Tempur Sealy International Inc (TPX) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tempur Sealy Fourth Quarter 2018 Earnings Call.

(Operator Instructions)

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

I'd now like to turn the conference over to Aubrey Moore, Investor Relations.

Please go ahead.

Thank you, operator.

Good morning, everyone, and thank you for participating in today's call.

Joining me in Lexington headquarters are Scott Thompson, Chairman, President and CEO; and Bhaskar Rao, Executive Vice President and Chief Financial Officer.

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

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

Investors are cautioned that these forward-looking statements, including the company's expectations regarding sales, earnings, net income and adjusted EBITDA and anticipated performance for 2019 and subsequent periods, 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 heading Special Note Regarding Forward-Looking Statements and/or Risk Factors.

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

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

This morning's commentary will include non-GAAP financial information.

The press release contains reconciliations of these non-GAAP financial information to the most directly comparable GAAP information, except as otherwise discussed in the press release, as well as information regarding the methodology used in our constant currency presentations.

We posted the press release on the company's investor website at investor.tempursealy.com and have also filed it with the SEC.

Our comments will supplement the detailed information provided in the press release.

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

Thank you, Aubrey.

Good morning, and thank you for joining us on our 2018 fourth quarter and full year earnings call.

I will start with some comments regarding our progress in resetting the foundation of our company and positioning it for long-term earnings growth.

Then Bhaskar will review our quarterly and full year financial performance with you in detail.

Finally, I will wrap up with a review of our long-term corporate initiatives.

As we reflect on 2018, we see it as a transitional year that showcases the progress we have made towards our long-term goals.

But the year also presented many challenges for the company along the way.

The primary challenges we faced in 2018 were as follows.

First, we initiated the largest U.S. Tempur-Pedic rollout in the company's history, which was so large that we needed to stagger the launch over a multi-quarter period.

Our entry-level products that were launched in May of 2018 were wildly popular with both retailers and customers.

However, we were the victims of our own success as we experienced higher-than-expected cannibalization of our products priced above $3,000.

The above-$3,000 products will be refreshed in the first half of 2019.

Second, the U.S. bedding distribution footprint underwent enormous change, including store closing, retail bankruptcies, the expansion of alternative channels, while also dealing with weaknesses in brick-and-mortar retail traffic.

Third, Mattress Firm, the largest bedding retailer in the U.S., in early 2018 employed what we consider to be uneconomic strategy of low ASP, aggressive discounting promotional activities, which drove down industry-wide profits.

Fourth, an influx of low-priced Chinese mattress imports were a headwind for our entry-level Sealy products.

Finally, every one of our commodity-linked inputs experienced price inflation that was above our expectations, which continued to escalate during the course of the year.

Although we took price, the time lag between these cost increases and price increases was significant.

Now that 2018 is behind us, we have many reasons to be optimistic about 2019.

First, we look forward to completing the launch of our fully refreshed Tempur-Pedic and Stearns & Foster lineups.

We recently showcased these products in Vegas market (sic) [Las Vegas Market], and they met -- were met with rave reviews.

The Stearns & Foster products are hitting the floor as we speak, and we're confident that retailers will see the new lineup as a tool they need to elevate average selling price among Innerspring customers.

The Tempur-Pedic Luxe models are fully rolled out, and we expect the Tempur-Pedic Breeze products to hit retail floors by Memorial Day.

Once all the new Tempur products are floor at retailers, we anticipate mitigating the negative merchandising mix we faced in 2018.

Second, we've improved our distribution network.

We enhanced our relationship with a number of key retail partners, and we hope to further bolster them in 2019 with our Retail Edge program.

This program is designed to help North American retailers leverage our consumer insights to stay cutting edge in both their brick-and-mortar and online marketing strategies.

Retail Edge will enable them to improve their in-store performance and take their fair share of web business.

Additionally, to serve consumers who want to buy directly from the manufacturer, we opened an additional 27 Tempur-Pedic stores in 2018, and we currently have plans to open another 20-plus stores in 2019.

Third, with the material number of bedding stores recently closed, including department stores and mattress specialty stores, we believe the foundation is being set for a much healthier U.S. bedding industry.

Fourth, the mattress industry's antidumping petition is currently under review by the U.S. Department of Commerce and U.S. International Trade Commission.

While we initially hope to receive feedback in February, the government shutdown delayed this date, and we now anticipate a preliminary ruling in the second quarter of 2019.

Finally, commodity headwinds have abated.

After 2 years of material commodity cost headwinds, we do not currently expect commodity cost inflation in 2019.

We believe that 2019 will put the company back on a trajectory of earnings growth and that the earnings growth will accelerate even further in 2020.

