Tempur Sealy International Inc (TPX) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to TEMPUR-Pedic second quarter 2012 Earnings Conference Call.

(Operator Instructions).

I would now like to hand the conference over to Mr. Mark Rupe.

Sir, you a may begin.

Good evening everyone.

Thanks for participating in today's call.

Joining me in our Lexington headquarters are Mark Sarvary, President and CEO, and 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 provision of the Private Securities Litigations Reform Act of 1995.

Investors are cautioned that Forward-looking statements including the Company's expectation regarding sales and earnings involve uncertainties.

Actual results may differ due it 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 their heading special note regarding Forward-looking statements and risk factors.

Any Forward-looking statements speaks only as of date on which it is made.

The Company undertakes no obligations to update any Forward-looking statements.

The press release which contains a reconciliation of non-GAAP financial measures to 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 everybody, and thanks for joining us.

As we previously communicated in early June, changes in the competitive environment in North America during the second quarter had an adverse effect on our performance.

During the period, there was a marked increase in the number of premium competitive products on many of our leading retailers floors.

The majority of which were new offerings from our primary competitors who were supporting them with aggressive on-air and in-store marketing and incentives.

As a result, and contrary to what we had expected, we believe a material number of consumers who otherwise would have bought TEMPUR-Pedic ended up buying a competitive product.

Sales overall were down 4% and earnings per share were down 41%.

On a constant currency basis, North American sales decreased 8% while International sales increased 17%.

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

But first, I would like to briefly make some comments regarding the current situation.

As I noted, there have been significant changes in the competitive environment for TEMPUR here in the US over the last few months.

Our strategic goal, however, is uncharged.

We intend to be world's favorite mattress and pillow company, and we are as committed to that as ever.

The key to our success to date and what will continue to be the key going forward is our systematic introduction of innovations year after year.

Our innovations grew our business, grew the specialty category, grew retailer average selling prices, and most importantly broadened the TEMPUR consumer base,by far the most satisfied owner group of any major brand.

Our innovations started with the original TEMPUR-Pedic line based on our proprietary TEMPUR material that created the revolution that has resulted today in a world in which the majority of premium mattresses are nonspring and no longer even considered specialty.

We then invented TEMPUR HD technology that allowed us to create the Rhapsody bed.

A $3,500 product that for many year was our best selling product andtoday is still one of our best sellers.

Just three years ago we created the TEMPUR.

ES material, the core component of the Cloud line which today is our biggest product line and one of the biggest in the industry.

And earlier this year, we introduced the Simplicity line which is based on our new TEMPUR essential material.

From time to time over the years competitors have introduced products that competed with TEMPUR.

Most recently a series of products using gel-infused foam.

These gel products have had some success primarily driven by their lower prices and effective in-store marketing.

However, they use an existing technology, and one that has proven to be ineffective in its central claim that it purports to help consumers sleep cooler.

Going forward we will continue to work with retailers to provide unique and consumer value products that allow them to improve their average retail selling prices and get a greater and greater number of consumers on TEMPUR beds.

In addition, we will work to ensure that retailers overall profitability is maximized by selling TEMPUR products.

We have been implementing a series of initiatives that will become increasingly apparent to the investment community over the next few weeks.

They include number one, in Las Vegas next week, we will introduce a host of new products that are differentiated from what is currently offered in the category, proven to be preferred by consumers, and that will raise average retail unit selling prices, and we won't stop there, though.

Our pipeline of innovative new products is very robust, and you should expect to see a continuous stream of them coming to market in 2013 and thereafter.

Number two, a comprehensive review of our consumer and wholesale prices, our integrated advertising programs, and all our other consumer customer programs that drive growth.

We intend to ensure that all our retail customers have every incentive to sell TEMPUR products.

And number three, a continuation of our commitment to consumer advertising.

In-store as well as on TV and new copy supporting our new products.

Month by month we will evaluate the effectiveness of these initiatives, and we will modify or change them as necessary.

We are committed to returning to growth, and if in the short-term this requires some reduction in our overall margins we are prepared to accept that.

For obvious competitive reasons we will not be sharing specific details on these initiatives tonight.

We will, however, be unveiling several of them at next week's industry tradeshow in Las Vegas.

To be clear, though, and as Dale will also discuss, our financial outlook incorporates the initiatives I have just described.

In closing, we know that people who sleep on TEMPUR sleep better than those who don't, and so we are going to continue to focus on returning to growth by pursuing the four elements of our strategy, making sure that there is a TEMPUR that appeals to everyone, making sure that everyone knows that they would sleep better on TEMPUR, make sure that TEMPUR is available to everybody, and make sure that we continue to deliver the best sleep.

We are the leader in a large and growing category, and we have significant growth opportunities here in North America as well as overseas.

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 us begin with an overview.

In total, second quarter net sales were $329 million, a decrease of 4% over the same period last year.

On a constant currency basis net sales decreased 1%, North American net sales were down 8% and International net sales increased 8%.

On a constant currency basis International net sales increased 17%.

Now, by channel, in North American retail net sales were $206 million, a decrease of 9%.

Our North American direct channel increased by 3% to $18 million.

Internationally retail sales were $82 million, up 14% and up 24% on a constant currency basis.

By product, mattress sales were down 4% while units increased 1%.

North American mattress sales decreased 8% on a 6% decrease in units.

ASP declines were due primarily to the rollout of simplicity floor models and promotions.

