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Operator
Good day, ladies and gentlemen.
Welcome to the Tempur Sealy fourth-quarter 2014 earnings conference call.
(Operator Instructions)
As a reminder, today's conference call is being recorded.
I would now like to turn the conference over to Mr. Mark Rupe.
Sir, you may begin.
- Analyst
Thanks Candace, and good evening everyone.
Thank you for participating in our 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 provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that forward-looking statements, including the Company's expectations regarding sales, earnings, or adjusted net income, or the integration 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 and the Company's quarterly reports on form 10-Q under the headings special note regarding forward-looking statements and/or risk factors, as well as the Company's press releases.
Any forward-looking statement speaks only as the date on which it is made, and the Company undertakes no obligation to update any forward-looking statement.
The press release which contains reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures, and information regarding the methodology used for constant currency presentation, is posted on the Company's website at TempurSealy.com and also filed with the SEC.
As a reminder, we are hosting an investor day in New York City on February 18.
The event will begin at 10:00AM and will include presentations from our CEO, Mark Sarvary; our COO, Tim Yaggi; as well as our President of International, David Montgomery; and our CFO, Dale Williams.
If you're interested in attending, please send an e-mail to investor.relations@tempursealy.com.
Attendance must be confirmed in advance.
With that introduction, I will turn the call over to Mark Sarvary.
- President & CEO
Thanks, Mark.
Good evening everyone, and thanks for joining us.
Today I'll provide a brief overview of our performance in the fourth quarter and full year, and will then discuss our plans and outlook for 2015 and beyond.
Dale will then provide details on the fourth-quarter and full-year financial results and 2015 guidance.
We ended the year with a solid fourth-quarter performance.
In the US, both Tempur and Sealy sales grew double digits, and all five of our US brands grew in this period, a testament to the complementary nature of our portfolio.
The success of our new products and effective marketing investments were the key drivers of growth.
Sales outside of the US were strong in Asia-Pacific and Latin America.
The strengthening of the US dollar turned sales increases in Europe and Canada to declines when translated, and also impacted earnings to a greater extent in the quarter than we had forecast.
In total, our net sales increased 9.9% and adjusted EPS increased 30%.
On a normalized basis correcting for currency, sales would have increased approximately 12.8% and adjusted EPS would have increased approximately 39%.
Looking at 2014 as a whole, this was a year in which a lot was accomplished.
We launched a record number of new products in the first half of 2014 and the rollout execution went quite well.
Furthermore, these new products were very successful.
Consumers and retailers alike responded very positively to them and to our marketing programs.
This drove considerable growth of Stearns & Foster and Sealy, and returned Tempur-Pedic to growth, which led to US market share gains for the Tempur Sealy portfolio as a whole.
In addition, we gained share in several key international markets, including Argentina, Japan, and the UK.
We also positioned ourselves for future growth.
In 2014 we acquired the Sealy brand rights in several markets throughout the world, and Tempur distribution rights in Mexico.
We divested our US innerspring component manufacturing plants and made significant progress on our new distribution network for the US.
The organizational integration in North America relating to the Sealy acquisition is now essentially complete and our team is working well as a single entity.
Cost synergies have been captured at a faster rate than projected and we are focused on driving additional cost efficiencies in 2015 and beyond.
So a lot was achieved, and sales were good in 2014.
However, our margins were challenged and not as high as we had expected due to unfavorable mix, innerspring manufacturing inefficiencies, and foreign exchange.
On mix, essentially all of our sales growth in 2014 was through the retail channel, and that decreased the proportion of our sales from the more profitable direct sales channel.
In addition, the products we sold included a higher proportion of our adjustable bases than we had anticipated.
These bases are highly incremental, and drive retailer ticket prices that have a lower gross margin.
In addition, the productivity in our innerspring manufacturing plants was lower than we expected.
This is going to be a big focus in 2015 and an area we plan to discuss in more detail on February 18.
Lastly, both sales and EPS were negatively impacted by significant foreign exchange moves through the year.
At the beginning of the year, we anticipated that foreign exchange would be a negative $0.10 EPS impact.
It turned out to be a negative $0.15 impact.
Indeed in the fourth quarter, it was $0.03 more of an impact than we had anticipated when we spoke to you on October 30.
So in summary, full-year 2014 sales grew 21% to $2.99 billion and adjusted EPS grew 11%.
On a normalized basis correcting for currency, adjusted EPS would have grown 18%.
One final note on 2014.
Cash flow was a major focus.
We generated $225 million of operating cash flow and $178 million of free cash flow.
We lowered our total debt by $234 million.
The past few years have been a transformational period for our Company.
As we enter 2015 with the integration of the organization largely complete, we are entering a new period as a single large global Company committed to steady top- and bottom-line growth.
In accordance with this, we have established evergreen annual growth targets for sales and adjusted EPS that we will measure ourselves against every year.
We expect these targets to remain consistent for at least the next three to five years.
On a constant currency basis, we will target net sales growth of 6% and adjusted EPS growth of 15%.
We expect our operating margin to expand by approximately 50 basis points each year.
We will talk more about these targets on the 18th, but our 2015 financial guidance is consistent with them.
However, as Dale will explain, our 2015 full-year guidance includes an anticipated negative $0.27 adjusted EPS impact from foreign exchange, based on current spot rates.
And this is on top of the $0.15 adjusted EPS impacts from FX we experienced in 2014.
In September of 2013 we communicated an adjusted EPS target of $4 for 2016.
At the high end of our guidance, we're on track to achieve that target a year late, in 2017.
