Tempur Sealy International Inc (TPX) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tempur-Pedic first-quarter 2012 earnings conference call.

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

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

(Operator Instructions).

And as a reminder, today's conference is being recorded.

Now I would like to turn the program over to Mark Rupe.

Thanks, Matt.

Thank you for participating in today's call.

Joining me in our Lexington headquarters are Mark Sarvary, President and CEO; Dale Williams, EVP, and CFO.

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

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

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

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

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

These factors are also discussed in the Company's SEC filings, including the Company's annual report on Form 10-K under the heading, special note regarding forward-looking statements and risk factors.

Any forward-looking statement speaks only as of the date on which it is made.

The Company undertakes no obligation to update any forward-looking statements.

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

With that introduction, I will turn the call over to Mark Sarvary.

Thanks, Mark.

Good evening, everyone, and thanks for joining us.

We are pleased with our first quarter.

We're off to a good start to the year.

Sales are up 18%, and earnings per share were up 26%.

On a constant currency basis, North American sales increased 18%, and international sales increased 22%.

In a few moments, Dale will provide details of the first quarter results, as well as discuss our outlook for 2012.

But first, I'd like to talk about the progress we've made in our key strategic initiatives during the quarter.

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

As we discussed at our Investor Day in February, our investment in brand advertising is a key driver of our future growth.

We know that increasing rates of advertising, results in higher Tempur brand awareness, which in turn, drives increased sales, share and profitability.

And we said we were going to significantly increase our investment in advertising in 2012, and during the first quarter, we did just that.

Our advertising was a record $47 million with considerable year-over-year growth, both in North America, and in our key international markets.

In the US, we significantly expanded our heavy up marketing program.

Internationally, we increased our brand advertising investment in Germany, France and the United Kingdom, and introduced TV campaigns into additional markets including Italy and Australia.

While it is still early, these marketing campaigns are showing positive results with brand awareness, purchase consideration, and website traffic growing in line with plan.

In particular, strong performance in our key international markets during the quarter, proves that our advertising investment continues to be successful.

However, while our confidence is high that these investments will continue to be effective, we will also continue to monitor the results closely and adjust as necessary.

The second of our initiatives, is to make sure that there is a Tempur mattress and pillow that appeals to everyone, by expanding and strengthening our product line.

In the US, we introduced the Tempur Simplicity collection at the Las Vegas market in late January.

And just recently, began shipping the product to the customers.

As we discussed in detail at the Investor Day, Tempur Simplicity is the most researched product we have ever launched, and addresses a very large market segment that we had not previously targeted in a meaningful way.

At $1499 for a queen set, the three bed collection with soft, medium and firm comfort options, addresses the $1000 to $2000 price plan; a segment, which has the same dollar value, as all the segments above $2000 added together.

While it remains very early, we are pleased with the performance we've seen so far.

Retailer feedback continues to be very positive, and we have gained considerable incremental volume.

Internationally, we continued the successful rollout of the Cloud collection, as well as just introduced the Sensation Deluxe model in certain markets.

These launches are part of our collection selling strategy, which drives both slot growth, and broadens our addressable market.

Our third strategic initiative is to make sure that Tempur is available to everyone, by gaining broad, high quality distribution.

During the first quarter, we continued to add distribution and slots, both in North America and internationally, and expect additional gains throughout the balance of the year, Simplicity being a large contributor.

The recent launch of our new Elite retailer program is also expected to support and contribute to our distribution efforts.

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

We did that too, during the first quarter.

We significantly increased our R&D spend, both on new product development, as well as breakthrough new technologies.

So we have made solid progress on all these initiatives in the first quarter.

And before I hand it over to Dale, I'd just like to make a couple of contextual comments.

As I said, I am pleased with our results.

We have continued to grow our top and bottom line substantially.

However, as anticipated, there have been significant new competitive launches and aggressive price promotion in the industry, as it has moved increasingly toward non-spring mattresses.

Our major initiatives this year, brand advertising, integrated retailer advertising, the new Tempur Simplicity line, and improved dealer margins, will all strengthen our competitive position.

The impact of these initiatives will largely be felt in the second quarter and beyond.

We remain very confident in our long-term strategy for growth.