In the International segment, mattress sales increased 11% driven by a 15% unit increase.

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

Total pillow net sales decreased by 2% on a 1% decrease in units.

North American pillow sales decreased 10% on a units decline of 9%.

International pillow sales were up 5% on a 9% increase in units.

On a constant currency basis, International pillow sales increased 12%.

Sales of our other products which include items that are normally sold along with a mattress were down 5% in total and down 8% in North America while up 4% internationally.

On a constant currency basis, International other sales increased 13%.

Gross margin for the quarter was 50.7%, down 220 basis points year-on-year and down 290 basis points sequentially.

The year-over-year basis, gross margin declined primarily due to the following.

Increased promotions and discount, de-leverage and product mix.

These impacts were partially offset by improved geographic mix.

On the sequential basis gross margin declined 290 basis points as a result of de-leverage, increased promotions and discounts, and higher commodity costs.

Based on the lower than expected North American sales, coupled with the investments made during the quarter based on a plan that anticipated higher sales, we experienced significant operating expense de-leverage.

We increased advertising spend by 28% to $46 million or 13.9% of sales compared to $36 million or 10.4% of sales in the second quarter of 2011.

We also invested heavily in R&D during the second quarter which was up 48% year-over-year.

It is also important to note that during the second quarter the Company benefited from a favorable one-time adjustment of $2.5 million to the earn-out payment related to a prior acquisition and a $1.6 million favorable one-time adjustment to long-term incentive stock compensation.

These items are reflected in G&A.

Our second quarter operating profit was $47.5 million or 14.4%.

Interest expense was $4.2 million.

The tax rate was 33.6%.

EPS was $0.45 as compared to $0.76 per diluted share in the second quarter of 2011.

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

Our accounts receivable balance was down reflecting sales levels.

DSOs were down one day from last year.

Inventories were up $20 million year-on-year or 23%.

Principally due to the lower than expected second quarter sales in North America.

Payables were up three days due to timing.

During the quarter we generated $42 million of operating cash flow and capital expenditures were $14 million.

The increased debt by $117 million to $682 million.

Share repurchases during the period were 4.9 million shares for a total cost of $138 million.

Our remaining authorization under our existing share repurchase program is $100 million.

Our cash balance remained flat at $134 million.

Funded net to EBITDA ratio was 1.85 times near the high end of our targeted range of 1.5 to 2 times.

We have evaluated this range and in light of the current business environment, we feel it is appropriate at this time.

I would like to address our updated financial guidance for 2012.

On June 6th, 2012 the Company revised its full year 2012 guidance.

Today the Company maintained its outlook for full year 2012 net sales to be approximately $1.43 billion.

In addition, the Company updated its full year 2012 earnings guidance andcurrently expects diluted earnings-per-share to be approximately $2.80 principally reflecting a lower weighted average shares outstanding for 2012.

In light of the uncertainty in North American sales trends, our guidance assumes that sales for the third and fourth quarters will each be approximately equal to the second quarter of North American sales adjusted for slight seasonality.

We do not believe that our North American initiatives will have a significant impact until sometime in the fourth quarter and their full impact will not be felt until early 2013.

Our International business continues to perform quite well.

We continue to expect double-digit growth for the balance of the year.

And it is important to note that our guidance is based on recent trends which can be volatile from week to week.

Also, in considering our guidance it is possible that our actual performance will vary depending on the success of our new initiatives, macro economic conditions, and competitive activities or the consequence of other risk factors we have identified in our press release and SEC filings.

The Company currently projects gross margins for the full year to decline approximately 100 basis points year-over-year.

However, in the third quarter as compared to the second quarter, we are expecting gross margins to be relatively unchanged.

The Company currently projects operating margin for the full year to decline approximately 450 basis points year-over-year.

However, we expect improvement as the year progresses.

In the second quarter our operating margin was 14.4%.

We expect improvement in the third quarter and ultimately get back to our first quarter 2012 operating margin level by the fourth quarter of this year.

In the third quarter as compared to the second quarter, we are expecting operating margins to expand approximately 400 basis points due to realigning our cost structure.

As Mark noted, our financial outlook includes an estimate for the cost impact of all of the new initiatives.

We currently anticipate interest expense for the full year to be approximately $17 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 approximately 32.7%.

Given the reduction in our share counts during the second quarter, we are now expecting an average of 63 million shares for the full year with a current share counts of 61 million.

This share counts does not assume any benefit from a potential further reduction in shares outstanding related to the Company's repurchase program.

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

With that operator, please open the line for questions.

Thank you.

(Operator Instructions).

Our first question comes from Budd Bugatch from Raymond James.

Good evening, Mark.

Dale and Mark this is actually Chad pinch hitting for Bud.

A couple of questions.

Dale, in your commentary regarding the forward guidance, could I just clarify?

Did you say 3Q gross margin would be relatively unchanged versus the prior quarter or was it the prior year?

The prior quarter.

So second quarter we were at 50.7 we perfect third quarter to be about the same.

Okay.

And I guess maybe help me think through some of the puts and takes there because we know that 2Q was impacted by the Simplicity floor samples.

I would expect that maybe commodities starting to head the right way.

Well, I guess what are some of the offsets?

Well, as we think about 2Q to 3Q, obviously we had a lot of Simplicity floor models, as Mark mentioned, there will be some new products introduced at Vegas next week.