However, if currency rates had not changed since September 2013, at the high end of our guidance we would be on pace to achieve that target as planned in 2016.
Now I'd like to discuss our strategy and initiatives in the context of our 2015 outlook.
While we are already the global bedding leader, we are the share leader in only a few countries.
It is our goal to become the share leader in every country we compete in.
Our strategy everywhere in the world is focused on investing in our brands, developing consumer-preferred products, expanding distribution, and striving for highest dealer advocacy, and where appropriate, making strategic acquisitions.
Our initiatives in 2015 are consistent with this strategy.
In North America in 2015, we are expecting good sales growth and even better earnings growth.
We anticipate that sales growth will continue to benefit from our successful 2014 product introductions, as well as our 2015 introductions.
A couple weeks ago at the US Bedding Show in Las Vegas, we introduced two significant new product lines, TEMPUR-Flex, which is a new third collection for Tempur, and an entirely new Posturepedic offering.
TEMPUR-Flex uses hybrid construction and new proprietary technology, and will extend our brand appeal and expand the number of consumers that feel Tempur is right for them.
It was well received by our retail customers and we're optimistic about its prospects.
Posturepedic is celebrating its 65th anniversary, and we are rededicating the brand to its back support heritage.
We have improved the value proposition across the entire line by incorporating in-case coils, gel memory foam, and a core support center for unsurpassed back support.
Like Flex, we were also very pleased with the reception it received from our retail customers.
We remain committed to investing in our brands, and will maintain a consistent level of marketing and advertising investment in 2015 as compared to 2014.
We will continue to support Tempur-Pedic and Posturepedic on TV as well as digital, and Stearns & Foster, Optimum, and Sealy through a combination of digital and print.
We also have cost initiatives underway throughout our US organization, including the continuation of our distribution network redesign, improving the efficiency of our innerspring manufacturing plants, and overall productivity and expense initiatives.
Now switching to international.
This is an enormous opportunity for the Tempur and Sealy brands, and we are investing to capitalize on it.
As a result, while we're expecting solid sales growth in 2015, we are expecting minimal earnings growth.
At the Cologne Fair in Germany last month, we officially launched Sealy and Stearns & Foster and introduced a new Scandinavian bed system called Tempur North.
We will expand the distribution of Sealy and Stearns & Foster in Europe and invest ahead of sales in marketing to support distribution and build brand awareness.
We will also expand our Tempur International direct business through the opening of new owned stores, which will pressure profitability earlier in the year.
We also anticipate expanding the retail distribution of Tempur overseas.
Apart from our investment in growth, it's important to note that weakness in central Europe, particularly in the German-speaking countries, is not abating.
And we anticipate this to further pressure our international performance in 2015.
Before turning over to Dale, I would like to contextualize our outlook.
Today, Tempur Sealy is a stronger and more stable Company than it's has ever been.
We're developing great products that retailers and consumers are purchasing, investing our marketing dollars more effectively, and positioning ourselves for substantial future growth across the world.
Our cash flows are strong and while our costs have been higher than we expected, we have initiatives in place to reduce them and improve our margins.
In 2015, we are expecting solid sales growth and significant margin improvement in North America, somewhat offset by investments in building Sealy and Stearns & Foster sales overseas and the continued weakness in central Europe.
And as I have said, FX continues to be a serious headwind.
We look forward to sharing more details with you regarding our longer-term outlook in a couple of weeks.
With that, I'll now hand the call over to Dale.
- EVP & CFO
Thanks, Mark.
I'll focus my commentary on the fourth-quarter and full-year 2014 financial results, and then discuss our 2015 guidance.
I'll address the performance on a consolidated basis, then speak to the performance for each segment and provide commentary on the key areas or items where there's notable variance from the prior year.
Consolidated net sales for the fourth quarter were $745.5 million, up 9.9% versus last year.
On a constant currency basis, fourth-quarter sales increased 12.8%.
Tempur North America net sales increased 16% and were driven by strong demand for our new mattresses and adjustable bases, as well as certain heavier year-end buys from a few customers that elected to stretch to higher rebate tiers for 2014.
Bedding net sales increased 18% on a unit increase of approximately 10%.
Within bedding, sales growth of adjustable bases was significant, and once again higher than we forecast.
Sales of other products declined 8%.
By channel, Tempur North America retail sales were up 17% and direct sales declined 2%.
Tempur International net sales were up 3.3% and on a constant currency basis up 11.4%.
Growth was driven by a combination of higher Tempur sales and sales from Sealy Japan and Europe.
Bedding net sales increased 6% on a unit increase of 11%.
By channel, Tempur International retail sales were flat while direct sales increased 27%.
Sealy sales increased 8.2%, driven by strong growth in the US.
On a constant currency basis, Sealy sales were up 11%.
Bedding product sales were up 12%, as were retail channel sales.
Fourth-quarter consolidated GAAP gross margin was 39.5% as compared to 40.2% in the prior year.
On a year-over-year basis, fourth-quarter gross margin declined primarily due to product and channel mix, increased discounts, and most notably customer rebates, and unfavorable foreign exchange.
These impacts were partially offset by operational efficiencies, primarily in Tempur North America.
Consolidated advertising expenses of $82 million were 11% of sales as compared to last year's 10.5%.
Consolidated operating income was $76.5 million in the fourth quarter of 2014 and included $18.9 million of integration cost related to the Sealy acquisition and $1 million of financing costs related to the October 2014 amendment to the Company's senior secured credit facility.
This compares to operating income of $74.1 million in the fourth quarter of 2013, which included $8.2 million of transaction and integration costs.
There are several factors that drove up the integration cost during the fourth quarter.