Based on our commitment to providing superior sleep, people who sleep on Tempur, sleep better, than those who don't.

And our sustained significant investment in consumer advertising, making sure that everyone knows that they would sleep better on Tempur.

We will continue on our path toward our goal of $2 billion in sales by 2014, and to our recently introduced five year goal of $3 billion by 2016, through a continued focus on execution of our strategic initiatives.

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, first quarter net sales were $384 million, an increase of 18% over the same period last year.

On a constant currency basis, net sales increased 19%, North American net sales were up 17%, and international net sales increased 19%.

On a constant currency basis, international net sales increased 22%.

Now by channel, in North American retail, net sales were $242 million, an increase of 16%.

Our North American direct channel increased by 35% to $24 million.

Internationally, retail sales were $96 million, up 26%, and up 29% on a constant currency basis.

By product, mattress sales were up 18%, driven by a 17% increase in units.

North American mattress sales increased 15%, on a 12% increase in units.

In the international segment, mattress sales increased 26%, driven by a 26% unit increase.

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

Total pillow sales increased by 20% on an 18% increase in units.

North American pillow sales increased 22% on a unit growth of 19%.

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

On a constant currency basis, international pillow sales increased 19%.

Sales of our other products, which include items that are normally sold along with the mattress, were up 18% in total, and up 23% in North America, and 4% internationally.

Gross margin for the quarter was 53.6%, up 130 basis points year-on-year, and up 150 basis points sequentially.

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

These benefits were partially offset by higher new product costs.

On a sequential basis, gross margin increased 150 basis points, as a result of the lack of costs associated with US shipments to support our Danish manufacturing facility, improved efficiencies in manufacturing and distribution related to our productivity programs, and fixed cost leverage related to higher production volumes.

Our European factory produced at record levels during the first quarter, and did not experience any subsequent system-related issues.

In line with our plan, gross margin improvement was more than offset by a significant investment in advertising during the first quarter.

We increased advertising by 37% to a record $47 million or 12.3% of sales, compared to $34 million or 10.6% of sales in the first quarter of 2011.

We also invested heavily in R&D during the first quarter, which was up 47% year-over-year.

These investments are the cornerstone of our key strategic initiatives, and thus will remain an investment focus of the Company.

Our first quarter operating profit was $86.1 million or 22.4%.

Interest expense was $4.1 million.

The tax rate was 31.1%, down reflecting a net benefit of $2 million from the resolution of foreign tax matters.

Earnings per share was $0.86, as compared to $0.68 per diluted share in the first quarter of 2011.

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 down one day from last year.

Inventories were up $26 million year-on-year or 36%, largely due to the planned build for the planned rollout of Simplicity and increased volumes.

Payables were down four days due to timing.

During the quarter, we generated $45 million of operating cash flow and capital expenditures were $7 million.

We lowered debt by $20 million to $565 million.

Share repurchases during the period were 0.2 million shares, for a total cost of $12 million.

Our remaining authorization under our existing share repurchase program is $238 million.

Our cash balance increased by $23 million to $134 million.

Funded debt to EBITDA ratio was 1.4 times, slightly below our targeted range of 1.5 to 2 times.

Now I would like to address our guidance.

We are confirming our 2012 financial guidance.

We expect net sales to range from $1.6 billion to $1.65 billion, and we 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 2011gross margin was negatively impacted by 50 basis points due to the system upgrade issues incurred in our Danish facility.

However, in the second quarter, as compared to the first quarter, we are expecting gross margin to be (inaudible) down sequentially, as we have accelerated the Simplicity floor model rollout, and face slightly higher commodity costs than previously expected.

We project our operating margins for the full-year to be -- to expand nearly 100 basis points at the high end of our guidance range, despite our continued investment in the strategic initiatives to drive long-term growth.

However, in the second quarter as compared to the first quarter, we are expecting operating margins to contract modestly, as we further accelerate investments in advertising and R&D.

We continue to 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 of our new office in Lexington.

We continue to anticipate the full-year tax rate to be approximate 33.3%.

Given the slight reduction in our share count during the first quarter, we are now expecting 65.7 million shares for the full-year.

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

In conclusion, our guidance continues to reflect, and this is long year, with many strategic initiatives and products that are just underway.

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

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.