So we will see a few of those.

The bulk of those foremost probably will go out in 4Q, but there will be some floor models, but less likely less than what we had in the second quarter with Simplicity.

Commodities have, oil has dropped.

Our chemical prices have not changed dramatically, but atleast the pressure that we were expecting earlier has eased.

We have the new programs that are going into place that are going to have some costs to the business.

So there is a variety of puts and takes.

we will continue to get productivity.

We still have a very strong productivity program that we are driving.

So we see a lot of puts and takes, but that is our best estimate at this time.

Okay.

And Mark, on the last call you had made a comment referred to sort of the Cloud Supreme promotion as maybe not quite optimal.

I would -- now that the promotion has wrapped up, and you have had some time to evaluate it, could you share with us maybe a little bit about what you learned from that and maybe give us a sense of what we can expect from TEMPUR in the future with regard to the magnitude and cadence of price promotion?

I think that we learn from everything.

We learn from every promotion that we do, and you know us well enough to know that we try to measure and evaluate everything we do, and this promotion was no different.

If we look back on it, we had -- we had wanted to announce it very close to its period of introduction so that it couldn't be duplicated in the marketplace which worked on one front, but on the other hand, we realized it made it difficult for retailers to implement it as effectively as we would have liked them to have done.

On the other hand, the promotion did have -- it did have some positive effect we believe in net-net it did lift our business, and so we have learned from it.

We will -- whether we will ever repeat that exact promotion I don't know, but that we will continue to do promotions in this promotional environment, of course we will.

So we learned from it.

Some things work better than others.

You know, we learn from it.

Okay.

And, Dale, you talked about ad spend in the quarter.

Can you give us a sense of what you are expecting or what you are assuming in your guidance for the full year?

Yes.

We will see ad spending coming down as a percent of revenue in the back half of the year.

The 14% was well above obviously what we had intended to spend at the start of the year, but as you get into a quarter and midway through the quarter plans change.

It is hard to adjust advertising effectively, but we will dial advertising back some to a more historic level of what we have tended to run, which is in the -- little bit lower than that 14%.

In the low teens as the year goes on.

We will continue to advertise strong in the third quarter, a little bit lower run rate, but still Labor Day is an important time.

So we will still be doing a lot of advertising and a little bit less in the fourth quarter.

Okay.

Well, thanks guys for taking my questions.

Good luck to you.

Thanks.

Thank you.

Our next question comes from John Baugh from Stifel Nicolaus.

Just a couple quick things.

First of all, Dale you made a comment about a 400 basis points increase in -- in some line item, and I did not understand which one it was due to realigning costs.

Yes, the400 basis point increase in operating margin.

So from 2Q to 3Q.

So we were 14.4% in 2Q.

We expect 3Q to be about 400 basis points better.

Obviously, I also said gross margin rate that would be about the same.

So what you will see is improving cost around advertising, other marketing G and A. So in the operating expenses we will see some improvement there.

Great.

Okay.

And then any color on Simplicity?

Looking back on the launch now and where it is placed, rate of sale, any color around the product?

Yes.

It is placed very broadly.

It is essentially rolled out, and as we anticipated we have gained significant slots from it.

And as I said on the last call, our rate of sales of it are not has high as we would have liked, but they are within the bands of what we had expected, albeit it the low end,as a proportion of our total sales.

But all that said, it has not been a blockbuster that it might have been, but we are very committed to Simplicity.

We believe it is an important product, and it is an area that we will continue to focus on.

And then on the International business.

Can you comment on how Europe performed in the context of everywhere else, I guess?

Well, the International business is up quite well as Dale said, and it is across-the-board, but very much so in Europe which as you know is our most important or our biggest single block overseas, and what is very good to see is that the reasons that we are up are those strategic things that we initiated a year ago.

Essentially, where we started to rollout the broader collection of products led by the Cloud, but also invested in advertising in the major countries in Europe, and both those things are really paying dividends.

So it is quite exciting to see what is happening in Europe from our business point of view because it is paying off according to what we had anticipated.

Now we are seeing obviously pockets of some countries which are being affected by the general malaise in Europe, and that is having an impact on our business, but overall not enough to bring down our overall performance.

That said, and as Dale made the point in his comments, obviously we are watching the European macro environment carefully.

We have assumed that there is no -- in our assumptions there is no assumption of a fundamental change in the European macro environment.

We assume that our trends continue as they are into the macro environment continues to be essentially as it is.

I would just add, there, John, the European macro environment has not been good for some time, and we have had pockets of strengthened pockets of difficulty in various markets around Europe that has not fundamentally changed at this time.

The European business is doing extremely well broadly, but there are some areas that have been weak and have been weak for several years.

So unless there is a significant change in the overall trends in Europe, we feel comfortable there.

And I guess my last question, thanks for that color would be back to the US.

Whether all of the competitive environment we have seen has there been any change in cadence from any source in the last couple of months, or is most of the damage that has been inflicted on your Q2 results a result of things that happened earlier in the year?

One of the reasons that we are sticking with the style of guidance just the point guidance, and the way that we are doing the projections using a relatively formulaic approach is because there is still a degree of uncertainty of the macro visibility in the environment.

Now, having -- so that is the first thing that we see.

It is not perfectly clear.

Our assumption is that the impact of our -- of the increased competitive environment is going to continue to affect us and impact us and probably grow as some of the rollouts continue.

