Tempur Sealy International Inc (TPX) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by and welcome to your Tempur-Pedic third-quarter 2012 earnings conference call.

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

Later we'll conduct a question-and-answer session and instructions will follow at that time.

(Operator instructions)

As a reminder, today's conference call may be recorded.

It's now my pleasure to turn the floor over to Mark Rupe.

Sir, the floor is yours.

Thanks, Huey.

Thank you 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 statement that we make during the 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 Company's expectations regarding sales, earnings or the proposed transaction with Sealy, 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, regulatory, competitive, operating, and other factors discussed in the press release issued today.

These factors are also discussed in the Company's SEC filings including, but not limited to, annual reports on Form 10-K under the heading Special Note Regarding Forward-Looking Statements and/or Risk Factors.

Any forward-looking statement speaks only as of the date on which 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 SEC.

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

Thanks, Mark.

Good evening, everyone, and thanks for joining us.

Before we get into the quarter, I want to make just a few comments about our proposed transaction with Sealy.

We are very excited about the potential for the combined companies.

Together, Tempur and Sealy will have a portfolio of highly-complementary brands, products, technologies and geographic footprints that will provide a robust platform for growth.

We have initiated a process and are working with Larry Rogers and the Sealy team to prepare for a very successful integration once the required regulatory approval is appro -- is received.

I have been very impressed with the Sealy individuals I have met in the short time since our announcement.

Now I'm sure that you understand our constraints in discussing details regarding this transaction so we will focus tonight's call on our third-quarter performance and the updated financial outlook for Tempur.

As I've said before, the competitive environment we are currently facing is very different than anything we previously experienced.

I said that our competitive response would require a broad series of new initiatives and that these would be implemented over a period of time and their full impact would not be expected to be seen until early 2013, and our third-quarter performance is consistent with this.

To summarize, our third-quarter sales overall declined 9% and were down 7% on a constant- currency basis.

North American sales declined 14%, but were in line with our projection of up slight sequential growth relative to the second quarter due to seasonality.

International sales increased 3% and on a constant-currency basis increased 11%.

While our international business once again delivered a solid quarter in what many would consider to be a difficult economic environment, our international sales were below our expectation.

We recorded a $0.03 loss per share on a GAAP basis.

The loss reflects the provision for taxes that we recorded to reflect the anticipated repatriation of foreign earnings, together with transaction costs related to the proposed Sealy acquisition.

Excluding these items, adjusted earnings per share were $0.70 in the third quarter, down 22%.

I'll provide an update on the progress of our new initiatives and then I'll turn the call over to Dale for details of our third-quarter results and the updated financial outlook.

As we indicated on our July 24 second-quarter call and disclosed in an 8-K filing with the SEC on July 30, we launched a broad series of new initiatives at the last Vegas industry show.

They included six new product introductions, five new mattresses and a new adjustable foundation and the discontinuation and close out of two US mattress models.

Also, wholesale mattress price reductions on certain US models to improve the margins of our US retail customers, manufacturer's suggested retail price reductions on two US mattress models and warranty extensions of all of our newest mattress models to 25 years to improve the competitiveness of our products in the marketplace.

And various other initiatives, including customer program and integrated advertising adjustments to realign dealer incentives given our reduced financial year 2012 outlook.

These actions were well received by our retail customers and believed by many to be the appropriate response.

While some of these initiatives were implemented during August, many more have just recently been launched.

Only in September did we begin shipping all of our new mattress models.

Retailer enthusiasm for these new products has been high and our early read is that it appears we've gained some overall slots at our key retailers.

It's still very early.

The rollout of these products is less than 50% complete, but we are witnessing some promising initial signs.

Demand for some of our new products has been greater than we expected, and as pleased as we are by this initial reception.

We are equally disappointed that as a result many of our retail customers are facing order backlogs or allocations due to our supply constraints and we have been moving as fast as we can to very quickly ramp up our supply lines to address this demand and are now beginning to catch up on the backlog and we anticipate the supply will be normalized within the next few weeks.

We launched the new Tempur-Weightless collection featuring the Tempur-Weightless Select and Supreme mattresses that have a unique-to-the-market feel; the support of a Tempur combined with easy mobility of a traditional mattress.

We also launched the Cloud Supreme Breeze, and Rhapsody Breeze mattresses, which optimize the sleep climate to produce an extra cool feel for people who feel that they sleep warm.

While our existing beds are already proven to be cooler than the leading gel foam beds in independent tests, these new mattresses take our cool comfort advantage to the next level, featuring phase change material and proprietary Tempur climate material.

We also introduced the Tempur-Cloud Select mattress at $1,999, which offers consumers a better value proposition than the cloud mattress it replaced.

It is both taller and has an improved cover.

These new mattresses are not only differentiated from competing products on the floor; they're also proprietary and further expand our growing and already extensive portfolio of innovations.

We'll not stop here, though.

Our pipeline of innovative new products remains very robust.

We have several compelling strategic initiatives and product introductions planned for the January and August 2013 Las Vegas industry shows that we believe have the potential to contribute significantly to our overall business in the future.

It's important to note that these new initiatives have come at a price and are more costly than we had initially estimated.

As we communicated in July, our objective is to return to growth even if that requires some reduction of our overall margins in the short term, and our margin performance in the third quarter reflects this.

While our immediate focus remains on returning to growth, we have already identified opportunities to improve margins and will work on achieving these in the fourth quarter and into 2013.

Switching to our international business, growth trends softened during the third quarter, which we attribute to a persistent and weakening macroeconomic environment in Europe.