With that operator, please open the line for questions.

Thank you.

(Operator Instructions).

Our first question in queue comes from John Baugh with Stifel Nicolaus.

Your line is open.

Thank you.

Good afternoon.

I wanted to just touch on the product launch, drag on gross margins in the quarter.

Is that due to factory issues, in terms of making the new product, or is there also selling of samples at a lower cost in there?

Yes, primarily, John, it's related to starting up in the factory.

We -- as I mentioned in the inventory, we built a lot of inventory on Simplicity.

So we have to go through the start-up process.

We had to get the product out into our distribution system because we wanted to have a very quick launch here in April.

We did have a few products go out a little bit early, but not a lot.

And but -- so primarily is related to just getting started up, and getting the warehouses ready and in place, to hold the Simplicity inventory for a very quick launch here in the second quarter.

And so does, Dale, the -- as a follow-up here, does the margin, gross margin pressure related to Simplicity shift in Q2 to the sample sales?

Or do we still have lingering impact from manufacturing, or do we offset all of that with the sales unit gains from the product, because it will be fully placed and selling?

Yes, the manufacturing start-up, that's just kind of a one-time first batch kind of issues that you run into with new formulas and brand new products.

But so we feel very good about the production of Simplicity.

So essentially it's -- we're, as I mentioned in my remarks, we are accelerating this rollout.

We said it would be six to nine months.

We now think it is going to be six months or less, in terms of getting Simplicity out, and it is going to be, actually even more heavily weighted into the second quarter, than what we had anticipated at the beginning of the year, as customers want it.

Thank you.

Thank you.

Our next question and queue comes from Jessica Schoen with Barclays.

Your line is now open.

Good afternoon, everybody.

I had a question.

You mentioned the current environment right now, and the competitive changes that you've seen happening.

And you talked a little bit about some initiatives, and starting to see the impact in 2Q.

I was wondering if you could give a little bit more detail on what those initiatives are?

And what the themes in the environment that you are seeing that has led to that?

What we are hearing from customers across the country, and we've been hearing this for sometime now, is that there is a increasingly fast movement in the premium mattresses, away from spring mattresses toward, what are called specialty mattresses, which obviously we are the leader in our channel.

And as this has happened, there has obviously been -- our competitors have noticed and have started to participate.

The initiatives that we are focused on though are, obviously the launch of the Simplicity, which is a very important product for us, because it is greatly broadens the range of consumers who we target.

It targets this group of people between, who are willing to pay with between $1,000 and $2,000.

So that's one very big initiative.

The second one is our integrated advertising, working with the retailers, to make sure theirs and our advertising is coordinated and effectively working together.

And, of course, our brand advertising itself, is a very important part of the initiatives that are driving growth.

And, finally, as we made some changes to our promotional structure, so that it makes Tempur-Pedic more profitable for our retailers to sell.

Those are the key initiatives that we are working on.

Okay, great.

And then, when you look at the market, and you see a lot of that outside growth coming from the popularity of specialty mattresses, what kind of expectations do you have for the rest of the year, how the market will continue to trend?

Well, projecting the market is always a tricky thing to do, which we try to avoid.

What I think we, honestly, I think the big thing, which is quite significant -- and I mean I know this from our own experience here at Tempur.

But from speaking to a lot of retailers, what is happening is that, this move to specialty is something that is going to continue.

And it is more than simply a move, one for the other, because what it means, is that consumers are trading up.

Consumers are prepared to spend more on a good nights sleep, which is a pretty fundamental change.

So we see this is being, something that's going to continue to happen, it's going to continue to be good for consumers, for retailers and for us.

All right, thank you so much.

Congrats on the quarter.

Thanks.

Thank you.

(Operator Instructions).

The next question is from Keith Hughes with SunTrust.

Your line is open.

Thank you.

Just wanted to ask on the growth in US mattresses.

I saw one of your competitors out the other night, where do you think you stack?

Are you just in the middle of product cycle, or where do you think this looks versus your long-term growth rate?

Well, I'm not quite sure what you mean by a long-term growth rate.

What we're -- as we look at the market, we are up 18% this quarter, on top of very significant growth last year, and consistent with our growth projections for the full-year.

So we feel pretty good about it.