Having said -- and we implicitly assume that the initiatives that we are taking are going to counteract that.

So we don't -- what we are assuming is that the sales rate that we saw in the second quarter is going to continue in the third and fourth adjusted for seasonality which implicitly says that there will be continued and increased impact of the competitive environment offset by the initiatives that we are taking.

Great.

Thank you.

See you next week.

Yes.

Thanks.

Thank you.

(Operator Instructions).

Our next question comes from Keith Hughes from SunTrust.

Thank you.

Mark, I want to gets back to your prepared comments where you refer to a comprehensive review of the wholesale and retail prices.

Is that -- the results of that review, will we hear about that next week?

Will it be rolled out over time, how will that look?

You will hear about some of it next week.

It is what it is.

It is what I said, which is that it is a review of every aspects of our pricing strategy.

But some of it you will see.

Some of it is going to be something that will be between us and customers.

Some of it you will see, some of it you won't.

Okay and the promotion on the Cloud Supreme, will we see more individual mattress or individual product groupings promotion for limited periods of time?

Is that what we are going to look at in the future?

Or can you give us any color on that?

I cannot because -- for competitive reasons, obviously.

Part of our challenge is obviously we do not want to talk about promotion to far in advance.

But as I said we will -- what we are going to look as is evaluating promotion effectiveness, and as I said we learn from every one we do, and we will continue to innovate in that front.

We will do -- one of the things about -- like any good promotion is it needs to be news worthy to the consumer and to the retailer, and we will continue to ensure that we will do that or optimize that.

Some will be -- so I cannot really give you any characterization beyond that right now.

Final question you had referred -- you or Dale I cannot remember, had referred in the prepared comments about I guess sacrificing margin in the near-term to get the growth back going in the Company.

Would that imply that promotions would be for a short period of time and then go away?

Or is this something that is going to be kind of a way of life at TEMPUR-Pedic moving forward?

Well, first of all, we are saying, and we are implying by the fact that the margins for the full year are going to be lower than they are for the last year, we are deliberately and for the second half, we are deliberately making a policy that we are going to strive to get growth.

and that is going to implicitly require some investment.

And furthermore, and I would reiterate this before it comes to promotion points specifically, that we are being very specific.

Also that we are going to evaluate these initiatives as they go, and if they are working splendid, and if they are not we will change them.

We are very committed to this.

But now when you talk about promotions, remember A, we have been promoting for a long time.

We have done different times of promotion for years now, and this is a very promotional industry.

And it is something that drives what people call consumer activation.

Consumers move on the belief that they have a promotion to act upon in a short period of time.

So we anticipate that we will continue to do that.

Exactly the design of those promotions, how we implement them, how we implement the customers, we are going to continue to evolve and innovate.

My final thought of question on inventory.

Dale, will we have to ramp back production in inventory with potentially more than sales in the quarter?

Well, we have rolled back production, and we started rolling back production in June, and we had to reduce some hours in the plants.

We had to unfortunately lay some people off in the plants.

We will get our inventory back in the right levels with a bunch of new products coming here in the third quarter.

It may not get completely corrected here in the third quarter as we are adding new products to the mix, but by the end of the year we expect for inventories to be back into a reasonable level for a projected revenue.

Okay.

Thank you.

Thank you.

Our next question comes from Jessica Shaw from Barclays.

Hi everyone.

You mentioned the Simplicity and the promotion impact of your initiatives that you set forth in the first quarter.

I was wondering if you could talk about your integrated add program with the dealers and the nationwide advertising heavy up and some of the impacts or lessons learned and take-a ways you have seen from those.

The integrated advertising is part of the overall thing -- the overall pricing and promotion programs that as I said we are reviewing.

So that is in the bucket of things that we are reviewing, and we will talk more about it in Vegas, but there will be some changes made to that.

We have learned how we can make that even more effective.

I do not want to talk about the specifics on the call right now.

In terms of the heavy-up of advertising, clearly it has the effect of -- we continue to see improvements in awareness and preference for TEMPUR, and we have just conducted an independent research which is just reconfirmed that for us.

So we know that works.

What we are very keen to make sure that happens also is that we -- once the consumer goes to the store that they have a good experience and end up coming in wanting to buy a TEMPUR and end up buying one.

So we are making that we balance both sides of our investment.

Both the getting people to come to the store and making sure they buy when they are in the store.

But as Dale said, and as I said in my comments, advertising is a crucial part of our brand differentiation, and we will continue to invest in it.

Okay.

And then on the International, the context of the kind of underlying macro environments is very helpful.

I was wondering if there is any other observations as far as how the overall mattress market industries are trending and some of those companies like -- sorry -- some of those countries such as the popularity of specialty and other sort of industry dynamics.

Yes.

Well, that varies by markets, Jessica.

That is the great thing about International is every market is different.

Competitors are different in every market.

In terms of specialty in some markets there is no such thing as Spring.

Other markets are similar to the US, five years ago still have -- still primarily Spring.

Other markets are at varying stages in between.

So it is a very mixed bag.

Every market is different.

Even within Europe.

Two countries side-by-side will have a very different mix of products and technologies and competitors from just crossing our little border.

The International business overall -- the first part of your question was about Europe, how the overall mattress market is doing.

By and large the mattress market in Europe has been flat to negative for several years.

Mm-hmm.

And we do not see that changing dramatically one direction or another.

