your line is open.

You said I guess a little bit bigger picture question on your dealers.

How were your dealers thinking about allocation of space to premium and maybe more specific specialty?

I'm just thinking of that in the context of the Cloud which was highly incremental in terms of slots per store for you and with the rollout of the new product in 2012.

Presumably we are looking for that to be incremental as well, but just trying to understand as this mix shift occurs within the business, how receptive retailers are to moving in this direction and opening up more slots?

Not just for Tempur but for others who are looking to play more broadly in the space?

As I said a little earlier, I think the thing that is happening is that people are -- consumers are increasingly prepared to invest in superior premium mattresses.

Where they are confident that they can sleep and it will improve the quality of their sleep.

And I think that trend is going to continue.

As you know, we are talking about these new products at $1,499.

As you know, premium -- the traditional break point for premium is $1,000.

So, we are obviously clearly into the premium mattress arena.

But I also know that I think that there is a large proportion of the consumers who unless there is the purpose of this price point will want to compete -- will want to consider beds that are superior but can't reach all the way to the highest levels of premium.

And so I think that retailers will give space for those things that will appeal to their consumer base and I think that there is a lot of room -- I think there is a lot of room there.

In fact, historical -- recently over the last period, 12 to 24 months the growth in the industry has come from the premium and the lowest end of the lowest price points.

This is an area where retailers and consumers are looking for opportunities to drive more growth.

And consumers will come if it is superior and meets their needs and is designed for them.

So I think slots will follow volume.

And then one quick question.

Just on the multi year cost saving program.

I think you just completed year three of that program and just wondering where you are from a kind of 700 basis points of targeting cost savings?

Can we think about that terminating at the end of 2012 or it's just kind of one step in a process that extends beyond that?

Thanks.

Good question.

We are not focused anymore on that 700 basis points improvement.

We are approaching it.

And in 2012 we will basically hit that.

But the program has changed over time.

Is it now a continuous program.

There is not a specific goal.

The goal is every year we are going to find ways to improve the cost and drive cost out of the business.

And help improve margins.

Funding the growth initiatives that the business is undertaking.

So the team is doing a great job.

They have great plans.

Well into the future in terms of the directions they are going to go and how they are going to get there and some of these things take time because even if you have a great idea and you go do it and it appears to work you have to then put test product through, life cycle testing to make sure you are not impacting the properties or the feel or the durability of the product.

Everything that we do from a cost standpoint is fully vetted.

There is a long runway of opportunity ahead of us on this program.

Thanks, Mark, thanks Dale.

Looking forward to seeing you next week in Vegas.

Next question comes from Joshua Pollard with Goldman Sachs.

Your line is open.

Can you provide an update on the Cloud expansion internationally sort of where you are and if there are any marketers or doors where you guys are still not quite there so that should be a tail wind for your international growth?

And also talk about whether or not there is an international product launch component for Vegas?

First of all on the Cloud for international.

The Cloud is still in its first year.

Remember, first of all, the Cloud is still in its first year of launch anywhere internationally.

And it takes 12 months to 18 months just to get seated.

And as you can see in the US, we're continuing to grow Cloud.

So, everywhere where it is it's relatively new and there is still a lot of opportunity in countries throughout where it's already been launched.

For example in the UK it was only launched in the fourth quarter of last year so still in the UK it's a very new phenomenon and there are other countries where that's through as well.

I would consider Cloud essentially halfway through it's rollout is how I think about it.

In terms of new product introduction.

In general, we don't do international new product announcements in Vegas because we don't have international customers come to Vegas in general, there are very few.

We will tend to do that in forums more convenient for retailers in the countries that we are selling in, in Europe and in Asia.

But there is no major product announcement like what we are going to show in Vegas next week for international currently scheduled.

But although, believe me, there are many things in the pipeline.

Is that mute button still working?

Yes, actually it is.

And very successful mute functions.

My other question was it's been a little while since you guys have acquired one of your third party distributors.

Is that still part of the strategy?

Thanks, Joshua.

Well, we acquired Korea in July.

So, six months is not a long time, but absolutely that is a part of the ongoing international growth strategy continuing to expand markets.

The third party distributor network is a good way to see the market, get in, get started.

As we see that there is an opportunity or we think that the market is -- growth potential is not doing what we think we could do with it.

Then there are -- periodically we will take one over.

But that is something that we will continue to do into the future at the appropriate time.

It's not something that we per se schedule out and certainly not something that we will talk about in advance of getting deals done.

Great.

Thanks, guys.

I show a follow-up question from Eric Hollowaty from Stephens Inc.

Your line is open.

Dale, earlier in response to a question I believe you said that the new $1,499 queen product would be hitting stores starting in the second quarter of this year.

Is it reasonable to assume that the rollout for this domestically might look much as it did for something like the Cloud where it was kind of an 18 month type of time frame or might it be closer to something like a Contour which was more of a fast track or might it be somewhere in between?

Any color you can put on that?

I would think it would be more in between.

The Cloud was an -- more of an extended rollout.

It is one product at a time.

Here we are rolling out a collection but it's new.

The Contour was very concentrated because it was a new collection but it was replacing existing products on the floor.

So it was both in ours and the retailers interest to make that transition very quick and swift and it went very well.

So the new product line will be somewhere in between.

Not quite as fast as the Contour, but it would not take -- should not take hopefully as long as the Cloud.

Okay.

Great.

Thanks very much.

I show a follow-up from Keith Hughes of SunTrust.

Your line is open.

Thanks.

Just to confirm, the $1,499 you are referring to, is that for a queen set on one of the new models?

Correct.

That's correct.

All right, thank you.

And ladies and gentlemen, unfortunately I show we were out of time for questions on today's call.

I would like to turn the program back to our presenters for any concluding remarks.

We look forward to talking to everybody again in February.

When we host the investor day which we hope many of you will be able to joining us at in New York.

But thank you for joining us this evening.

Have a nice evening everybody.

Ladies and gentlemen, thank you for participating on today's conference.

This does conclude the program and you may now disconnect.