That said, we continue to perform very well in certain of our key European markets, and our Asia-Pacific business was up strongly during the period, reflecting solid performance in markets like Japan and Korea.

Still, visibility internationally is limited and the environment is more uncertain today than it was just a few months ago.

While we had been expecting double-digit growth to continue for the remainder of the year, given the uncertain economic backdrop we are no longer projecting this.

In closing, I'd like to reflect on where we are today and where we're headed.

Tempur-Pedic was the key driver of change within the industry over the past decade and we've always anticipated that as we grew the specialty category it would get more competitive, and that's what has happened.

The landscape has changed and the new playing field is in the process of being established.

It's a different competitive environment than the one we were in historically.

However, we are not any less committed or less confident in our ability to resume growth and outgrow the overall industry once this new playing field is established.

We have significant advantages, from the strength of our brand, our integrated supply chain, and our expertise in consumer-focused innovation.

Nonetheless, Tempur is currently competing in single area of the market against competitors who have the benefits of scale from competing all segments of the market.

The proposed combination with Sealy will address this issue, allowing the combined companies to compete broadly across the whole market.

With that I'll now hand the call over to Dale.

Thanks, Mark.

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

Let's begin with overview.

In total, third-quarter net sales were $348 million, a decrease of 9% over the same period last year.

On a constant-currency basis, net sales decreased 7%.

North American net sales were down 14% and international net sales increased 3%.

On a constant-currency basis international net sales increased 11%.

Now by channel.

In North American retail, net sales were $221 million, a decrease of 14%.

Our North American direct channel decreased by 15% to $17 million.

Internationally, retail sales were flat at $85 million and up 7% on a constant-currency basis.

By product, overall mattress sales were down 11% on a unit decline of 2%.

North American mattress sales decreased 15% on an 8% decrease in units.

In the International segment, mattress sales increased 1%; on a constant-currency basis were up 10%.

Units increased 10% also.

Total pillow net sales increased by 11% on a 10% increase in units.

North American pillow sales increased 5% on a unit increase of 9%.

International pillow sales were up 16% on a 12% increase in units.

On a constant-currency basis international pillow sales increased 23%.

Sales of our other products, which include items that are normally sold along with a mattress, were down 13% in total and down 16% in North America and down 3% internationally.

On a constant-currency basis, international other sales increased 5%.

Gross margin for the quarter was 49.2%, down 310 basis points year on year and down 140 basis points sequentially.

On a year-over-year basis, gross margin declined primarily due to the following -- product mix and increased promotions and discounts.

These were partially offset by positive geographic mix.

On a sequential basis, gross margin declined 140 basis points as a result of the product mix and increased promotions and discounts.

These were partially offset by improved efficiencies in manufacturing, and fixed cost leverage on higher third-quarter sales relative to second-quarter sales.

As Mark indicated in the opening remarks, our new initiatives have been more costly than we initially estimated.

This factor, along with lower-than-expected international sales and overall product mix, led to third-quarter gross coming in below our previous expectations.

From an operating expense perspective we were generally pleased with the progress we made during the quarter.

We realigned cost to reflect the reduced North American sales projection, as we communicated in July.

Advertising spend in the third quarter decreased 3% to $38 million from last-year's third quarter and decreased 16% on a sequential basis relative to the second quarter.

As a percentage of sales, advertising spend was 11% in the third quarter compared to 10.3% in the third-quarter last year and 13.9% in the second quarter of 2012.

Despite the slight reduction in advertising, we have continued to see positive results with brand awareness and purchase consideration.

We also lowered G&A expenses during the quarter, as reported, after adjusting for the Sealy transaction costs incurred and the benefit from the long-term incentive compensation reduction.

During the third quarter the Company recorded a benefit of approximately $8 million related to grants from the 2012 and 2011 performance restricted share units due to the Company's reevaluation of the probability of meeting certain required financial metrics.

This benefit was offset by approximately $3.6 million of costs related to the acquisition of Sealy.

We continue to invest heavily in R&D, which was up 63% year over year.

Our third-quarter reported operating income was $63.4 million, or 18.2% of sales.

As previously indicated, the reported GAAP financial results include both the $3.6 million Sealy transaction costs, as well as benefit of approximately $8 million related to the long-term incentive stock-compensation plan.

Interest expense was $4.8 million.

The tax rate, however, was 103%.

The tax rate reflects the provision for taxes reported with respect to the anticipated repatriation of foreign earnings, which in total was $42 million.

Without this tax impact the normalized tax rate for the quarter would have been 32.5%.

The $40 million tax amount reflects all of our historic foreign earnings and profits of approximately $350 million.

Per accounting guidelines, it was appropriate to record and accrue for the expense in the third quarter based on the timing of our decision to acquire Sealy.

The cash tax repatriation payment is also not expected to occur until the quarter following the transaction close.

Third-quarter GAAP EPS was negative $0.03 as compared to $0.90 per diluted share in the third quarter of 2011.

Adjusted EPS was $0.70, which as detailed in the press release, excludes the tax impact from the repatriation of foreign earnings and the Sealy transaction costs incurred in the third quarter.

Included in the adjusted EPS was an after tax $0.09 per diluted share benefit from the long-term incentive stock compensation adjustment.

Next I'll turn to the balance sheet and cash flow for a brief review.

Our accounts receivable balance was up.

DSOs were up six days from last year, primarily due to timing.

Inventories were down $4 million year on year, or 4%, principally due to greater emphasis on inventory management due to our reduced sales expectations.

Payables were up nine days, primarily due to the timing as we were ramping production of the new products.

During the quarter we generated $67 million of operating cash flow and capital expenditures were $18 million.