Before I turn the call over to Bhaskar to do a detailed dive into our financial results, I'd like to highlight a few recent trends that we think are further reasons for optimism moving forward.

First, worldwide sales in the fourth quarter increased 7%, underpinned by 9% growth in North America.

In North America, we saw wholesale growth of 8%, which is significant improvement from the flat-to-declining wholesale growth that we had experienced over the past few quarters.

Our worldwide direct business grew 23% and now represents 10% of total sales.

Clearly, our efforts to fill in our distribution gaps and enhance our third-party retail relationships are showing progress.

Next, our North America Tempur and Sealy sales trends improved sequentially in the fourth quarter, with Tempur-Pedic up 24% and Sealy is up slightly, excluding Stearns & Foster which is in product transition.

We've seen these trends slightly increase during the current quarter.

Finally, we generated strong cash flow in the fourth quarter, which allowed us to repay debt and return to our target leverage range of between 3 to 4x net debt-to-adjusted EBITDA.

And with that, I'll turn the call over to Bhaskar, to review the financials.

Thank you, Scott.

Before going into the details, I would like to start with a few highlights from the fourth quarter.

Global net sales were $676 million, an increase of 7%.

Adjusted gross margin was 42%.

Adjusted operating margin improved 20 basis points to 13.4% of net sales.

Adjusted EBITDA increased to $118 million.

And adjusted earnings per share for the quarter was $0.90.

On a segment basis, sales in North America increased 9%.

The wholesale channel increased a solid 8%, a significant acceleration from our prior quarters.

And the direct channel increased 17%.

Direct sales, although strong, were hurt by a decline in call center sales and 1 soft month of web sales.

At a brand level, as Scott previously mentioned, Tempur sales grew 24% in the quarter and Sealy sales were slightly up, excluding Stearns & Foster.

As expected, Stearns & Foster sales were a headwind as those products are in the third year and in the process of being relaunched in 2019.

During the quarter, our GAAP gross profit and operating income in North America were primarily impacted by a $21 million charge associated with iMS, a third-party retailer that recently filed bankruptcy.

The following results have been adjusted for this charge and other onetime items.

North America adjusted gross profit margin was 39.8%, remaining flat to prior year.

Tailwinds to gross margin included favorable pricing and brand mix.

I would like to highlight that U.S. Tempur gross margin and mattress ASP improved sequentially due to pricing actions taken in the quarter and because the new LuxeAdapt hit retail floors.

Headwinds to gross margin included continued commodity pressure, unfavorable merchandising mix within the Tempur brand and launch-related expenses.

As expected, the unfavorable mix impact within Tempur lessened in the fourth quarter, and we expect this headwind to further mitigate in the back half of 2019 with the launch of the Breeze products and additional retailer training.

As a reminder, we did not have a fourth quarter product introduction in 2017, so this year, our launch costs were entirely incremental.

North America adjusted operating margin improved 40 basis points to 14.2% as compared to the fourth quarter of 2017.

This was primarily driven by improved operating expense leverage from reduced incentive compensation as we did not hit our internal targets.

Turning to International.

Net sales increased 2% on a reported basis.

On a constant currency basis, International increased 5%.

The wholesale channel was flat, and the direct channel increased a robust 37%.

International performance was in line with our expectations with Europe stabilizing and Asia continuing to perform well.

If you consolidate the sales from our Asian joint venture, International net sales for the quarter increased 7% on a constant currency basis.

The Asian JV has performed well for many years, led by our JV partner and their high-quality management team.

Net sales and EBITDA have grown at a CAGR of about 20% for the last 5 years.

We are thrilled to report that we had extended the relationship for an additional 20 years, continuing a solid foundation for growth of our Sealy brand in Asia.

As a reminder, the existing agreement was scheduled to expire in 2020.

During the fourth quarter, we streamlined our International operations primarily with headcount reductions in Europe.

We believe that keeping our organization lean and nimble is necessary to remain competitive in the global bedding market.

The following results have been adjusted for $5 million of restructuring charges related to these activities, which we expect to see a payback within 18 months.

Our International adjusted gross margin improved 60 basis points to 51.7% as compared to the prior year.

This improvement was primarily driven by the new revenue recognition standard as well as operational improvements.

International adjusted operating margin declined 20 basis points to 24.8%.

This decrease was principally driven by royalty income, which was partially offset by favorable operating expense leverage; improved gross margin; and improved Asia joint venture performance.

Lastly, regarding our simplification initiative in Latin America.

We are pleased with the progress that we had made with derisking our business in these markets.

We announced in December that we completed the sale of our largest subsidiary in Latin America.