As we look at the industry as a whole, we think that the industry certainly back from the doldrums that it is been in.

But as we look forward for our full-year, we're pretty confident we are going to continue to gain share, as we have been for the last few years.

In the first quarter, did you gain share in specialty?

In specialty, probably not.

But remember, that's a challenge when you think that in it for a long time, we were very dominant player.

As new people come in, the dominant players always going to be impacted disproportionately.

We look at it as share of total category.

In that, we believe we will have continued to grow.

And Keith, this is Dale.

Let me add a couple points.

On your first question, in terms of you were asking about long-term growth rate.

In February at our Investor Day, we talked about, reiterated and talked about the $2 billion growth plan.

Obviously, to hit $2 billion in 2014, we have to compound growth at 12%.

We talked about a $3 billion growth plan for 20 -- to be $3 billion in 2016.

That requires a16% compound growth rate.

So we have, certainly a lot of plans around products, and a lot of plans around how we go-to-market, to drive the growth of this business.

And this is a global growth goal, it is not just North America goal.

So we feel very good about where we are at, and our position on that.

As to your second question, on share within specialty, we've said for as long as I have been with this business, the long-term goal here, the long-term gain is not to necessarily maintain our share of specialty.

We want specialty to become gain share in the market.

And we expect to lose some share in specialty along that way.

But if specialty is 20% of the market, and we are 70% of specialty, that's nice.

But we'd much rather be 50% or 45% of specialty, and specialty be 50% of the market.

That's a much better equation for us.

Okay.

I hear what you are saying.

And just one real quick one on international, outstanding numbers there, is that the influence of the Cloud?

Yes, the Cloud and the advertising really working over there, building the brand awareness.

All right, thank you.

Thank you.

Our next question comes from Joe Altobello with Oppenheimer.

Your line is open.

Thanks, good afternoon.

Just a couple quick ones.

I guess first, just going back to your comments earlier on competition.

You have had competition in the space for a while.

I think you have had some branded competition in the space for almost a year now.

Is there something that's changed in the landscape in the last three months or so?

Is the competition getting more price competitive?

Have there been new entrants in the last three months?

Or has something changed recently that's caused you to sort of tone down your comments today?

Well, the -- obviously, there's been competition forever and the competition we've always had is very strong.

I think that's what's happened, not over the last three months, but over the last 12, 18 months, is that as the recognition has come, that specialty as Dale said, is trending toward being, probably 50% of the market in dollars, everybody is going to participate in that.

And so that is -- that's going to -- that has happened, and will continue to happen.

As we -- and this is a -- this is in fact in some ways a -- something that is being driven to large extent, as new people come in, by being very promotional, and very focused on price, we intend to maintain our focus on making sure that we are focused on the consumer, making sure our that products are right for the consumer.

And that our communication is, or our investment in marketing is largely on direct consumer communication.

But this is a -- this is what we have long anticipated, as the market shifts.

And I think it's, as I said, it's a 12 to 18 month phenomenon, not a three month phenomenon.

Okay, fair enough.

And then secondly, in terms of accelerating the roll out of Simplicity.

Just to be clear, it sounds like the rationale or driving reason for that, is simply the fact that retailers want faster.

Is there anything else that's causing that?

Well, that, and the fact that the build up was quicker.

We always put a certain amount of conservatism, as we planned building of a new product, just to get (inaudible).

It's new manufacturing process, getting everything right and so on.

So we put a little bit of conservatism in it.

Our supply chain guys were ahead of schedule, and the demand was very high, and so we were able to move it -- we essentially moved the rollout schedule earlier.

Largely driven by demand, but also by our ability to meet that demand.

Okay, great.

Thank you.

Thank you.

Our next question comes from Brad Thomas of KeyBanc.

Your line is open.

Thank you, good afternoon.

Just a follow-up on the sales in the domestic segment.

Mark, I was hoping you could just you talk little bit about performance by different price points?

Was anything you saw differently among your lower-priced models, or by any channels that you sell in?

Or anything that maybe points more to the competitive or promotional landscape, in terms of how your sales played out?

We don't -- as you know, we don't split our sales by price point, but as we said before, and I can reiterate it again this quarter, not really.

There is no systematic differences in the distribution of sales by price point, this quarter versus prior quarters.