We decreased debt by $32 million to $650 million.

Our cash balance increased $18 million to $152 million, primarily driven by international operations.

Funded debt to EBITDA ratio was 1.98 times.

Now I'd like to address our updated financial guidance for 2012.

Today, the Company lowered its outlook for full-year 2012 net sales to be approximately $1.4 billion.

In addition, the Company lowered its full-year 2012 earnings guidance.

The Company currently expects 2012 adjusted EPS of approximately $2.55.

The Company notes that its expectations are based on information available at the time of this release and are subject to changing conditions, many of which are outside the Company's control.

The Company also noted that adjusted EPS guidance does not include tax provisions expected to be recorded in the fourth quarter in connection with the decision to repatriate foreign earnings, or transaction costs related to the proposed Sealy acquisition due to uncertainty of timing and magnitude of these items.

In addition, the Company's net sales and adjusted EPS guidance assumes the Sealy transaction is not completed during 2012.

In light of the current market and our limited visibility, our updated fiscal-year 2012 sales guidance assumes that our fourth-quarter aggregate sales are a continuation of the third-quarter aggregate sales, although there may be some variation between the North American and International segments as compared to the third quarter due in part to seasonality.

Given the amount of current uncertainty, we feel that this methodology remains the best approach.

Through the first three weeks of October we are tracking to these projections.

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

The Company currently projects gross margins for the full year to decline approximately 170 basis points and expects gross margins in the fourth quarter to be similar to the third-quarter gross margin rate.

The Company currently projects operating margins for the full year to be 18.2%, excluding the $3.6 million of transaction costs.

In the fourth quarter of this year we are expecting operating margin to be approximately 16% as we continue to roll out new products and we'll have a full quarter of the new initiatives.

We currently anticipate interest expense for the full year to be approximately $18 million.

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

We now anticipate the full-year tax rate, excluding APB 23, to be slightly 32.5%.

We continue to expect an average of 63 million shares for the full year based on the current share count of 61 million.

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.

Understood, sir.

(Operator instructions) Our first question comes from the line of John Baugh with Stifel Nicholas.

Please go ahead, your line is open.

Thank you and good afternoon.

If we could start with the gross margins and talk a little bit about some of the puts and takes.

Was there much of a change in production or capacity utilization, and then maybe comment on raw materials and then comment on how the incentives or wholesale price reductions were impacted in the gross margins?

Thank you.

Yes.

Obviously when -- in the second quarter when the business slowed down we did curtail production.

Production was curtailed.

If you recall from the second-quarter call, inventories were high.

So, we continued to curtail production part way through the third quarter.

As we got a little bit further into the quarter we started ramping production back up a little bit, and ramped it up even more going into the end of the quarter as we started to produce and ship the new products.

So, from an overall productivity standpoint, capacity utilization dropped a little bit and then returned as the quarter went on.

It's not a big factor.

In fact, from an overall productivity standpoint, we still were able to deliver positive productivity in the factories, but not at the rate that we have experienced before, or that we would've expected earlier, just because of the lower volumes.

Also a lot of our effort was redirected to getting the new products going, as opposed to improving the cost position of other products.

From a commodities standpoint, John, there really was not any change, commodities were not a factor one way or the other in the quarter.

Commodities have been pretty stable for some time.

As we said earlier, if we look at the mix of the Business in terms of the gross margin impact, about 40% of the impact was related to mix, about 40% is related to pricing actions, and then the other 20% was related to the floor models that went out.

We did have more floor models going out than we had originally anticipated of the new products and those were, as we said earlier, partially benefited from the productivity initiatives.

But the other factor that plays in there was the geographic mix was not what we expected.

We did expect international -- while international had a good quarter, we did expect international to actually do much better than it did.

We saw the trends in Europe change, and so that's been reflected, not only in third-quarter actuals but also in our outlook for the balance of the year.

Thanks for that color, Dale.

You mentioned the implementation of a lot of these things is still ongoing in the third quarter.

So, as it relates to incentives with the dealers, is that something that accelerated as you went through the quarter, and would therefore have more of a negative impact in the fourth quarter?

Or that they worked through pretty much in the third quarter?

Yes, John, the -- there is going to be a greater effect in the fourth quarter because they were implemented in the third quarter, but they weren't all implemented in the beginning, so I would anticipate a certain -- there will be -- as we have projected out there's going to be a greater impact in the fourth quarter.

It's more of a run rate -- more of a full-quarter effect than it is of a change of the run rate.

Okay.

And Mark, you'd made the comment about stab -- sales stabilizing with some of these changes, could you quantify that, or what does that mean precisely?

In the US sales in the third quarter are essentially up a little from the second quarter, which is what we had -- what we were projecting to do, so we had stabilized the decline and we got the degree of a little bit of seasonality that we had anticipated.

And as we look forward we said -- the first period of October Dale said has been consistent with the projection, which is also a continuation of this sort of steady state, so that's what we're saying about stabilizing.

And my last question quickly is on advertising.

As you think about ad spend in 2013, is that going to be a source of leverage to earnings?

We're not going to talk about the specifics of guidance for next year, so I can't get into that level of detail.

But what I will say is that advertising is going to remain to be an important part of our Business going forward.

I do not see it being a source of great leverage or a source of great costs.

Thank you.

Dale, you had something you wanted --

Yes, I just wanted to add a couple points there on the stabilizing.

Obviously, John, if you look at just the North American business, it shows that it was down more in the third quarter than it was in the second quarter but it's down not as bad as the trends at the end of the second quarter.