First, our work to improve our warehouse and distribution network in the US has led to various actions, including certain plant actions, closures, and openings.
We also incurred integration costs related to integrating Sealy into our international operations.
Interest expense was $21.4 million.
Other income was $13.3 million and included income from a partial settlement of a legal dispute.
The fourth-quarter tax rate was 31% and the pro forma tax rate was 26.1%.
Fourth-quarter GAAP earnings per share was $0.75 as compared to $0.44 per share last year.
Adjusted earnings per share increased 30% to $0.86 in the fourth quarter as compared to adjusted earnings per share of $0.66 in the prior year.
Now I'll summarize the income statement for the full year 2014.
As a reminder, 2013 results only include Sealy from March 18, 2013 onward.
Sales increased 21% to $2.990 billion as compared to $2.464 billion in 2013.
Tempur North America sales increased 9%, Tempur International sales increased 7%, and Sealy sales increased 37%.
Operating income was $276 million as compared to $244 million in 2013.
Operating income for full-year 2014 included $43.8 million of integration and financing costs, and in 2013 included $44.6 million of integration and transaction costs related to the Sealy acquisition.
GAAP earnings per share for full-year 2014 was $1.75 as compared to GAAP EPS for the full-year 2013 of $1.28.
Adjusted earnings per share in 2014 was $2.65 as compared to adjusted EPS of $2.38 in 2013.
Now I'll turn to the cash flow and balance sheet for a brief review.
Operating cash flow during the quarter was $44 million and for the year was $225 million.
We reduced total debt by $234 million in 2014.
At December 31, 2014 the Company had consolidated funded debt less qualified cash of $1.6 billion.
The ratio of consolidated funded debt less qualified cash to adjusted EBITDA was 3.9 times, calculated in accordance with the Company's senior secured credit facility.
A calculation of this ratio is included in the press release.
Today the Company issued financial guidance for 2015.
The Company currently expects net sales to be in the range of $3.050 billion to $3.150 billion, which reflects growth of 2% to 5% compared to 2014 despite approximately 3.5% headwind from 2014 based on current unfavorable foreign exchange rates.
Adjusted earnings per share to be in the range of $2.70 to $3.10, which includes $0.27 per share of unfavorable foreign exchange impact.
We are also providing the following additional full-year 2015 guidance assumptions.
Depreciation and amortization of approximately $95 million.
Adjusted EBITDA of $420 million to $455 million.
Interest expense of approximately $86 million.
Annual tax rate of approximately 30%.
Noncontrolling interest of approximately $2 million.
Average share count of 62.5 million shares, and capital expenditures of approximately $65 million.
It's important to note that our 2015 adjusted earning per share guidance excludes the impact of ongoing integration costs related to the acquisition of Sealy.
From an earnings perspective, our guidance reflects margin expansion resulting from improvement in North America offset partially by investments internationally and continued weakness in Europe.
In addition, our guidance assumes and unfavorable $24 million operating income impact from FX.
Based on these assumptions, we expect our operating margin to be in the range of 10.8% to 11.5% for full-year 2015.
We are planning for first-quarter 2015 sales of approximately $710 million to $720 million, which reflects growth from approximately 1% to 3%, or 5% to 7% correcting for FX.
Another factor impacting the first quarter growth is that a few of our customers made heavier year-end purchases in order to qualify for a higher rebate tier, which we estimate pulled forward approximately $15 million to $20 million of sales into the fourth quarter 2014 and out of the first quarter of 2015.
There was very modest earnings benefit to our fourth quarter, as the higher rebate was applied over the full year's purchases.
We expect these higher fourth-quarter purchases to somewhat dampen our first-quarter results.
While year-end buys are not uncommon, 2014 was the first year in some time that customers who had achieved significant growth in 2014 were in a position to capitalize on stretching to a higher rebate tier.
In addition, we are also expecting unfavorable FX to impact first-quarter 2015 earnings per share by $0.07 and our international business to be a drag on profits.
Taking this all into consideration, we currently expect adjusted earnings per share to range from $0.45 to $0.50 in the first quarter of 2015 as compared to $0.53 in the first quarter of 2014.
Our adjusted earnings-per-share guidance is pro forma, and as noted in the press release does not include integration costs related to the Sealy acquisition.
Discrete tax items associated with the repatriation of foreign earnings and certain nonrecurring interest expense and financing costs.
In considering our guidance, it is possible that our actual performance will vary depending on the success of our new initiatives, macroeconomic conditions, unexpected changes in foreign exchange rates, and competitive activities, or the consequences of other risk factors we have identified in our press release and SEC filings.
As noted in our press release, our guidance and these expectations are based on information available at the time of release and are subject to changing conditions, many of which are outside the Company's control.
Before turning the call over to Q &A, I would like to make one final comment.
Beginning in 2015 in recognition of the progress made integrating Sealy into our business, the Company will be changing our segment reporting to North America, International, and Corporate.
We plan to file an 8-K next week with historical segment data to provide perspective on the changes.
In addition, the material we will present on February 18 will reflect the segment reporting changes.
With that operator, please open the line for questions.
Operator
Thank you.
(Operator Instructions)
Budd Bugatch, Raymond James.
- Analyst
Yes.
Good afternoon.
Thank you.
I guess, Dale, if you could, would you take us through maybe the FX affects on revenues, gross profit, and operating expense maybe by segment, if it's possible for the fourth quarter?
- EVP & CFO
For the fourth quarter?
- Analyst
Yes.
- EVP & CFO
Yes.
I don't have the fourth quarter in front of me.