This completes the initiative to align resources where the risk and returns make sense.

Going forward, we will receive royalty payments and not have assets exposed in the region.

This is a simpler structure to manage, and we expect it to result in higher returns.

Now turning back to the company's global performance.

Adjusted operating income was $91 million.

Adjusted EBITDA was $118 million, up $6 million from last year.

The increase in EBITDA was primarily driven by higher volume, pricing benefits and reductions to incentive compensation.

This was partially offset by commodities, launch expenses and unfavorable Tempur merchandising mix.

Foreign exchange rates were slightly unfavorable to EBITDA in 2018.

Going forward, we anticipate the U.S. dollar getting stronger relative to all major international currencies, which will result in sales and EBITDA headwind primarily in the first half of 2019.

We estimate this headwind to be approximately $30 million, primarily to International sales, and $5 million to consolidated EBITDA.

The adjusted tax rate was 26% and interest expense was $23 million.

And adjusted EPS for the quarter was $0.90.

Now moving on to the balance sheet and cash flow items.

We generated operating cash flow from continuing operations of $77 million in the fourth quarter.

Cash cycle was unfavorable by 4 days to the fourth quarter of 2017.

This was principally driven by higher inventory levels required to support the launch of our new Tempur-Pedic products in North America as well as an increase in adjustable base inventory, which we purchased ahead of the tariff impacts.

As of the end of the fourth quarter, net debt was $1.6 billion, which decreased $107 million from the fourth quarter of 2017.

Our leverage ratio was 3.9x, ending the year just within our target range of 3 to 4x.

Now turning to our financial guidance.

The company currently expects adjusted EBITDA to be in the range of $455 million (sic) [$425 million] to $475 million for 2019, which includes the benefit from strong sales growth of Tempur-Pedic in North America, tailwinds from pricing actions of approximately $30 million, improved merchandising mix resulting from the launch of new products and continued expansion of our direct channel around the world, offset by a single-digit decline in North America Sealy sales, normalized incentive compensation of $20 million as it was unearned in 2018 for about 4,000 individuals, and incremental investments of $15 million to develop and test new product opportunities.

For the full year 2019, we currently expect depreciation and amortization to be between $115 million and $120 million; total CapEx to be between $70 million and $75 million, which includes maintenance CapEx of $60 million; interest expense of $90 million to $95 million; and a tax rate of 26% to 28%; and the diluted share count to be 55.5 million.

With that, I'll turn the call back over to Scott.

Thank you, Bhaskar.

Great job.

Turning to our long-term corporate initiatives.

First, developing the most innovative bedding products in all the markets we serve.

A key pillar of our product plan was commencing our largest ever Tempur-Pedic product rollout in North America.

Our goal was to create a simplified and easy-to-understand product portfolio to enhance the shopping experience for our customers and to improve SKU productivity on our retailers' floors.

We feel these actions will result in market share gains.

The first phase of our Tempur launch in 2018 was focused on innovative, new products to gain market share in the $2,000 to $3,000 price band.

This is a significant profit pool in U.S. bedding market, and it's where we were underrepresented.

The second phase of North American Tempur-Pedic rollout is positioned to drive improved product mix as it focuses on higher price points.

As I mentioned earlier, the LuxeAdapt began rolling out in the fourth quarter of 2018, and the TEMPUR-Breeze models will be launching at the end of the first quarter 2019.

Not to be forgotten, also this quarter, we started the rollout of our new Stearns & Foster lineup, replacing a line that has been in the market for 3 years.

Our retail partners are looking forward to having these strong brands with new, cutting-edge innovation.

These products are designed to wow the customer with their feel and aesthetic while driving higher ASP.

I'm pleased to share with you these rollouts are on time and on budget, and all are showcasing spectacular quality, which we are known for.

We're excited to have the entire new product portfolio floored in time for the important summer selling season.

We anticipate these products to stay on the floor for the next 3 years, serving as the new North American flagship line for Tempur-Pedic and Stearns & Foster products.

Going forward, we will continue to build out our innovative pipeline and explore new opportunities to address consumer preferences.

But these current products will be our volume drivers for Tempur-Pedic and Stearns & Foster for a number of years.

The second long-term initiative is to invest significant marketing dollars to promote our worldwide brands.

In fact, in 2019, we anticipate having increased advertising investments, both in dollars and as a percentage of sales, to support the new products.

Consumers have never had more access to information at their fingertips, and they are engaging with more products and brands online than they have in the past.

We are responding to this changing behavior and speaking to customers where they want to be engaged.

We're in the process of driving our marketing efforts to keep our brands top-of-mind with consumers, whether they're casually watching television, browsing social media or actively researching bedding online.