And as we're leaving the third quarter the trends are better than what they are reflected for the full quarter, so our expectations for the rest of the year would be that the North American business, it's still going to be negative but it's not as negative as it was in the third quarter.

We're seeing improv -- by stabilizing what we're -- what we mean by that is we're seeing, while still negative trends, those negative trends improving some.

Great, thank you for the color.

Good luck.

Thank you, sir.

Our next question in queue comes from the line of Budd Bugatch with Raymond James.

Please go ahead, your line is open.

Yes, I have a few questions, good afternoon.

Just making sure on the adjusted EPS that the only two items that are adjusted in there are the tax provision on the repatriated funds and the transaction costs related to the deal so far?

Correct.

And the $8 million of savings that came from the recalibration of the LTIP, I take it that that money will actually show up again in the fourth quarter, and so that benefit will not recur, is that right?

That benefit will not recur, correct.

But we're calling it out because it was important in the quarter, but we historically have had to make LTIP adjustments up or down at various times as we've reevaluated our position on those programs.

Okay.

I hate to beat this horse, but I think I'm a little confused on the stabilization issue.

You had sales down domestically down 14%, and you said that the trends at the end of the quarter were not as bad as the trends at the beginning of the quarter.

What does your guidance imply for domestic sales year over year for the fourth quarter?

The guidance would imply domestic sales being down in the neighborhood of 10%.

Okay, all right.

On the accounting for the tax of the repatriation, make sure I understand that.

You basically tax effect all of the embedded earnings that have not been taxed before to bring back the cash?

Correct.

And how many cash are you planning to bring back from off-shore in that number?

From a book standpoint we recognize a $42 million expense and that's related to $350 million of not-previously taxed foreign earnings and profits.

So, sitting here today you would expect that we would bring back at least $350 million over the next few years.

However, we will be and we are looking at opportunities within the -- because of the acquisition, to enhance the efficiency of our international tax structure, and we believe we might could do better than that but we'll -- as time goes on and we get that firmed up we'll let you know at a future point in time what that could look like.

So you could be right dollar for dollar of the repat -- the taxes -- of the income so taxed?

Correct

Is that what you're saying?

Yes.

Okay.

When you put the inventory down, and the inventory was down nicely, obviously that had some impact on the gross margin.

Can you quantify what that might of had in terms of inefficiencies of drawing down the inventory?

Is there any way to look at that on a ongoing basis?

Well, I think the important thing, Budd, is it was early in the quarter, and by the end of the quarter production was back up at a more efficient level.

It was not a material thing, it was built into the productivity, which was an overall benefit.

But certainly, as we were getting to the end of the quarter building the new products, starting to get those shipped, that caused production to the back up a little bit.

In fact, inventory ended a little bit too low.

As Mark mentioned, we've had to allocate some of the new products, but we're getting out of that hole here in the next couple weeks.

All right, but that would also imply probably a mix variance that was not positive, too, because as you develop new product that takes a while to learn that make that product efficiently, would that be a fair assumption?

Right, two negative mix issues there, but you've got, A, floor models going out.

Obviously the floor models are discounted at 50%.

You also have parti -- not all new products cause mix problems, but new technologies cause mix problems and there's a lot of new technologies in these new products and there's a learning curve on those.

They're never real efficient when you first start making them so as time goes on and you produce more of them you get more efficient and you find ways to improve the cost of those over time.

As we go forward into next year and start getting down the learning curve we would expect to see some good productivity on the new products that we've launched here in the last month.

Okay, I have just two quick other questions.

Your DSOs were up I think the 42 days if our calculation is right; up six days.

You said that was timing, there's no additional terms being granted to your dealers?

No, no change in terms.

It really was a function of the -- as we got to the end of the year, you've got -- I'm sorry, the end of the quarter.

September was better than the other months of the quarter.

Plus you had those floor models going out.

That's good to hear that that's a September issue, I hope that continues.

And finally, the new ad I saw on the web, Love Waking Up, what does that imply for the As Me campaign and will we see that Love Waking Up campaign exported more to the general broadcast media?

The primary advertising on -- for the next little while is going to continue to be Ask Me and the fundamental premises of Ask Me are going to continue going forward.

We plan to evolve our advertising in the first part of next year, and we'll talk more about that at the appropriate time.

Okay, good luck on the quarter.

Thank you, sir.

Our next question in queue is Keith Hughes with SunTrust.

Please go ahead, your line is open.

Thank you, a couple questions.

You referred to the allocation issues on the new products.

I assume that was all new products, I guess that's number one question?

And then number two, with it being rolled out in such limited numbers at this point.

I was surprised that was a problem, can you address that?

It's not -- when we rolled it out we had anticipated -- it has always been anticipated that these products will be a broad distribution and as we -- in general we have a sequence of rolling them out in stages, and we were following that normal sequence and the sales sell-through has been higher than we had anticipated, so reorders were quicker than we anticipated.

And so what we have done is, as a temporary measure, is stop the rollout to the next wave of customers.

Obviously, it's frustrating for those customers but we felt that it's less frustrating to having product on the floor, which they can't get for customers.

And then unfortunately there are some of our customers who are in that situation, and as I said, we're moving heaven and earth to get this fixed.

It's not something we're pleased about and we're addressing it as quickly as we can, but we do believe we'll have it sorted in a couple of weeks.

So, it's an issue and we're not happy about it but we're working hard to fix it.

But it is related to the new products?

Yes, sorry, it is the new products we're referring to here.

Do you have an estimate of when you'll continue to roll out, or when will it be done, maybe is the question?

I don't have the detailed plan, but I anticipate that we'll be sort of switching it back on again in a couple weeks.

Okay.