Okay.

And then in terms of Simplicity, at this stage, I know it is started shipping.

We have seen it in retailers.

You've talked in the past about the ability to gain, hopefully 2 or more incremental slots, is that still something you could see?

How are you feeling about the order process at this point?

Well, it is extremely early.

So everything I say about Simplicity has to be caveated by that.

But the initial plans, the initial rollout plans, what retailers have agreed to, does seem to be consistent with our plans to get 2 or so incremental slots.

So what -- we will see it when we see it.

And but that is what people are agreeing to, and that's what we are rolling out to, that's what we are seeing.

Okay.

And if I can just maybe squeeze one more in here.

In terms of the investment in advertising, I mean if we were truly nitpick here, this is one of lower sales quarters that we have seen in a while, and a lower contribution margins in a while.

Admittedly, you have a exciting product coming out.

But are using the returns that you want to see still on the incremental advertising dollar investment?

We are -- but as I said in my prepared comments, we are, but we monitor it very, very closely.

One of the things you have to realize that, is that advertising doesn't pay for itself on the day you do it.

It has to be over a period of time.

And this obviously is the lowest ad -- the proportion of promotional times, which is when advertising is most effective, and when our heavy [ups] have coordinated it, there is limited amount in the first quarter.

So it is consistent with it, but we monitor it very carefully.

I think one of the things that we -- that is kind of a leading indicator is web hits.

And so, it's true in America, and true in the rest of the world.

Web hits are a good indicator of whether advertising is breaking through.

And I think I saw data that we are well above 50% higher on web hits this quarter, than we were last quarter, and we believe that's very driven by advertising.

I mean, sorry, by this quarter than we were first quarter last year.

Great.

Thank you, Mark.

Thank you.

(Operator Instructions).

Your next question is from Jon Andersen with William Blair.

Your line is open.

Good afternoon.

I just had a question on the guidance.

By my math the top line guidance of 1.60 to 1.65, kind of implies growth through the balance of the year somewhat below what do you experienced in the first quarter.

And I guess with the launch of Simplicity, the benefit of the incremental advertising spending, it's not immediately intuitive to me, why that might be the case.

Is there -- just a -- does this more have to do with conservatism because we're early in the year, or is there something else you are seeing their?

Thanks.

Well, yes, I would say, in regards to Simplicity, we have plan for Simplicity.

While we are accelerating the rollout of Simplicity we haven't changed the plan that we have for the year, in terms of what Simplicity would do at this stage.

It is only been in the market for a couple of weeks.

It is really only been in Florida, for a week and half or so.

It is way too early to have a gauge of what Simplicity is going to do.

It is way too early to know what the real benefit of the heavy up is going to be.

We are just embarking here, as Mark said, a lot of the programs are just kicking here in the second quarter.

And yes, we had ideas are planning for the year, of what the benefit of those programs like the integrated advertising, et cetera would do for us, but they are just starting.

So there's no basis to change what our original plans were.

One other thing that I would comment on from a total year standpoint, at the start of the year we thought FX would be fairly neutral this year.

It proved to be a headwind in the first quarter.

Based on how the euro specifically is trading, it doesn't look -- and the continued uncertainty around, particularly the European markets were performing very well there.

But you read the headlines in the news as much as we do, and there is still a significant uncertainty as to what the economy is really -- the economies over there really doing.

So we are trying to be a little bit cautious.

We've built in -- FX is now going to be headwind for the year.

We will see pressure from FX as the year goes on.

We will also continue to be concerned about the overall macro environment in Europe.

So I think it is a function of, not enough has changed, to change our plan for the year.

We don't have the evidence and proof points yet, because most of the major initiatives for the program -- for the year are just starting.

Okay.

Thanks.

One follow-up.

I don't want to beat it to death.

But on competition, I know we've kind of talked in the past about, the competitors have had specialty offerings in the marketplace with varying degrees of success.

It sounds like, and it looks like, based on some of the industry growth rates, that might be getting more traction, is there a different approach that's being taken by some of your competitors?

A better in-store presence?

Better marketing?

Or -- I'm just trying to kind of get a better handle on why there may be more traction in the premium area?