Let's go to the next question and I'll pull that up.
- Analyst
Okay.
- EVP & CFO
I've got them for the year, but not the fourth quarter.
I'm sorry?
- Analyst
Yes, I'll take it that way.
That's fine.
- EVP & CFO
Well, for the full year of 2014, FX cost us $41 million in revenue.
It affected our gross margin by approximately $24 million.
Operating expenses were improved by about $11 million, and operating earnings were reduced by $13 million.
In terms of our expectations for 2015, the current FX rates would negatively affect revenue, and this is incorporated into our guidance, this negative effect, by $110 million.
So the guidance that we are giving on revenue is $110 million lower due to foreign exchange.
- Analyst
I've got that.
- EVP & CFO
The gross margin impact is $48 million -- I'm sorry, $58 million.
Operating expenses would be improved by $34 million.
And the operating income impact of foreign exchange would be $24 million negative.
- Analyst
Can you run that -- go ahead.
- EVP & CFO
No, go ahead.
What was your question?
- Analyst
Give us a little bit by segment.
I know you're going to change the segment accounting, but I would think most of that -- is most of that factored in Europe?
How much of that's in the International segment?
- EVP & CFO
If we look at 2014, the impact was about two-thirds Canada.
So the bulk of that impact affected Sealy, some impact in Tempur North America, one-third is Asia /Latin America.
That also affected Sealy and Tempur International.
In 2015, the impact is one-half Canada.
So that affects under the new segments, North America.
Under the old segments it would affect both Sealy and Tempur North America.
And one-half is in Europe, and that would be all in Tempur International.
- Analyst
Is the effect equivalent across all three functional buckets, too?
Revenues, gross profit, and operating expenses, or does that vary?
- EVP & CFO
I mean, the split is pretty similar.
I think that from a gross margin standpoint, the impact is probably skewed a little bit heavier to Europe.
I don't have it laid out exactly that way.
But just looking at the pieces here, from a gross margin impact, the bulk of the -- probably two-thirds of the earnings impact is on gross margin is Europe.
Then you have a better operating income give back on that where the expenses get lower.
So of the total, about half of that earnings impact is in Canada and half is in Europe.
The issue we have in Canada is a significant portion of our purchases, of our COGS, is US dollar denominated.
So as the Canadian currency declines, your cost is in US -- a good portion of your cost is in US dollars and your -- but your revenue's being knocked down because of these currency.
While we were -- I was able to pull up Q4 here.
In Q4 currency affected the Company $20 million in sales, $11 million in gross profit, $6 million in operating income.
I'm not going to break that down by segment.
- Analyst
I understand.
I don't want to take a much more time on that, but it's obviously a big issue.
And Sealy Canada over-indexes versus what you would normally and Tempur Canada, under-indexes.
Is that still the case?
- EVP & CFO
Yes.
- Analyst
Okay.
Last question for me is just trying to walk-through gross profit differential in the fourth quarter versus your expectations.
You had expected significantly better gross margins.
Maybe if you can quantify where the most significant variances were, that might be helpful for us.
- EVP & CFO
Well, the gross margin, it was down 70 basis points year over year.
FX was much worse than we expected.
As I said, our adjustables over-performed expectations again in the fourth quarter.
- Analyst
That was a mix impact.
What would that have taken down?
Gross margin.
- EVP & CFO
What would it have taken down?
- Analyst
Well, gross margin rate, right?
- EVP & CFO
Yes.
- Analyst
It would have helped gross profit dollars and hurt rates.
- EVP & CFO
Right.
Well, the adjustable mix would have impacted the gross margin negatively by -- North America was -- acted negatively on the mix by about 150 basis points.
- Analyst
Okay.
- EVP & CFO
And then the other big factor was the rebate [casing].
- Analyst
And what was the impact of that?
You said that was $15 million to $20 million of revenue.
So would the impact of that be $6 million to $8 million?
- EVP & CFO
Not quite that high but almost.
- Analyst
(Laughter) Okay.
I was hoping for numbers too, but okay.
Almost will -- we'll live with almost, all right.
Thank you very much.
Good luck on the balance of the quarter, and will see you next to -- see you in a week or two.
Operator
Thank you.
Josh Borstein, Longbow Research.
- Analyst
Good afternoon, everyone.
Thanks for taking my questions here.
Just on the guidance, is it possible to talk about what the guidance implies for each of the three segments on the top line?
- EVP & CFO
Yes.
For the year, what we are -- this is on an old segment basis.
For the year we are expecting Tempur North America to be up mid-single digits.
When we talk about what the guidance implies, we always talk to the midpoint of the guidance.
So the high end of the guidance would be a little better.
The low end of the guidance would be a little bit worse.
But at the midpoint, Tempur North America would be up mid-single digits for the year.
Tempur International, up high single digits.
Keep in mind, despite our discussion of continuing issues in Europe, we are rolling out Sealy and Stearns & Foster in Europe.
That is included in the Tempur International old segment because it's going through the Tempur distribution system, and that's where we expect to see significant growth internationally.
Sealy, we would expect to be up low single digits, and Sealy is heavily affected by FX.
- Analyst
Okay.
Thank you.
And then just on that International high single digit growth rate, how much do you think is organic, how much is the Sealy rollout?
- EVP & CFO
Well, we're not going to break it down.
But the Sealy rollout is organic.
That's our products.
It's our distribution channels.
So it's just adding product to our existing programs.
- Analyst
Sure.
That make sense.
How much -- I guess said another way, how much do you think is coming in from the legacy business as opposed to the new Sealy products that are rolling out?