And a question for you, Dale.

With the revenue guidance and the flat sequential gross margin, it seems as though the EPS would be higher than what $2.55 for the year would imply.

Is there anything below the line that's unusual that's going to be affecting the quarterly number?

No, the only thing unusual below the line on the quarter you have a net benefit of approximately $4 million between taking out the $3.6 million of transaction costs and the LTIP benefit.

We are continuing to increase our R&D spend because we have a lot of very good programs that we're pushing to bring to market early next year and other programs that are doing a lot of work on that are slated for mid next year.

From an overall standpoint, one of the issues, Keith, is versus our prior expectations from a revenue standpoint, the revenue change is international.

The third-quarter international was less than what we expected and fourth quarter we're -- a significant impact around International.

The International, particularly things that are more tangible, more, quote, variable, become a little bit less variable in the short term as the commitment timeline around advertising is longer internationally than it is domestically.

So we're already -- by the time we saw International, particularly Europe, slowing down a little bit you are already committed for the quarter, so we're not seen a lot of movement on expenses in the International business with the revenues slowing down there in the short term.

That said I would add one other thing is that we talked before about the fact that the International business does react well to the advertising, particular in Europe, we've seen that this year.

What we're seeing in Europe is very different than what we have in the US.

It's not competitive situation, it's a macro situation, and that our belief is that the ROI on the advertising, it remains good.

So while we're being cautious about it, we believe it's -- the most appropriate thing to do is to continue to investment.

Is the -- again in the near term until that takes hold is you're expecting the guidance International to deteriorate further in the fourth quarter?

No, we think that we've got -- from what we can see the trends Internationally, we've got that reflected well in the guidance.

Thank you.

Thank you.

Our next question in queue comes from the line of Brad Thomas with KeyBanc Capital.

Please go ahead.

Yes, thank.

Good afternoon and just to follow up on that last line of questioning in Europe.

What did the international trends look like as the quarter was wrapping up, and can you give us a better sense of what you would be looking for?

And in constant currency are we still an environment where you guys are going to be able to do positive sales growth?

From a projection point of view we're projecting essentially flat give or take in the constant-currency basis.

The projection is essentially flat in a constant-currency basis.

It's just a reflection of a slowing down that we saw at the end of the third quarter.

We think it's appropriate to project that for the fourth quarter.

Great, and then just along that same vein, Mark.

The Cloud roll-up -- rollout in Europe has really been a big success as it was in the US.

Can you just talk about slots in Europe, and are we going to continue to slot growth there?

There any other things you can drive to drive more organic growth in spite of the slowing environment?

Yes, first of all, yes, we are going slots and we are growing doors and also -- and I know you know this but it's not just Europe, our internat -- our Asian business is growing very well.

For example.

Korea and Japan are both growing very well.

And in Europe, in particular, advertising is quite an effective tool and continues to be.

And I think that is important to recognize that even in this strict environment we grew 11% in the third quarter in Europe.

It's just that we're -- we all of us can see the macro environment is tough.

We believe the fundamentals for Tempur-Pedic and Tempur-Pedic's relative growth and Tempur-Pedic's market share are going to continue to develop.

That is not something we see changing, it's more of a reflection of the overall Business.

Great, and if I could just ask one more question around the US business.

Is there any color that you can provide around the price points.

If we look back at your actions during the summer you lowered the prices on the Simplicity line, you exited the Contour model, you improved the Cloud model, all price points $2,000 and below where you really make some actions.

Was that where you've seen the greatest pressure, or is it really across the whole line?

Any more color would be very helpful.

Our USV has gone down and if you break it down the fundamental reason why, the addition of Simplicity is clearly the biggest one.

There was the adjustment to the Cloud Supreme price, which has had some effect, too.

But the decline in our Business is relatively broadly spread across the different parts of the Business, relatively even.

And I think what we're focused and I know a lot of customers are, is they are focused on making sure that the $2,500 and above segment of the market continues to grow for the whole industry, and that's an area where we're -- obviously, we're very focused on maintaining growth.

One of the advantages of the new products that we just introduced, the Cloud and -- sorry, the Breeze and the Weightless, they are providing consumers and retailers new products at those price points, which are raising the AUSP for the industry.

Very helpful.

Thank you, Mark.

Thank you, sir.

(Operator Instructions) Our next question in the queue comes from the line of Jessica Schoen with Barclays.

Please go ahead, your line is open.

Good afternoon, everybody.

Just following up on the question regarding the price points.

I was wondering, as you start to see some of the pressure moderating, is there any particular segment in your range of products where you see that stabilization coming back quicker than other parts?

And is there any particular initiative you can point to that you have seen really have the most impact?

No, truthfully not really.

It is spread across the whole of our line and the initiatives that we're doing, particularly the advertising and promotional things, are aimed across the board.

So, not really is the answer.

And then as far as the implication of the recently -- the pricing on the recently- introduced products, for gross margin in the fourth quarter is there anything to be aware of, or anything assumed in your guidance?

Can you say that again?

Sorry.

The pricing of the recently-introduced products if there's any implication of that on gross margin in the fourth quarter that we should be aware of?

Not on price -- from a pricing point of view, but from -- as Dale was saying earlier, like they have a lot of new technology in them and as a rule a new product with a new technology generally has -- we haven't gotten down the cost curve as much as we like on some of our more established products and therefore they generally have a slightly lower margin and that is the case for these products.

Okay, great, thank you for taking my question.

Thank you, ma'am.

Our next question in queue comes from the line of David Macgregor with Longbow Research.

Please go ahead, your line is open.