Obviously, we are not seeing a surge of growth right now in the overall market in Europe, but we have not seen a significant deterioration either.

Part of that is we are smaller player.

We are less penetrated in Europe than we are here.

So we are able to gain share there a little bit easier because we are not as penetrated, but we are gaining a lot of share in Europe in every market that we play in and having our strategy that we embarked on internationally and broadly Europe specifically in the last couple of years is paying a lot of dividends right now.

Alright.

Thank you.

That is very helpful.

Thanks for taking my question.

Thank you.

Our next question comes from David MacGregor from Longbow Research.

Good afternoon everyone.

I guess I realize there is a limit to what you want to talk about in terms of specifics, given that most of your competitors are probably in on this call, but is there anything that you can say at a higher level about your commitment to developing RSA advocacy for the brand?

Maybe start with that if anything at all, please.

You are right on both counts.

The limit to what we will say andRSA advocacy is a very important thing.

You are right.

And we know that and it is always been the case.

And we have been-- we talked about it earlier in the year about wanting to make sure that retail and profitability is something we are focused on as we have been improving our cost structure.

We have said more than once for us to make sure that retailers benefit from the improvements that we can make, and that obviously retailers have enormous influence on the advocacy of their RSAs by the way that they structure their commission programs as well as other things.

So that is a very important part of it, but also the support that we provide to the RSAs in terms of training and frequency of calls, I think that we are also investing in, and there is no doubt that in our industry there are two side to this.

And we have the advantage of having the strength which is direct to the consumer, and we want to make sure that we also maintain the strength that we have with the advocacy of the RSAs.

Since our early June call, have you seen any let-up in the levels of spiffing and kind of incentives from some of your competitors to these RSAs?

Well, I mean it's -- no, is the answer.

But on the other hand it is not a very precise science.

A lot of our customers do not allow spiffing.

It is frequently used in some customer in some areas and not in others.

it is ain endemic thing in the industry, and I have not seen -- I do not have any information that tells me it is significantly better or worse.

And finally just with the pull back in advertising.

How do we think about slot productivity in the second half?

I wonder if you could just talk about the puts and takes there as you think about the second half versus first half.

Well, productivity is obviously very important, and that is what we are focused on, and it is the balancing of all the aspects of the marketing mix that is important.

Advertising without doubt is very important, and as we have said repeatedly, even though we will be pulling back in terms of percentages, we will still be spending at a very heavy level and at a very significant level because it is the backbone of our brand and every retailer will tell you that they loving having the advertising becauseit really brings people into the store.

But at the same time, there are the other parts of the marketing mix including in-store marketing and including new product introductions and so forth and promotions and the balancing of all those different things is what we always do, and in particular now as we go forward with these new initiatives we are very focused on doing that.

Thanks, Mark.

Thank you.

(Operator Instructions).

Our next question comes from Brad Thomas from KeyBanc Capital Market.

Thanks.

Good afternoon and thanks for taking my question here.

I want to just follow up on one of your comments, Mark.

You mentioned earlier the key is innovation and, as we have all alluded to in our questions, we know you cannot really tell us exactly what you are going to do.

But can you help us just think a little bit more about how this company is going to operate over the foreseeable future?

I mean should we be expecting multiple bed launches per year versus what historically had been more like once a year once every other year.

How should we think about how you put that innovation into practice?

Well, obviously, -- I do not mean to sounds silly, but I am loathed to say things specifically because of the exact reason that you said, but the way we think about it is this.

Since the day that TEMPUR was introduced, we have been focused on improving the way that people sleep.

That is our long claim to fame is people who sleep on TEMPUR-Pedic sleep better than people who do not.

We have really made this a backbone, and then for example when we introduced the Cloud and it gave such a wide range of people a product that allowed them to sleep better, be better supported and so forth, in a bed that was more comfortable that appealed to what their type of comfort they like.

And I think that the way we characterize what constitutes innovation is those improvements or those improvements to or additions to our product lines that will allow a consumer to perceive an improvement over what they could buy in the marketplace before.

What was available to them from a sleep service?

And so as we think about innovation, what we think about is the constant search for ways to improve the way -- and the quality of how people sleep and how they like their beds.

So what I believe you will see from us, what I know you will see from us is innovation but innovation that is -- that has value to a specific set of consumers and that does what it says it is going to do.

Great.

And then just to follow up on that you in your prepared remarks, Mark, also talked about the claim of some of the gel manufacturers that their bed sleeps cooler and -- and I believe your website now has a study that says that the TEMPUR-Pedic beds sleep cooler than a gel bed.

You Are you in a position where you are there for a limited to not enter that arena of a bed that makes the claim that it will sleep cooler?

Or is there an opportunity to perhaps address that market?

The pivotal thing that we have communicated on the website, we communicated on TV, and we have communicated with pretty much every RSA in the country is the research that has been done by an independent party in Germany very properly done shows that not only do these gel beds not sleep cooler, but that our beds actually sleep cooler than them.

So it is a very important thing.

And we will make sure we continue to communicate that.

From time to time, people have asked us whether we will make a gel bed, and we would not because if it does not work why would we?

So but on the other hand, nothing precludes us from doing anything.

But right now our key focus is on communicating the fact that on this very important thing which seems to be in the ether even though it is not a real issue is one of the -- I think you know this is that heat complaints of sleeping hot such a tiny, tiny percentage of people who actually own TEMPUR.