- EVP & CFO
The Tempur legacy business would be -- we actually expect Tempur legacy business to be mid-single digits and the new Sealy products to drive that higher from an overall growth.
- Analyst
Okay.
Great.
And just on the gross margin expectations for Tempur North America, what are your expectations?
What's baked into guidance for Tempur North America?
- EVP & CFO
From an overall business, we're looking for gross margins to be in the 39.5% to 40% range.
We expect significant improvement in profitability in North America.
We actually expect both Tempur and Sealy North America business, despite the Canadian FX headwind, to see significant improvement in both gross margin and operating margin in 2015.
We saw very strong improvement in the performance of Tempur North America in the back half of the year, and we think that will continue throughout 2015.
We expect Sealy North America business next year to see good improvement in profitability through the programs and initiatives that we've put in place.
And from an overall business, International gross margins are going to be down, despite the revenue up.
FX affects that significantly, but also we're investing in international and we're rolling out a lower margin product line in International.
- Analyst
Okay.
Thanks for the color.
Just one more for me.
A lot of talk, obviously, about commodities here lately.
What are your expectations for the year?
Do you have anything baked into guidance?
What are you seeing in terms of either foam, steel wire for the coils, or on distribution costs?
Thanks.
- EVP & CFO
On the commodity side, what we have baked into our guidance for 2015 is actually very modest, slight inflation.
Let me explain that because there's a lot of people that think that we ought to be seeing dramatic deflation.
If you look at the raw materials that we buy, certain chemicals, foam, steel, but particularly around the chemicals and the foam that we buy, those product -- the key components of those products, obviously, are oil or natural gas-based.
But way down the chain you get into the chemicals that, essentially, developed -- are developed into polyol, TDI, MDI that you use to make the polyurethane foams.
Last year, all year as we talked about on our third-quarter call, we saw a price inflation in those key ingredients in those chemical inputs such that the peak pricing was in December.
And so even if -- and we have started to see some improvement in the feed chemicals that ultimately lead to making polyol, TDI, MDI, we've started here recently to see some improvement in those feed chemicals, but we are starting from the highest point of the year last year where we saw increasing price pressure in those inputs all year.
So we have to see significant reduction before we would ever get any benefit.
Another key component is, we do have contracts in place with our suppliers.
Those contracts are three-, six-, nine-months depending on the supplier and input.
And they are done that way to principally protect us in the other direction, that they can't jerk our prices around when prices are going up, that we have clear visibility to price increases months in advance.
But in a situation like this, that works in the negative, where it delays getting price declines.
But it provides for a more stable environment.
Certainly, we will work hard with our suppliers to get advantage, despite the contracts, of some improved input costs they're experiencing.
But right now our expectations are our expectations.
- Analyst
And the coil or the seal costs, not seeing any deflation there either?
- EVP & CFO
Not a lot.
A significant portion of our material cost is chemicals or foam.
Seal obviously is another key component that we buy, but steel, similarly, we expect to see some price improvement there but not dramatic.
- Analyst
Okay.
I appreciate the color.
I'll see you all next week.
- President & CEO
Thanks.
Operator
Thank you.
Brad Thomas, KeyBanc Capital.
- Analyst
Thank you.
Good afternoon.
- EVP & CFO
Hey, Brad.
- Analyst
Wanted to first ask about the heavy year-end buys, and perhaps you'd give a little more color about what you think that did in terms of the earnings impact in the fourth quarter and what kind of a drag it could present in the first quarter?
- EVP & CFO
Yes.
Well, as I said in my comments, what occurred was because of the success of Tempur last year, at the beginning of each year we set up these programs.
A couple of customers had a very successful year, made significant improvement in their business and our business.
They, coming into the end of the year, were in a situation where if they took some inventory, they could get up to the next rebate tier.
And with the way the rebates work is it's retroactive for the full year.
Some of that buy-up that a couple of those customers decided to exercise really did not contribute much margin to us.
So we had a lot of moving parts, but the biggest moving part we had in addition to -- from where the business was and what our outlook was on October 30 was $0.03 worse in FX.
So from a fourth-quarter standpoint, revenue is higher, earnings were marginally different.
The first quarter impact is we don't have that full value revenue in the first quarter.
So that dampens first quarter both from a top and a bottom line.
- Analyst
Got you.
So if I think about a contribution margin on $15 million or $20 million of revenue of maybe 25% or 30%, that might get a $0.05 or $0.07 drag.
Is that how we should be thinking about what's baked into the first-quarter guidance?
- EVP & CFO
Yes.
- Analyst
Great.
And I wanted to follow-up just on the Sealy side.
This is an important refresh that they have underway this year.
Their big competitors in Simmons and Serta, of course, are doing refreshes this year.
Could you talk a little bit about what the placements look like, what the initial demand from retailers looks like on that product?
- President & CEO
The products has yet to start rolling, but they will of the end at first quarter and into the second quarter.
The retailer reaction has been quite positive, actually.
We feel we'll see it when we see it, but we feel quite positive about it.
The products have been well received, both from an aesthetic point of view but also very much from a feel point of view.
We're quite proud of the way that we've improved the interior of the products and improved the feels, and, as I said in my comments, focused on the back support, which is obviously the heritage.
That resonated well with retailers.
The aesthetics have resonated well.
Quite honestly, we're quite excited about how that has been received.
So the proof will be in the pudding.
As of today, it looks quite positive.
- Analyst
Great.
Thank you so much.
Look forward to seeing you in New York.
- President & CEO
Thanks, Brad.
Operator
Thank you.
(Operator Instructions)
Jessica Mace, Nomura Securities.