We believe we can drive customers to brick-and-mortar and online stores so they can engage with our world-class products firsthand.

The third long-term initiative is to optimize worldwide distribution to make sure our products are properly represented in all channels.

Even though consumers are more digitally savvy than ever, our research shows the vast majority of customers still want to visit brick-and-mortar stores to touch and feel bedding products before they purchase them.

While it's always our preference to work with third-party retail partners, we have established 41 high-end company-owned stores in the U.S. in order to serve customers looking for a low-pressure sales experience.

These high-end, low-pressure showrooms with knowledgeable, noncommissioned sleep consultants educate consumers on our product, provide further brand awareness and generate future sales opportunities for third-party retailers in the local market.

These stores continue to perform well, and we anticipate having at least 60 Tempur retail stores open in North America by the end of 2019.

Our last initiative is to drive increases in EBITDA.

As we look forward in 2019, we believe the combination of our innovative, new, premium products, our increased focus on marketing efficiency and our internal productivity initiatives will improve profitability to help us to create long-term shareholder value.

Lastly, before opening the call for questions, let me give you a brief update on litigation with Mattress Firm.

As most of you know, we have been engaged in multiple, separate lawsuits with Mattress Firm relating to a separation and certain trade risk issues.

Mattress Firm's new board reached out and requested we settle these expensive and unproductive suits.

As described in the press release, I am pleased to report both companies have resolved all litigation.

I truly appreciate Mattress Firm's new board members' handling of the situation.

Operator, will you please open the call for questions?

(Operator Instructions) And our first question comes from Michael Lasser of UBS.

Scott, on the subject of Mattress Firm, what are the chances that settling the litigation is now a segue into potentially reunifying with them?

Well, thank you for your question.

I think when it comes to the Mattress Firm relationship, I would say it's trending well.

Communications continue to be constructive.

In fact, communications have probably never been better, and we're normalizing the relationship between the 2 companies.

Obviously, Tempur Sealy is the largest bedding manufacturer in the world and Mattress Firm is the largest bedding specialty retailer in the United States.

And it just makes sense that the companies have a normal relationship.

Today, I don't have anything to report other than the settlement of litigation now.

And our next question comes from Bobby Griffin of Raymond James.

Scott, I just want to dive into a little bit about the Sealy outlook for 2019 of a low single-digit decline.

And try to help us understand, what is exactly driving that in connection with the Stearns & Foster launch, which was pretty impressive in Vegas, and kind of the moving parts around that commentary?

Sure, great question.

First, let me set a little bit of foundation.

As we said in the prepared remarks, Sealy in the fourth quarter, if you exclude Stearns & Foster, was up slightly.

So Sealy as a brand in North America actually had a pretty good quarter in the fourth quarter.

And as I said in the prepared remarks, quarter-to-date, that trend is slightly better, as we said in the fourth quarter.

And then you saw in the guidance there was a little bit of the expected headwind from Sealy in the guidance.

I think when we look forward into '19, we have a -- we've got a tough comp and that we had a very successful hybrid performance last year.

We continue to see weakness in the below $1,000, and we see strength above $1,000.

And we've got this -- the Stearns & Foster launch, which you're right, did get a very positive reception in Vegas.

So when we blended them all up together and we're working through guidance, we've got a slight headwind in Sealy.

Maybe it's conservative, maybe it's not, but that was our best guess, to put it in the middle of the fairway as we sit here today.

Would you say anything different, Bhaskar, in explaining that?

No, I think it's well said.

Okay.

And our next question comes from Keith Hughes of SunTrust.

With the news a couple of days ago that did for the retailer, do you characterize this as a one-off?

Are you looking to do more of these, when the right situation develops, to buy other independent retail?

Yes, thanks for the question.

Our strategy has always been worldwide, not just in the U.S., is that our primary focus is third-party retailers.

And where we have third-party retailers that are supportive and give us the distribution we need, that is our preferred channel by far worldwide.

But we've always said that in situations if we don't have that, that we're open to different options.

And around the world, we execute different options.

In this particular situation that came at us fairly quickly, we looked at it and we think that distribution's important, and we executed a different option, which is to keep that distribution in the marketplace, and we've made a bid for it.

It is not a strategic change in the way we think about distribution.

We -- I think we'll always lean third party first.

But at times, we're going to own a few stores.

At times, we've joint ventured.

At times, we've got stores in a store over in Asia.

When we look across the world in our distribution strategies, we've used lots of different methods.

It's just probably the first time we've done something like this in the U.S.

And our next question comes from Peter Keith of Piper Jaffray.

I was intrigued with your comments around earnings growth accelerating as you look out to 2020.