Hi, this is Josh in for David Macgregor, thanks for taking my call.

Just a joint of clarification, did you say the $2,500 and up price point was still growing?

No, no, no.

Well, I didn't say that and it may be -- but frank -- I didn't say that and if I did I misspoke, because I wasn't [looking] for the whole industry.

What I said was saying is it's an area of focus us and for the industry.

Okay, thanks for that.

With the Weightless and the Breeze you had some allocation issues, could you say was it the Weightless or the Breeze that was on backlog?

It was a bit of both, but it was -- the Breeze was the primary one.

Okay.

And is that an indication just that at this point in time it's selling better, or was that due to the some other reasons?

It's early, and we're in the middle of a rollout, so it's not just a question of how well it sells but how well it sells against the forecast of the rollout schedule, so it's a little bit hard to read.

Having said that, all indications are it's selling a little better than we expected and we're pleased about that.

And then just a final one the drop of the price of Simplicity.

Now have you noticed any change in sales since that was implemented?

Do you think it's better succeeded in moving people up who would have spent $800 to $1,000 maybe moving up to that $1,399 price point?

It's hard to tell, frankly.

But we think that there is some benefit.

And the Simplicity has not been the big success that we had hoped it would be, but it is still a material part of business and we think that the pricing has had some effect.

Okay, now if I can just squeeze one more maintenance question.

Can you give us update on your door count for the US and international?

Yes, let me see if I can read it.

North American doors, furniture and bedding, 8,200.

International -- is that right?

International's 5,600.

And about 400 of those in Canada, is that still about right?

Yes, about 400 in Canada.

Thanks for taking my questions and good luck.

Thank you, sir.

Next in our queue comes from the line of Joe Attobello with Oppenheimer.

Please go ahead.

Thanks, good afternoon.

First, in terms of competitive environment obviously you've had a pretty sizable influx of competitors and they've been pretty active on the promotion side throughout most of this year, well into the summer.

Have you guys seen any slowdown, or pull back on their part in terms of level of dollars that's in the trade at this point?

No, I can't say.

As we've said, there's been a degree from our perspective of stabilization, but there continues to be -- it continues to be a very competitive environment and we can detect no funda -- I can detect no fundamental change at this stage.

Okay, and just to follow up on that -- on a related topic here.

You mentioned earlier that the initiatives you're seeing -- or that you're implementing have been more expensive than you thought, could you drill down as to why that is?

Is it that the price reductions that you put through did not drive the volumes you thought, or is it that the -- you had to increase the level of price increases and promotion activity throughout the quarter?

If you can just give a little more color on that point that'd be great.

When we sa -- I will, and two pi -- first of all, when we talk about the new initiatives we always are including the new products, and the new products because of what we've been talking about in terms of the cost of production have been more expensive than we had anticipated when we first projected what they would be.

So part of the cost of is the cost -- the relative cost to us of the new product.

The other part, though, have been the promotions and the things that we've done with retailers and we're learning how to do it.

One of the things we said on the last call was that we were going to do initiatives with different retailers and in different areas of the country and then we were going to measure them and calculate ROIs and work out which ones worked the best and which ones didn't.

And we're doing just that and we're learning -- frankly we're learning as we go and we're going to get better at this and it is part of the world that we're competing in now.

But, quite frankly, some of them have been less -- given it to do again we wouldn't have done some of them, but on the other hand some worked doing quite well, and we're learning that.

So, this is part and parcel of learning as we go here in this new world.

Okay, just one last one, if I could.

In terms of the International business, you mentioned trends seemed to weaken a little bit and that was related to the macro.

Why do you think it to this long for the macro to start to impact you guys, and are there additional distribution opportunities there, or are you guys really where you want to be at this point in terms of Europe, in particular?

Well, remember that our penetration in Europe, in particular, our distribution is really quite good, in terms of the number of doors that we have.

There are clearly some opportunities.

Country by country we can always talk about one or two of the areas that we think there's an opportunity for us grow in distribution.

But obviously, we are -- growing slots is a big area of focus, which is why the Cloud rollout has been successful and the Sensation, which is essentially the -- to a large extent can be described as Weightless of Europe.

Those two product lines are enabling us to increase our slots.

And awareness is the big one, which means -- which drives the turns in those areas and those are the three areas that we are very focused on.

And they continue to seem to be effective and continue to show up to make us believe that the penetration, which we have in Europe right now, which is much lower than it is in the US, can get significantly higher.

In terms of why the macro environment hasn't affected us as much yet, I think partly because we haven't -- we're not seeing it because we have been growing.

So we're sort of a little bit -- we're not seeing what the line trends are because we're doing quite well.

And what we're seeing now, as I said, it's still sporadic.

It's not like a fundamental across the board, it's just a general sporadic weakening, which is causing us to be a little cautious looking forward.

Okay, thanks, Mark.

Thank you, sir.

Our next in queue is Joshua Pollard with Goldman Sachs.

Please go ahead, your line is open.

Thanks for taking my question.

First, I would love to understand why Tempur-Pedic is focused more on growth than on margin.

From a returns perspective it seemed like margin pays more from a returns perspective to shareholders, and I'd just love to understand the strategy?

That's a fair question, Joshua, and the answer is this.

As we have said when the environment changed, for us quite dramatically earlier in the year, that what we were going to do was, that we believe very fundamentally that specialty is going to continue grow, and that we're going to be in a very strong position to grow in specialty.

Firstly because of our strong brand name, secondly because of our cost advantages because of our vertically-integrated supply chain, and thirdly because of our focus on consumer innovation.

So we believe that the specialty category is going to continue to grow and that we are going to grow -- we should grow as fast -- we should grow faster than it.