And I think -- I mean, I think as I've said, the really kind of astonishing change in the world is that, specialty is being accepted as being the bulk of what business above a $1,000 is going to be.

And as you look at it like that, what it means is, it's the retailers themselves who say, well, in that case that opens their ears to that.

It also provides us an opportunity.

But I think the fundamental changes is in that.

I think that there is a recognition, and a trend that has started to accelerate, which is causing -- obviously, the competitors to participate, but for the retailers to be more -- to have a justification for the space on their floors.

I mean, it is something that we've talked about for a long time.

And it is happening something like we expected.

Thanks for the color.

Thank you.

The next question in queue comes from Joan Storms with Wedbush.

Your line is open.

Hi, good afternoon.

Can you hear me?

Yes.

Okay, great.

Mark, you mentioned earlier, and I want to make sure that I got the comment is right, about obviously, because of the product rollout, in particular in the US, that business is likely to accelerate.

Obviously, you have some of these headwinds on the raw material cost and the FX.

But just due to the rollout of the Simplicity and the extra slots, that we should see some acceleration of business into Q2 through to Q4?

What I said is that we have a lot of initiatives, which are essentially kicking in, in Q2 to Q4.

And as Dale said, I mean -- we made our guidance for the year three months ago.

And we're not modifying it, even though we are slightly ahead of, in terms of the top line growth, of where we that we would be.

But the fact is, that we don't -- with all of these -- well, not all -- but these initiatives are still extremely early in their rollout.

It is too early for us to change our expectations of these things.

So as we stand here today, we think it's the best way to look forward, is to stick with what we had originally thought.

And that's what we are doing.

So we are excited to see them.

We're watching them with great anticipation.

But at the moment, it seems appropriate.

And our projections say that the best projection we can make is our guidance.

Most of the early channel checks we have done on the rollout of the Simplicity have been, most of the stores are taking in the entire three beds so far.

So are those part of like the Elite dealer program companies, that you are servicing first during the rollout?

Forgive me, but I didn't quite hear what you said.

Say that again?

-- three beds.

Sure.

On the -- most of the early channel checks we have done on the rollout of Simplicity, a lot of the stores are taking all three slots --

Right.

-- for that line.

And I don't know if you can -- are those customers or retailers part of the Elite program that get the product first, or how does that work?

As I said, in order for us to get an average of 2 in total, the majority of people are going to have to take 3.

So it is going to have to be -- it is not a big surprise.

We -- people are -- the majority of people are saying, they want to take two or more.

That you are -- that you are -- I'm sorry, we just had a buzzing sound.

I don't know what that was.

Yes, I --

It doesn't surprise me that you are seeing 3 in the stores you are visiting.

Okay, thank you very much.

Thank you.

Thank you.

Our next question in queue is from Budd Bugatch with Raymond James.

Your line is open.

Good morning, good afternoon, Mark.

Good afternoon, Dale.

Good morning, Budd.

Just Dale, one specific question.

I think in the last quarter guidance you said that growth margin would be up modestly, and it was a pretty nicely.

I know you talked about the efficiencies, and yet some new product drag.

So maybe you could give us a little bit of additional color on that?

Well, we had obviously, on a sequential basis -- felt like we were through, and we said, that we were through the Danish facility issue, but you never know absolutely until you go a few months, and make sure that everything is going as it appears to be.

But as I mentioned in my comments, we did not have any lingering Danish support needs from the US.

So that's a positive.

We had very good productivity build in response.

And while we have a little bit of start-up costs around Simplicity.

Actually the start-up costs were a little bit less than what we thought they would be.

So basically, from a gross margin standpoint, we saw very good performance, in terms of what our plans are, and what our outlook was.

We are projecting, and seeing some chemical pressure, in the balance of the year from what we expected at the start of the year.

Budd, you've mentioned a couple times that you've heard of more price increases and stuff.

And yes, we've built in some or chemical pressure into our outlook.

We think that will give us a little bit of a headwind in the second quarter.

But because of the performance that we are getting on our cost improvement programs, we think we can offset that in the second half, and actually get back whole for the year.

Which is, why even with higher chemical costs, we are not changing our outlook for gross margin for the year.

Okay.

And you -- could you give us a little bit more color -- you talked about the revenue guidance.