It is almost negligible, but it is something that ether and has been created to some extent by the focus perhaps of some of our competitors.

It has been important that we just put the record straight on that.

Got you.

Thanks so much and looking forward to seeing everybody next week.

Thank you.

Our next question comes from Joe Altobello from Oppenheimer.

Thanks.

Good afternoon, guys.

Just a few quick questions.

I guess first in terms of new products you are going to launch or introduce next week were those accelerated or was it your plan to always introduced them at Vegas in August?

We have said before that we had products in the pipeline and obviously we did and we do not decide until later in the year whether and when to launch products, and these products were ready to launch, but we decide today launch them now because the environment -- because quite frankly our business has not done well in the second quarter.

We wanted to start to turn the tide back to growth again.

Okay.

So the original plan was probably for a January introduction?

I am not getting into specifics, but yes, there was modification to the plan of what to launch when.

Okay.

Got you.

It says the advertising - - I just want to make sure that I have got this correct.

I think earlier, Dale, you mentioned that you expect the advertising as point of sales to come down a little bit from Q2 in the second to toward the low teens.

And I think in the first half you did about 13% of sales in terms of advertising, and it sounds like you are looking for another 13% in the second half.

Is that correct?

No.

I did not say that.

In the first quarter we did about 12%.

In the second quarter it was 14%.

I said in the back half, it will drop a little bit as the year goes on.

It would be more in the low teens.

Right.

Which is 13%.

Or lower.

Okay.

And just lastly in terms of Simplicity, you mentioned earlier that it was doing well, but it was not a blockbuster.

Why do you think it was not a blockbuster?

Because at the time that we launched the products alot of other products were launched at the same price point from a lot of different people.

Okay.

So it was not anything that was product specific, it was simply new entrance in the marketplace?

I think that was the primary cause.

I mean obviously every product can be -- one can always think -- we always do we are always possibly looking at ways to a evolve our products and we have done it -- there are things that we can learn that maybe could have been done differently, but the fact is the product was tested extremely well.

It is a very good product.

The consumers who have it love it, and the satisfaction rates is extremely high, return rates are very low.

It is a good product.

It is just that it arrived in the middle of a very large launch of products at the same sort of price point.

Okay.

Great thanks, guys.

Thank you.

Our next question comes from Jon Anderson from William Blair.

Good afternoon.

Most of my questions have been asked at this point, but a couple here.

First, Mark, when you talk about and understandably talk about the investments that you plan to make to continue to drive growth are these investments that the consumer will see in terms of pricing are they incentives between you and retailer?

I guess what I am trying to get a sense for as you kind have done a post-mortem on some of the challenges more recently.

Is your sense this is a price sensitivity issue among consumers or more of a retailer advocacy issue?

Everything you said is part of the story and it is either one or the other.

It is a bit of both is the part of the answer.

You will see some of it when you are in Vegas next week, and some of it will not be so apparent, but I cannot go into specifics, but I will say it is a bit of everything.

Is it -- would it be fair to say then -- again you are not going to talk that much about innovation at this point, but given I guess the move somewhat downstream with Simplicity and it is coming I would think below the midpoint at least of your expectations.

Did the innovation you are talking about, going forward would be more focused on what I would characterize as enhanced benefits versus lower price?

Yes.

Although I would say that we are always strive -- yes.

is the short answer.

The long answer is that we are always striving with all our products.

The key importance of Simplicity is to get people who otherwise would have bought a $800 bed to trade up by providing them with enough value and rationale to trade up if they would.

So we always have that in mind.

But yes, but the implicit in your question is yes, we are looking for increased value in terms of how the bed performs for the consumer.

Just a couple more quick ones.

On Simplicity, how many slots did Simplicity gain on average?

And do you expect Simplicity to hold slots here particularly in the face of the rollout of some new products in the second half?

With Simplicity the best thing that we have is always a bit suspect because- - but the best data we have, and it is good data.

It says that on average of the stores of the retailers that carry Simplicity they carry approximately a little bit more than two slots each.

So A, we did gain and net-net a gain for the whole -- for the whole retailers was a little bit more than one.

So we -- and that is counting ones that did not take on Simplicity.

So net/net it has been quite successful from that front.

As we go forward with the new products, you will see also in Vegas that there are new products and there are other changes.

We are anticipating, we are expecting, we are hoping to get increased distribution, increased slots as we go forward in the second half of the year, but we are also very focused on slot productivity.

So we will work with every retailer to make sure that they are maximizing their slot productivity..

So that could mean some changes, but in general we are looking for gains.

Okay.

Last one is just kind of housekeeping.

Dale, I think you mentioned, and I want to make sure I heard you right, in the second quarter there were two one-timers that adds up to about $4 million or $0.6 per share.

Is that right?

Yes.

$4 million.

Okay.

And that was $2.5 million related to an earn-out that is not going to happen and about $1.5 million related to the long-term incentive plan accrual rate.

Okay.

Thanks a lot, guys.

Thank you.

Thank you.

Our next question comes from Joshua Pollard from Goldman Sachs.

Hey.

Thanks for taking my questions.

On the topic of sleeping cool your competitors are advertising in the stores that they sleep cooler than you while you are educating on your website.

That is a good thing, but I am wondering does it not make more sense to make an even cooler bed?

Is that something that you guys can do and is that something that you guys think is worth focusing on from a product standpoint?