So we're very -- key it was very important for us strategically for long term (inaudible) to have a strong and growing position on these large markets.

But what has ha -- but given the environmental changes that we had to do, we had to approach this very quickly and we decided -- and we said at the time that what we were going to do was step one, we stabilize our Business because we were declining very fast, we had to stabilize our Business.

Step two was to workout and implement plans that would drive growth.

And step three would be to continue to our put our foc -- we should put back our focus on productivity and cost improvements to get our margins back.

And so, we have very deliberately and strategically approached it this way, because we believe in the long run we're going to have the greatest return for shareholders having a big and thriving business with a very good margin than we would be if we would've just pulled in our wings and allowed the situation to do what it's doing.

It was a very conscious strategic decision, one that -- obviously your question is a fair one, this is the way we decided to approach it.

Okay.

Have you guys considered cutting guidance, given what's happening both on the competitive side and just a limited visibility?

You take a look back to 2004, 2005 timeframe and as you guys are going through different struggles at that time, there were a number of different cuts to guidance.

Are you guys committed to giving guidance on a go-forward basis?

Generally we think it's a good idea and helpful to give you our thoughts.

However, that's something that gets evaluated from time to time.

But we're giving guidance today, and so that's still what we're doing.

Okay.

You guys talked about the benefit of scale in competing across the whole market.

Can you somehow quantify that, or least give some more qualitative color around that?

I know you guys are changing your approach to the Business with the Sealy acquisition, but I'd love to understand what the real benefit is of competing across the whole market?

Well, there are several benefits.

One of the obvious ones is that the raw materials of companies across the industry are very similar, so there's opportunities for manufacturing and purchasing savings across (inaudible).

Another big one is distribution.

Although different products are made and targeted at different consumers, they can be carried in the same trucks and delivered to customers at the same time, again an efficiency.

So there are areas of efficiency and there are also areas of benefit from, for example, shared R&D that can work across.

And so we think there are quite significant benefits of working across the whole.

Okay.

And then when you -- can you talk about the average hit to margin from bringing a new bed to the market?

You are bringing new products to the market much more quickly than you used to and so there's always a lot of talk about the impact from rollouts and distribution, so what I'm trying to understand is, what impact were you guys seeing once a year that you'll now see somewhat closer to twice a year?

I can't put an exact number on that and the answer -- because the answer is it will depend.

And so I can't give an exact answer but it will depend.

And it is a cost.

And I think that one of the things that in this new environment we will continue to be innovative.

We know that thing that really drives growth is innovation in this industry and as it becomes more competitive it's going to be necessary for us to innovate more frequently.

We have been innovators and we continue to be.

Getting more and more efficient at doing this is something that we're going to always the focus on.

But that is the price of poker in this new world.

Okay, very last question.

ROI on advertising, can you tell us what it was and what it is today in this new world?

I'm just trying to understand.

You guys have very high awareness, and so I'm really trying to understand what the ultimate benefit is of an additional dollar of advertising in quantitative terms?

I think - as soon as you get that, that will be very valuable to a lot of people.

It's a hard thing to do.

If you do it in -- Internationally, in Europe, in the countries where awareness is very low, one can actually over a relatively brief period see lifts in sales can be attributed to advertising, and it is a very relatively easy calculation.

In countries like the US where awareness is quite high, it's a different thing.

What it does drive is it drive is it drives -- it doesn't drive awareness as much as it drives propensity to buy and frequency of purchase and it is a -- one of those things that is valuable, and we know it is, and obviously all the companies that are effective market would agree, but furthermore, it's not something that has a return that happens the day you do it.

It's not like you do it on Monday and you get a benefit on Tuesday.

It is beneficial over doing it over time.

So it's we are focused on, it's a very important part of our business mix but we are confident that building our brand is the key to ongoing success.

Thank you, sir.

Our next question in queue comes from Peter Keith with Piper Jaffray.

Please go ahead, your line is open.

HI, thanks, good afternoon, everyone.

I just had two questions.

First off, on the sales cadence for the quarter, I guess some of the chatter that we hear out in the industry is that Tempur-Pedic does pretty well on the off promotional weekends, but on those promo weekends, like Labor Day, when the competitive environment steps with a lot of competitor TV commercials, that's where you guys see a real weakness.

And I guess if that's the case it might explain why your sales had improved towards the end of the quarter.

Is that a fair observation for what you guys was in the third quarter/

Not really in the sense that first of all, our Business follows cadence of promotional weekends so that is -- we do also have a sales cadence that looks like that of the industry.

Now the truth is historically a few years ago we used to promote a lot less frequently and, therefore, then in those days it was more true like you described, but it's less so now.

However, we are still a Company as a proportion of our total marketing, obviously we still allocate a large portion of it to the direct to consumer and therefore we have less of a promotional vent than do some of our competitors.

And this is something that we are -- we're kind of tweaking as we go forward, because as we become -- as we said, we're putting more programs to be retailer and promotional targeted, and that does imply that we're working more on -- that we're increasing our effectiveness in some of these promotions.

So, I would say that fundamentally it's not true, but it is an area that we can improve upon.

Okay, and maybe if you could just follow up on that.

Mark, I appreciate the answer.

With the sales improvement that you saw, is there something that you could point to, whether it is a particular new initiatives that are working, or with the rollout of the new beds that picked up, was there something that was a main driver, or just general improvement overall?

I think the new products are contributing, but I also think that -- as I've said, we are doing effective programs with different dealers, and there are areas where it's clearly working.

And so we've got to give this more widespread but it is clearly working in some areas.