- Analyst
Hi.
Good afternoon, everyone.
- President & CEO
Hi, Jessica.
- Analyst
My first question is on the annual 6% growth target.
Can you break that down for us as far as your assumptions for market growth, as well as what your market share opportunities are, especially with the significant opportunity abroad?
- President & CEO
It's, obviously -- it's a broad top-line number, but if you were to use the sort of rule of thumb, we would say approximately 4% is what we're baking in as the global market growth.
It will vary by country and so forth.
And as will our performance by country.
But broadly speaking, as I said in the comments, our expectation is to outgrow the industry.
And the 6% is a sort of expectation of a growth measurably faster than that of the industry.
- Analyst
Great.
Understood.
If you could just talk a little bit more about the Sealy Europe business in particular.
Talk maybe if you can quantify the top-line contribution it had this quarter versus your expectations, and just how you see that ramping throughout 2015.
I think you had mentioned in the past some expectation for EBIT contribution from leveraging the Tempur infrastructure, and what you think the timing for that is in 2015, given the currency headwinds?
- President & CEO
Well, the currency headwinds are, obviously, applicable across the International, Sealy, and Tempur.
So that is a factor.
But what -- the rollouts has gone okay so far, and the reason is this.
We've got distribution.
Our distribution has been -- has rolled out as we expected insofar as customers, as we anticipated want to carry the product.
We've been quite pleased with the reaction.
As I said, we showed it in Cologne, which is a big fair in Europe.
The reaction there from the -- was very positive.
One thing, though, that has slowed the rollout is that we were -- our third-party supplier was effectively the licensee that we used to have, the licensee from whom we bought the rights.
Their business has, frankly, got into trouble not from us, but from their other customers.
As a result, their company has very rapidly went out of business.
We've got an alternative supplier which is ramping up right now.
But it is giving us a little bit of a hiccup in the rollout here.
What I anticipate is that we are going to give the rollout -- the rollout will keep going.
I think that as customers get the products, the sales per store per slot will continue to grow.
Overall, we are seeing a little bit of a slowdown in that.
It's not going to materially affect the overall volume for this year, but it will be a slower.
So I think the readout is going to be at least a quarter behind where I had hoped it would be in terms of the ramp speed.
But the fundamental acceptance and sell-through that we are seeing is actually not bad at all.
That's good.
We've got to get this supply situation worked out.
We've got it worked out.
It's just going to take time to ramp up.
- Analyst
Got it.
That's helpful.
Thanks very much.
Operator
Thank you.
Peter Keith, Piper Jaffray.
- Analyst
Thanks.
Good afternoon, everyone.
Mark, I was curious.
In the prepared remarks, you had said that sort of at the high end of your guidance you would be on track with the 2016 operating margin goal of 13.5%.
So I guess reading into that, it sounds --
- President & CEO
No, I said EPS.
EPS.
- Analyst
Yes.
EPS?
Okay.
Maybe it sounds like you're a little bit behind where you thought you should be.
Could you highlight what's sort of stalling your progress here to that 2016 goal?
- EVP & CFO
FX.
- President & CEO
FX is -- what I said was this.
If we were to use the FX of 2016 -- 2013, I'm sorry, 2013.
At the high end of our guidance and assuming a 15% growth again next year, we'd be at $4 EPS.
Obviously the FX is not what was in 2013.
So right now what it says is that at the current tracking rate we will hit that $4 threshold in 2017, assuming that we achieve the high end and we get the 15%.
That was the point I was making.
- Analyst
I knew you were talking about excluding FX.
So there's nothing that's come up between now and when you put those numbers forth that is slowing down your progress?
Is that --
- President & CEO
No.
Obviously, our revenue -- one point to make is our revenue is higher than we had anticipated at this time.
That said, obviously we gave guidance at the beginning of last year and where our final numbers were, we are at the lower end of that guidance.
Clearly, I would have liked to have been in the middle or above of the guidance in terms of being on track for that run rate.
There's a variety of different things that are driving that.
One of them is the fact that we have had some issues from a productivity point of view on the spring manufacturing plants that have slowed our bottom-line growth.
But we are still on track.
We're not as far ahead, or as far along, as obviously we would like to be, just obviously given the fact that our guidance was -- that we are not at the high end of our guidance from last year.
- EVP & CFO
Peter, just to put in context.
By the end of 2015, if everything played out exactly as we just discussed, both from a top line, from a execution standpoint, and we were at the high end of this guidance, for over a two-year period, you would have -- from the 2013 rates to the 2015 rates, [we would have] lost $150 million of revenue.
And we would have lost 220 basis points of gross margin, and 110 basis points of operating margin, all just to currency.
- Analyst
Fair enough.
One thing I just want to get clarification on.
Last quarter there was some quality control issues as you ramped up Sealy Hybrid in Europe with the contract manufacturer.
You are now shifting over to a new one.
Are you fully ramped up with quality control, or could there be some risk that you run into some more margin issues in the first half of 2015?
- President & CEO
I don't think -- it's an important part of the business, I don't want to -- An important part of the process.
I don't want to trivialize it.
I think that the quality control process that we have in place, I think is quite good.
So that I feel pretty good about.
And in terms of the ramp-up, I feel pretty good about that, too.
I think that the supplier is good.
I think the issue is always, though, transitioning from one third-party supplier to another is not a trivial activity.
So it's not that it's going to be -- I think that's why I put the caution as I did to the prior person on the phone.
That sort of transition is always something we have to say with caution.
In terms of quality, I feel pretty good.
And in terms of capability of supply, I feel very good.
- Analyst
Okay.