Josh, we (inaudible) new products until we launch them.

So I do not want to say.

I am not speculating on that or any other type of new product.

For the obvious competitive reasons that you are obviously very close to.

Okay.

Sounds good.

On your initiatives, can you talk about a couple of things.

Number one, how much should we see in cost out as a result of those?

and You said your guidance includes them, but if it is not touching on any competitive issues, how much you guys are actually spending on it?

and I was a little surprised.

I was expecting some of your initiatives to be focused on your cost of manufacturing.

I was wondering if you could talk about what you guys are doing on your cost of manufacturing and whether or not it is cheaper to buy foam than it is for you to manufacture it.

Yes, Josh.

This is Dale.

Number one, on the cost impact of the initiatives it is included in the guidance.

We are not going to break out how much we put in there related to the enhanced initiatives and products, etcetera.

In terms of cost of manufacturing that is a continuous program.

That is what we have been working on for four years now is continually improving our costs of not only manufacturing but sourcing and distributing our products.

That is the productivity programs.

We continue to get significant benefit.

We believe that we have outstanding cost structure from an overall manufacturing capability standpoint.

We cannot buy our material from somebody else and somebody else would not be able to make our material.

So by being vertically integrated we are able to develop and produce the highest quality material in the world, and we do so very efficiently.

Okay.

A couple of quick ones.

Your margins by region both on the gross and on the operating side?

You will see it in the queue in about a week.

Okay.

The run rate on the LPI C and 1Q versus what you guys are expecting for the rest of the year?

I am not sure what you are talking about, Josh.

Your long-term incentive comp plan.

You said that you had a bit of a reversal there in the second quarter, and so from a modeling perspective I am trying to understand what it was in 1Q.

I know that 2Q will look a little funky because of the reversal, but ultimately trying to see what you guys will -- what will be impact from long term.

I think what you are trying to drive at Josh, is what is G&A going to look like.

So on the second quarter we had essentially $32 million in G&A, but we had as I mentioned two one-offs that contributed -- that impacted that by about $4 million.

The G&A run rate and the balance of the year will be very similar to what it was in the second quarter without the one-offs.

Okay.

That is clear.

And then my last question was just on your debt balance.

I saw one up from 565 to closer to 681.

Obviously I am assuming that you guys tapped your revolver for your share repurchases.

I am wondering should we think about the cadence of share repurchases from here as coming out of cash, coming out of new cash flow, or are you guys willing to put a little bit more debt on the balance sheet?

Well our revolver facility is a $770 million facility, but as I said earlier we have a debt to EBITDA target range, which we have talked about for quite sometime, one and a half to two times.

We reevaluate that on a regular basis.

We did look at that again.

We continue to feel very comfortable with that range.

Part of the reason for that range is to allow for potential disruptions to the business and still be very comfortable.

And so, sitting here today we are comfortable with that range.

We are at the higher end of that range right now.

We will continue periodically to evaluate that range and assess if we want to or need to change it.

Okay.

And the cadence of buybacks -- or let me just ask it this way.

The amount of cash that you guys want to have on the balance sheet what is that level?

We do not have a target in terms of cash on the balance sheet.

I think the thing that you need to understand is most of the cash -- not all but most of the cash on the balance sheet is in our International operations.

Okay.

Great.

Thanks very much, Dale, guys.

I appreciate it.

Thank you.

Thank you.

(Operator Instructions).

Our next question Peter Keith from Piper Jaffray.

Hey good afternoon everyone.

I just want to clarify a comment that was made earlier.

it sounds like next week you are going to talk at the conference about how you reviewed your pricing strategy.

Does that involve both a combination of cutting the retail price of consumers an cutting the price to retailers to offer a better margin?

Is it going to be a combination of those two?

As I said, everything has been considered.

So as we have evaluated we have looked at every part of it.

And at next week's conference some of it will become apparent, but not all.

So I cannot really go into any more details other than to say all elements of what you said have been considered and evaluated.

Okay.

We will look for that next week.

And then just lastly there has been some chatter up there in the channel that the cost of (inaudible) upper end of your product range.

Did you noticeany deterioration on Rhapsody or any of your other more higher priced beds as the year progressed?

We heard the similar chatter and it could be different from customer to customer.

But as we have looked at our aggregate data, and we look at it by the various price slices, one to two, two to three and three to four, three and above, and we saw that obviously has the promotion was running the Cloud Supreme -- well first thing is as the promotion was running it seemed to lift our overall trends to some extent, although it is hard to discern with a difficult trends like we got.

But it seams to be overall positive, but secondly that the decline in other products was sort of essentially similar and that the above 3,000 or the Rhapsody type was no more effective than any other.

Okay.

Thank you very much.

Thank you.

Thank you.

Our next question comes from Eric Hollowaty from Stephens Inc.

Hey.

Dale and Mark.

I realize we are going to get more information on the new products that you will be launching next week, but in the meantime in light of the fact that your most significant recent product launch in the form of Simplicity, or I should say as performed at the lower end of your expectations.

What additional comfort, if any, can you give investors in the meantime that the new products that you are introducing to reinvigorate sales growth will be successful in getting the topline back on track.

Well, one can never be 100% sure of anything.

But a couple things though, is that if you look at our track record over the years, we have had quite a few that have worked.

And as you said Simplicity is not a blockbuster.