I was struck, and I think John got a little bit to this, the revenue guidance is unchanged.

I recognize, it still is early in the year.

You are accelerating Simplicity, which would have said, you should have gotten a little bit more revenue as that gets placed earlier and has longer to get seasoned on retailers floors.

You did talk a little bit about FX headwinds.

So maybe, if you could quantify the FX headwind, and is that what is offset by the accelerated revenues from Simplicity?

Is that the right way to look at it?

Are those are the two major moving parts?

Yes.

I mean, those are the two major moving parts.

And again, even though we are accelerating the floor model roll out of Simplicity, we are not changing the sell-through assumptions of Simplicity per se, just because we really haven't sold much yet.

We don't have a broad response or input back, in terms of how it is performing in the market.

We have heard some good anecdotal things.

But until we get some time with it, we are not going to change our plans around Simplicity.

We are anticipating ongoing FX pressure.

In the first quarter, it cost us I guess, globally about a point.

I think for the full year, we are expecting it is cost us a couple points.

Two points or more?

Yes, probably two.

Okay.

On the international side, outstanding first quarter, 22% constant currency growth in the first quarter.

So very pleased with the performance overseas, but still concerned about the economies particularly in Europe.

And the comps do get tougher as the year goes on, as we are comping the Cloud.

We started rolling out the Cloud internationally in late in the first quarter last year.

And then it built and built throughout the year, so the comps do get tougher as the year goes on.

So we -- not necessarily expecting an acceleration of growth.

And we said at the beginning of the year, we thought for the year the growth rate between US and international would be more balanced.

So those are all the factors that we are looking at.

You did -- I will sneak one final one in there.

You did, I think, last quarter say that the Simplicity inclusion into 2012 guidance was modest.

Could you give us maybe a little bit more color of what's included in the $1.60 billion to $1.65 billion for Simplicity this year?

We're not going to get into exact specifics, of how much Simplicity we expect to sell, but it is still a relatively modest expectation.

It is not going to become -- our expectation for this year, is it is not going to become the whole driver of the business.

How about in terms of growth rate -- can you -- any way to characterize it in terms of the delta to growth rate?

No, we don't want to get into that.

Okay.

Thank you.

Good luck on the second quarter and the year.

Thanks, Budd.

Thank you.

Our next question is from Leah Villalobos with Longbow Research.

Your line is open.

Thanks.

This is Josh Borstein in for Leah.

Thanks for taking my call.

You implemented some pricing in early April.

Did you seeing any pull forward in demand, ahead of that increase?

Really, no.

One of the key things about this price increase, you always see a little bit.

But this one was very different than how we have typically done price increases.

This price increase was relatively small.

It was actually fairly heavily weighted to non high-volume sizes, twins, kings where queen is by far the highest volume.

So the price increases were on -- in areas where retailers were less likely to take advantage of it.

Also the flip side of that is, some of the new programs that we introduced, that start off in the second quarter that are geared around volume, actually kind of counterbalance any potential impact of trying to get a benefit from the price increase.

Last year, we had a sizable price increase in March on the Cloud Supreme, and which is our highest volume unit.

So on a year-over-year basis, the price increase impact was significantly different.

Thanks.

So how should we think about ASP going forward for the year?

In US, you have a little bit of pricing, you said from the April price increase, that presumably is going to be offset by some lower price points from the Simplicity.

So just in thinking about ASP for the year, how should we think about that?

Yes, for the year, I believe, we've said that we thought --on the North America side of the business we thought that ASPs would be flat.

Okay.

Because of the impact of Simplicity.

Okay.

And then if I can just sneak one in, a housecleaning question.

Can you update us on the door count for the US and internationally?

Yes, let's see, domestic door counts, I've got 7,700 I've got.

International looks like 5,300.

Okay.

That 7,700 that include Canada?

No, that's just US.

Okay.

Canada, there's -- the door count doesn't change much, there is about 400 doors in Canada.

Great.

Thanks very much.

Thank you.

The next question is from Eric Hollowaty with Stephens Incorporated.

Your line is open.

Dale, could you reiterate what your guidance was on gross margin for the second quarter?

You cut out, I think, when you were giving that.

Oh, okay.