Thank you very much.
Look forward to seeing you in a bit in New York.
Operator
Thank you.
Keith Hughes, SunTrust.
- Analyst
Thank you.
You talked about the launch of the Sealy products.
Just want to ask on the Flex.
Can you give us any sort of feel of account reception, how doors, how quickly it'll be out, things like that would be helpful?
- President & CEO
I mean again, I have to caveat it by the fact that we haven't, obviously, started properly shipping them.
The reaction was very positive.
In Vegas the customer reaction was very positive, and we anticipate this going to all of our major customers.
We had a very positive reaction.
We anticipate it getting a very good distribution.
It'll roll out at the end of the first quarter and the beginning of the second quarter.
And in terms of slots, we anticipate that were going to get -- there are three products in the line.
So we are expecting somewhere, obviously, between two and three slots per store.
We are expecting of the order of one, give or take, one incremental slots per store.
One incremental slot as a result of this product line.
We'll see, but we're quite excited.
The thing about this product is, it really, as I know you know, it has a very different -- it provides the support and the uniqueness of a Tempur but at the same time has a very different feel to either the Cloud or the Contour.
So we think that it is -- we hope that it will be quite incremental.
- Analyst
Question for Dale.
You had talked about the Tempur North America as part of your sales guidance for 2015 being mid-single digits.
Is there some Canada currency in that number, as well?
- EVP & CFO
There is some Canada currency associated with Tempur North America, yes.
- Analyst
Can you give us kind of a rough indication of what that's playing, what role that's playing?
- EVP & CFO
Well, Tempur in Canada under-indexers versus what we would like it to be.
So the impact on Tempur North America of currency is much smaller than the impact on Sealy from Canada.
But there is a slight negative there.
It's not a big headwind for us.
- Analyst
Final question on advertising views for 2015.
Any details you can give us there on what you're going to be looking to spend?
- President & CEO
We're going to spend -- roughly speaking as a ratio, we're going to spend very consistent with what we spent last year in 2014.
- Analyst
Consistent in terms of a dollar spend, is that what you're referring to?
- President & CEO
Percentage spend, the rate.
The rate spend.
- Analyst
Okay.
All right, thank you.
- President & CEO
Thank you.
Operator
Thank you.
(Operator Instructions)
Joan Storms, Wedbush Securities.
- Analyst
Hi.
Good afternoon, everyone.
- President & CEO
Hi, Joan.
- Analyst
Hi.
So with the resegmenting of the segments to North America, International, and Corporate, and I know there were a couple questions on this a little bit earlier, but on the projected growth rate for sales gross margin, so the sales on a blended rate were going to be about, I think you said about 6%, and then minus some FX, a little bit lower than that.
And then on the gross margin up in TPX, up a little bit in Sealy, and then down in International.
So maybe you could just maybe give us a general guidance on the sales for each of those new segmented channels?
- EVP & CFO
Joan, since you don't have any information on the new segments, we're going to send out an 8-K at the end of next week in advance of the investor day so you start to see some historical numbers in these segments.
But right now with nothing to look at, I think it's better, just let's wait for investor day.
Let's go through it then.
In advance of investor day you'll see historical data in the new segment format.
And then it'll be much better conversation, once you've seen that and have that.
- Analyst
Okay.
So we will just continue to model the way we have been until we get that.
- EVP & CFO
Yes, for the next week.
- President & CEO
Please, yes.
- Analyst
Okay, then we'll do it again.
Okay.
And then also on the Flex product, I thought that was pretty interesting.
Was there any indication on -- it seemed like all the -- Mark had just said they expect all the major retailers to take it.
Is there any fallout between slots on the other products on the Tempur North America at retailers?
- President & CEO
I mean, as I said, we think that will -- as we said, what our expectations are is that will get two to three slots in every -- on average.
And that of that, one of them will be incremental.
So 1.5 will be taken away from other spots.
What we anticipate, and in fact what most of our retailers are doing is taking out Weightless, which is a product that we had had, we have had for some years, but which is a relatively smaller volume product.
And putting in its place Flex, which both from us -- for Tempur and for the retailer is going to give a better turn on the floor.
So that's what we see happening.
We don't see it affecting the core Contour or Could spots.
- Analyst
Okay.
Perfect.
Thank you very much.
- EVP & CFO
Thank you.
Operator
Thank you.
Karru Martinson, Deutsche Bank.
- Analyst
To take a big picture view here, when you talk about wanting to become kind of share leader in every country that you're in, what's the time horizon that we're looking at from this international investment and the opportunity coming from there?
- President & CEO
Well, that's a good question.
There's not a single answer because you're quite right.
It's different in some countries than others.
In February -- I'm sorry, on the 18 when we met, we will talk specifically about how we're thinking about which countries are the ones that are sort of first on the list and which are the second tier.
However, we are in the top five in more countries than you would imagine.
It's not as though this is sort of far away.
One of the things that you may know is that in many of the countries, certainly in Europe there are no very large players.
And that Tempur, while relatively small, is actually by itself a relatively major player.
The combination of Tempur and Sealy puts us in a situation where we have a portfolio that will give us that opportunity.
So, what I would say is that in some countries we're talking two to three to four years, some countries it's going to be longer than that.
But it is one of -- it is a strategic objective wherever we are to be able to use the combination of the organic drivers of growth, and where appropriate and possible strategic acquisitions to move ourselves to be number one wherever we can be.
- Analyst
Forgive my ignorance.
When we look at the international markets, and recognizing that there's great variability between them, are they as far along on the special team mattress side of the equation as our market here, or is there more of an education curve that we still need to kind of realize there?