But Simplicity is at the lower end of the range of our expectation.

So it has done good for us.

But I would say also that we continue to invest time and money and energy into research of every product that we do with consumers, and I think one of the conclusions one might draw is that if the research that was done on simplicity pointed to it being a much better hit then it turned out to be then, therefore, research is wrong.

That is a very bad conclusion and not one that we come to.

We recognize that what we are always trying to improve the effectiveness and the quality of our research , but the concept of making products that consumers prefer and knowing that they do prefer them because you tested it with them is the backbone of our business model, and it will continue to be so.

So this is what has driven us on every major product we have introduce and it pays dividends.

So we cannot claim to be a 1000%, but we are believers in the fact that what will eventually drive growth -- what always drives growth in the end is providing the consumers something that they value and that they cannot get else where.

Great.

Thanks, Mark.

Look forward to seeing you next week.

Me too.

Thank you.

Our next question comes from Robert Straus from Gilford Securities.

Good afternoon, gentlemen.

Hi Robert.

Just a few questions.

And the first I do want to ask about the Simplicity line, and perhaps I missed it on the call, but what have you learned from the sales that you have achieved?

You have said that Simplicity ended up at the lower end of your original expectations, but it sounds like it still did, okay, not blockbuster but still did okay.

What did you learn from your retailers for the customers who are currently buying that product?

We have learned that for some of our customers it has been really quite successful.

It has been really quite a hit with customers, and not insignificant ones.

I am not going to talk specifics.

But for some it has been quite good.

And they are finding that it does just what we said which is lifting up people who would otherwise spend $800 to a $1,000 on a mattress to go up to go up to $1,500.

Is your sense that the majority of those sales to date is in fact moving that customers base who would look at an $800 mattress to up to that level rather than cannibalize any of your other products.

Is that your experience so far?

Yes.

Again, data is never perfect on this, but we have obviously planned -- we had obviously planned a degree of cannbalization from Simplicity, and it is hard to detect given that the trends levels that we have across-the-board are difficult, but our best estimate standing here today is that the cannibalization of Simplicity if anything has been less than we anticipated.

Okay.

Good.

And could you just remind me where you are in the rollout of that product line?

We are essentially finished.

I mean there is still some more to go, but for all intense an planning purposes, we are essentially rolled out.

Okay.

I would like to turn to the International opportunity that you have.

First I would like to hear some additional comments regarding the trends in Asia.

And then, secondly, regarding Europe,I would like to get a better understanding.

Overall your business in Europe sounds like it is doing quite well compared to what the macro environment is.

In those areas of softness in Europe is that following suit with the macro trends there?

Is that, as we would all expect Greece, Italy, Spain to be weak but the northern countries to be doing better?

I am just curious about that.

On Asia - - Asia is a very broad term for obviously, and we have businesses in several parts of Asia.

But the big ones are Japan, Australia and a growing business in China.

And a smaller growing business in China.

Japan and Australia are very different but both doing quite well.

And China remains small.

We have several other smaller countries, but overall our Asian business is doing quite well.

From a European point of view, you are right that the places that we are seeing the weakness -- I am not going to give you specifics but are the countries that you would expect, and as Dale said a little earlier, this is not something that is just happened in the last few months.

That has been going on for sometime.

Those weaker countries have been weak for sometime.

And where we are seeing the greater strength is again in the ones that you would expect.

Those central developed European countries which have the largest countries which we have been in for the longest time.

Great and just a final question.

In my travels I have come across what I think is a new initiative by you and that is TEMPUR-Pedic corporate retail stores.

I have identified two so far, and I was wondering if you were willing to make any comments about that strategy.

Tell me where the other one is.

I would love to know, but as far as I know there is only one, and that is just opened up in Boston, which is a Flagship store, and what these are is they are brand building.

They are part of our advertising.

Idea is that we will open stores in a small number of select areas where we can really give consumers who tend to gather in great - - in where there area lot of people like malls to gets people to come and try the TEMPUR experience.

And the idea is to build awareness of the brand and give people the opportunity to try it and the expectation is that it will lift sales in the area that surrounds it.

In fact, we have done that in several countries around the world, and we have found that it has worked quite well.

How many of those stores do you plan and -- or are you planning?

And then, secondly, is the mall strategy here specifically because maybe a research or your own internal thought process is that you perhaps are missing some of your customer opportunity with that mall traffic?

Really a marketing thing.

It really is.

One of the things that we have known.

For example when one of our customers have stands county fairs or state fairs where you get a lot of people.

People like to come and try TEMPUR, and so one of the things as I said it is a marketing thing.

It is part of building our brand.

We can -- the stores can be quite an experience, they can fun, they can be something that people enjoy and do almost as a recreation to come and try the different times of TEMPUR beds.

And what we think it will do is a bit like the NIKE store or Apple store is build awarenessof the brand over and above just being a selling tooling.

So it is a very small experiment.

It is as I said, we do it indifferent countries around the world, and in all countries it is a relatively small thing, but in all countries it does seem to work.

Okay.

Thank you very much and good luck.

Thanks very much indeed.

Thank you.

This does conclude our question-and-answer session portion for the today.

I would like to hand the conference back over for any closing remarks.

Thank you.

We look forward to talking to everybody again in October when we host the third quarter earnings conference call.

Thanks for joining us this evening.

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

This concludes our program for today.

You may all disconnect and have a wonderful day.