Okay, that's great, and then a separate question real quick.

On the long-term incentive compensation adjustment -- and I know it's clearly a painful adjustment for you -- so right now you would not anticipate that as adjusted as reflected on your on your guidance, but I guess there is further down side to your numbers, whether Q4 or 2013, is that also something that could turn up from time to time in certain quarters again?

Well, yes, if you look at it our [Allsup] programs are three-years program so 2010 program is still in place, there's two months left on that.

So we have an assessment of where it will be and could that change?

Yes, it could between here and the end of the year, but that one's almost over.

2011 and 2012, there's two components to these programs.

There's an option component and then a PRSU, performance restricted stock unit component.

The PRSU component of these programs is variable.

There are a number of metrics that have to be met for those programs to vary and they can -- the variable component of it can be terminated.

But based on the business performance this year, the 2011 and 2012 variable component of the LTIP programs are no longer on the table.

We broke the minimums.

Okay, thanks a lot for the feedback, Dale, I appreciate it.

Thank you.

Next questioner comes from the line of Jon Andersen with William Blair.

Your line is open.

Good afternoon and thanks for taking the question.

I understand that the new products as you roll those out, the Breeze and Weightlessness, that the initial costs are perhaps higher than on some of the existing lines.

How quickly can you get up to comparable margins in those new product lines?

Is there -- do have some visibility on that?

It depends.

Dale said it's a little early.

He said it depends on the degree of new technology and both of these new products have new techno -- significantly new technology for us.

So, A, that means they're from a higher hurdle and, B, it means that we've got a longer path to go down before we can get them down to comparable prices.

There's no single rule that applies to everything, but it's going to take a little while.

I don't want to an exact number on it, but this is not something that's going to get fixed in six or three months.

It'll get better but it'll take time.

Is there reason to believe that these new products with the new technologies you describe, Mark, you cannot reach gross margin profiles in line with the balance of the portfolio over time?

In the long run that would be the intention.

We always -- that's what we always target, but as I said, it takes time and it'll take more time for newer things.

Okay.

And then in terms of the backlog that you experienced in the third quarter, how much did that cost you in terms of sales and do you expect to largely clear that in the fourth quarter?

You mean backlog of new products?

Yes, the backlog.

I think you said were --

No, that was essentially within this -- that's relatively recent, that hasn't had any significant effect on the third quarter.

Okay, fair enough.

Just for clarification on the G&A run rate, it gets to an earlier question.

Dale, is it fair to assume you've been at around $36 million or so on a quarterly basis, if you X out the benefit of the -- or if you X out the LTIP adjustment and you're in the net range, as well.

Is that a good way to think about the G&A run rate going forward?

And you're including R&D in that?

Yes

Yes.

Last question, guys.

I know you can't talk much about Sealy, but is there any reason to believe that the acquisition of Sealy and the combination that could being more discipline to the industry in terms of pricing and promotion, because it sounds like it's still quite aggressive at the moment?

Thanks.

No, we've said that we think that the potential value for us and Sealy is this broad portfolio of products and brands and technologies, and, obviously, there is some potential cost synergies, as I described a little earlier to previous question.

That's the way we're thinking about it going forward.

Okay, thanks a lot, guys.

Good luck.

Thank you, Sir.

And we do have time for one final question.

Our final question comes from the line of Eric Hollowaty with Stephens, Inc.

Please go ahead.

Hey, guys, earlier this year you opened your first Company-owned and branded store outside of Boston and we've heard through the grapevine that a couple of others are in the works.

I'm wondering if you could just give us update on what you've learned from the opening of that Boston store so far, and how you're thinking about the Company-owned store angle as a strategic thrust going forward?

Thanks.

These stores are -- we call them flagship stores, but they're marketing stores.

The purpose of them is to put Tempur-Pedic in a showcase in a place where there are a very large number of people who generally are not considering buying a bed.

That's the idea of these things.

We're going to have probably three in the -- we're opening another one very shortly and we'll open another one in the beginning of nex -- in the first half of next year, so we can see our way to about three right now.

And they're still an experiment and the test that we're running with them is not just that they're successful as stores in there own right, but moreover the volume of the business in the geographic area surrounding the store is lifted by them.

And we've experienced this in Europe where we've put some stores like this and it really does have an effect, it raises the awareness.

And if you think about it, people buy beds only once every 10 years and when they do, they -- they're only thinking about it for a very short period of time.

What we know is that a very small proportion of the population has ever tried a Tempur-Pedic because everybody -- pretty much everybody's heard about it, very few people have ever tried one.

If it's in a nice environment in a mall, like these ones are, it gives people that opportunity.

And so what we're learning from this store that's been open a few months now is that that seems to be true.

We seem to be getting a pretty good number of people coming in and just trying the beds who had no knowledge or intention of buying a bed in that period.

Our sales are within the range of what we had hoped for to be able to cover the cost.

And so far the experiment seems to be going quite well.

We're also learning, obviously, other things, like managing a store and so on, but I'm pleased with the process that we're making.

Obviously, another part of it is it's not just bedding, it's accessories and it's the other parts of that.

But we're learning quite a bit, I'm quite pleased with how that experiment is going.

Thanks very much, Mark.

Thank you, sir.

And with that I'd like to turn the program back over to Mr. Sarvary for any additional or closing remarks.

Thank you and we look forward to talking with you all again in January when we host the fourth-quarter earnings conference call.

Thanks for joining us this evening.

Thank you again, gentlemen.

Ladies and gentlemen, this does conclude today's program.

Thank you for your participation and have a wonderful day.

Attendees, you may disconnect at this time.