- President & CEO
Well, they might say that we need an education.
It depends how you look at it.
One of the most remarkable things about the international business is how different it is from country to country, and how literally neighboring countries have totally different product lines, but also product types.
This is somewhat mortifying, but I think it would be a mistake to think of the specialty of the US as an advanced thing.
It is -- the brand, one of the things that I think is unique, I know is unique, is that although the countries are different, the major competitors are different by country, and even the types of product are different by country, one of the remarkable things is that there are no brands that transcend multiple countries in a meaningful way except Tempur.
Tempur is really quite unique in this, in that it exists as a material player in countries whose every other competitor is different.
But I wouldn't think of it as sort of a scale of more or less advanced.
I would think of it as more or less different.
And I think the most important thing is brand awareness.
As we think about our single biggest requirement, obviously distribution is critical, but also brand awareness.
That is the metrics that you use to drive leadership in a country, that we will use to drive leadership.
- Analyst
Thank you very much.
Appreciate it.
Operator
Thank you.
Jon Andersen, William Blair.
- Analyst
Good afternoon.
Two quick ones.
Just an update on any supply chain simplification efforts and the associated cost synergies.
I know you made, I think a fairly significant investment in point-of-purchase materials and displays to support the new product launches this year.
I'm just wondering what the response from the RSAs and consumers has been to that, and whether you think you're getting a good return on that investment?
Thanks.
- EVP & CFO
I'll take the supply chain one.
This is Dale.
From a supply chain standpoint, one of our major initiatives, as we've talked about, is to be easier to do business with, and a portion of that is the distribution network realignment that we've been doing across the US.
We're probably, at this stage, about two-thirds of the way through that.
And it's one of those things that you can't do it all at once, and you've got to go region by region and operation by operation.
And realign how the customer orders come in, realign what your trucking process is, your delivery process, et cetera.
That's why it's being done region by region.
The thing that led to that question was around the synergies.
We had said that at the beginning of the year that we expected to have achieved $40 million cumulative synergies by the end of 2014.
And we are slightly ahead of that.
We'll talk about that a little bit more next week.
Mark, you (multiple speakers)
- President & CEO
The amount that you had anticipated coming from the supply chain, what was achieved in 2014?
- EVP & CFO
Yes.
- President & CEO
As far as the POP is concerned, it has been very well received.
The reason that the POP, in my opinion, has been effective is it is attractive, and it attracts the consumer to come to the stand and to take a look at the bed.
But it's also actually a relatively simply informative, not only for the consumer but for the retailer RSA.
It makes it easier to sell the product because the information is there.
As we are rolling out Flex, one of the things that we've done is that although the Flex rollout is a smaller rollout than the Oslo rollout -- sorry, the Contour and Cloud rollout that we did last year, it's still a very big rollout.
It's possibly the second biggest rollout we've ever done.
So it's another big rollout.
But what we're doing is, again, tying it but with new POP, but very much in the family of the old POP.
So it capitalizes on that sort of structure.
We actually are quite pleased with it.
Posturepedic too is going to have new POP.
While quite different and designed for a whole different purpose, or a whole different structure.
That, too, is well received and that, too, we are going to be rolling out this year.
- Analyst
Thanks a lot.
- President & CEO
Thank you.
Operator
Thank you.
Sam Reid, Barclays.
- Analyst
Thank you so much, and good afternoon everyone.
Question here regarding the Sealy distribution in the US.
Just curious kind of what the follow-up was on that with relation to some of the issues you had in 3Q, and what your outlook is on that heading into 2015?
- President & CEO
Right.
These -- I refer to it in my commentary.
These -- in some ways one could point to one-off things that happened to cause these inefficiencies.
To some extent each one of them, or each thing that happened was in itself a one-off event.
But one of the things that I think that we all know and one of the big focuses for 2015, indeed it will be a big part of what we talk -- one of the themes that we'll talk about when we are in New York on the 18th, is a systematic review and -- from top to bottom review of the process from supply chain as well as the manufacturing process, to try and systematically reduce these sorts of inefficiencies.
To make the productivity higher, but also reduce the likelihood of one-off problems like this.
It's an improving of the systematizing of the plants.
I don't want to imply that the plants are broken or that they're no good.
They're good.
We just -- what we need to do is to be able to systematize better.
To take the best practices from each and plant apply it across the board.
That process is actually underway.
It's something that we have positive traction on.
I'm quite excited about it.
But it's not a thing that can be fixed or changed in a day.
This will take a little while.
We are well on our way through the distribution component of it.
The manufacturing component of it is now is going a big focus.
- Analyst
Thank you very much.
That was very helpful.
And then one quick follow-up here, and apologies if you have already addressed it.
What sort of adjustable contribution are you modeling in your 2015 guidance?
Obviously, I know it's very preliminary, but sort of generally speaking, how do you expect that to impact the top line there?
- EVP & CFO
We are expecting our adjustable mix to be relatively consistent with what we've seen here over the last quarter or two.
It's gone up dramatically.
We're not expecting significant further growth, but we are expecting some continued growth on attach rates of adjustables.
- Analyst
Got you.
No, thank you so much.
That's very helpful.
Operator
Thank you, and I'm showing no further questions at this time.
I'd like to turn the conference back over to Mr. Mark Sarvary for any closing remarks.
- President & CEO
Thank you very much.
And we look forward to talking with you again at our investor day in New York City on February 18.
Thanks for joining us this evening.
Operator
Ladies and gentlemen, thank you for participating in today's conference.
This does conclude today's program, and you may all disconnect.
Have a great day, everyone.