Yes, I said for the second quarter I expect sequentially from 1Q to 2Q, gross margin to be down a little bit, because of the impact of the heavy floor model rollout of Simplicity and chemical prices are up.

Right.

Okay.

And the international -- excuse me, the advertising expense increase in the quarter, can you give us a perspective on whether that was fairly evenly weighted US versus international in percentage terms, or how did that sort of play out?

In terms of percentage of revenue, the international spend is -- was higher in the first quarter as a percent of our revenue there and that's been the case for awhile.

In terms of growth rates of advertising, it was slightly higher growth rate in the US, but not dramatically different in terms of growth rate in advertising, between the two sides, because the US is catching up a little bit.

Last year the US was spending a 10%-ish and picked it up this year to 11% and change, and international which was spending at a higher -- over 12% last year, is now over 13%.

Great.

Okay, thanks.

Thank you.

Our next question is from Joshua Pollard with Goldman Sachs.

Your line is open.

Thank you for taking my question.

Can you talk about what percentage of your existing clients actually took on the Simplicity?

And then what the speed up of the rollout in the US, can you talk about when you are looking to put that out for your international segment?

Well, the vast majority -- I'm not going to give you an exact percentage of our customers who will be taking the Simplicity.

And as Dale said, the rollout is going to be over, essentially six months.

So starting from now, six months.

There will still be stragglers obviously, but that's roughly what we expect.

And we try to get quite a bit of that into the second quarter.

In terms of when we will launch it in international, we will launch it.

We haven't announced the date when we will do that but we do anticipate doing so.

It is just not appropriate to announce when.

Is it fair to ask whether or not that would be this year or next?

It won't be this year, but I don't -- I won't be more specific than that.

Okay, that's fair.

The other question I had was around your R&D spend.

You didn't give the numbers, but you did say that it was up almost 50%.

I'm trying to compare that with some comments you made in the second half of last year, where you said that the Simplicity end up, being your biggest product from an addressable market standpoint.

But that you had a number of products that were ready to go.

I'm trying to understand, when I think about the increases in spending that are needed, and the more competitive environment, the new products that you have coming out, potentially next year rollout with the Simplicity worldwide.

I'm trying to understand, why such a big increase in R&D for you at this particular point?

First of all, first of all -- as a -- first of all R&D is crucial to us.

This is a very big important component of our overall business strategy.

We are committed to making sure we have beds that people sleep better on.

And we do that from research product development.

First of all, it is a backbone of our business.

Secondly, if you look at it as an amount of spend, it is still -- in kind of big terms, it's a relatively small amount.

It is less than 1% of our total sales.

So it's an important thing.

It is a large number, but it is, in the big scheme of things, not a thing that greatly moves our P&L.

But having said all that, I think that -- the concept of making -- as I said, and I have said, and it is true that we have several things ready to roll.

But that doesn't mean we are not working on more things.

And there are two parts of R&D.

There is the product development side of it, which is using existing technologies to create products -- to create new products.

And there's the development of new technology which enables new products.

We do, and we do genuinely do both.

And so I can -- we can not -- we are never going to say, we've got enough R&D.

We're always going to think, we're going to need more.

That's going to be a continuing plan for us going forward.

Yes, and Josh, from a specific numbers standpoint.

First quarter of '11, we spent $2.3 million in R&D, and first quarter of '12, we spent $3.4 million.

Okay.

If I could just sneak one more in.

Are there any stores where you are net, only -- that you are actually losing a slot to put the Simplicity in?

I know it's not something that's really been talked about much, but I'm wondering if there's a portion of your customers who are taking on three or -- two or three Simplicitys, but taking one other off of the floor?

There's inevitably going to be some of those.

But the fact is, what we are looking for, as I have said, is net gain of two.

So there is going to be averages.

Some will take three, and I mean, it will average out.

But by the laws of statistics, there is going to be some people like that

Okay.

All right.

Thanks a lot.

I really appreciate it, and great quarter.

Thank you.

Thank you.

And I do show that we are out of time for questions.

I would like to turn call back to Mark for any concluding remarks.

Thanks very much.

Thanks, everybody, and we look forward to talking to you again in July, when we will host our second quarter earnings conference call.

Thank you for joining us this evening.

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

This does conclude the program, and you may now disconnect.