And while it's a ways out, maybe you could just give us a little bit of insight on how you're thinking about that and some of the drivers of that acceleration.

Sure.

First, I'm glad we were able to intrigue you.

We don't get that often.

Look, first of all, if you look at it, we've had to redo the entire Tempur line.

Those are expensive.

Those are disruptive.

Had been to all the adjustable bases.

We get all the Tempur line launched in 2019.

It gets floored.

People get trained.

And those products, as I said in my -- in the prepared remarks, are going to be the driver of volume for Tempur.

So that's certainly going to be -- we would think, would be a tailwind when you compare '19 to '20.

Additionally, we expect to continue to have some Tempur store growth.

And we -- and you can see the growth in our direct accelerate.

I think we were 23% growth in direct.

We expect that to continue.

And we've got some special initiatives to kind of work on the below $1,000 at Sealy that we hope will take hold.

So assuming that you get a reasonable commodity environment and you get -- continue to have a strong economy worldwide, it looks like to us that we'll have a pretty good '20.

Now the other thing that's getting us as far as growth rate when you look at '19 compared to '18, we're having to step over some incentive comp that -- we did not earn incentive comp in '18, and we budgeted incentive comp for '19.

And that's affected the growth rate.

It's our plan and our hope and our desire to hit the incentive comp in '19 and then hit it in '20 so you wouldn't have that headwind between the 2 years.

And our next question comes from Seth Basham of Wedbush Securities.

My question is around mix.

You spoke to some mix headwinds in the fourth quarter in Tempur-Pedic.

Was that in line or greater than your expectations; leading you to a fall to the low end or the bottom end of your guided range?

And then secondly, as you look to 2019, how much of a headwind do you look for Tempur-Pedic mix to be?

And related to that, is the $15 million in incremental R&D spend something that you contemplated in your guidance previously?

Okay, let me try to do all those, and then, Bhaskar, clean me up.

In the fourth quarter -- first part of the question was what was the cannibalization that we actually realized in the fourth quarter compared to what we expected.

It's interesting.

Luxe obviously got launched in the fourth quarter, and the Luxe product is doing what we want it to do and what we expected it to.

It's raising ASP.

And that side of the equation was kind of what we would expect.

We did have a little more cannibalization in the fourth quarter than we expected as the Breeze product deteriorated quicker than we would have expected, which may have gotten a hit by Luxe.

It may be people getting ready for the new Breeze product coming out.

So I would say it's kind of a mix issue when you talk about it in the fourth quarter.

When you talk about the launch, you've got Breeze coming that's on schedule.

You're not going to get totally through the cannibalization issue, what Bhaskar, until the back -- until about the third quarter?

That's correct.

So as I think about the merchandising mix, is exactly as Scott said in the fourth quarter, a little bit more than anticipated from Breeze.

Also, the Stearns & Foster we mentioned as well.

It's been, as you had mentioned, been received very well in Vegas.

We expect that to improve in 2019.

Specifically as it relates to merchandising mixes, the Breeze will go out after Presidents' Day.

And as we get into the back half of the year, we'd expect the merchandising mix to turn around.

And then I think the last part of your 1 question -- you were able to get 3 questions in on, which was very talented, was the $15 million incremental spend on new products.

That is incremental.

I would say it was not -- it was in -- it's in this year's guidance.

Correct.

And we'll be able to talk about that in more detail throughout the year so that you can see what that -- what we're doing in that area.

But at this point, we don't really want to talk too much about that particular product.

And our next question comes from Brad Thomas of KeyBanc Capital Markets.

Scott, I was hoping you'd talk a little bit more about the competitive landscape, specifically addressing perhaps share gains you may have picked up from Mattress Firm store closures, how the competitive landscape stands today with Mattress Firm under new ownership and the potential for antidumping to occur.

Sure.

I assume you're primarily -- you're talking about North America, so I'll address North America.

Clearly, with Tempur sales up 24% in the fourth quarter, that makes Tempur by far the strongest major brand in North America, and I think, under any computation, gained significant market share.

So I'll just write out on Tempur.

If you go to Sealy and the Innerspring beds, which, as I said before, was up a little or slightly ex Stearns & Foster, it is my perception that, that is a strong performance relative to other Innerspring manufacturers in the fourth quarter.

Did we pick up some share relative to Mattress Firm store closing?

Hard to tell.

I think that we probably got some, but that's very hard to tell.

I will tell you that the Sealy business has been a little stronger than we were probably thinking.

And so maybe, some of that is from store closings.

But it -- but like I said, it's very difficult to tell.

If you go all the way across the industry, you probably have to touch on the BedInABox guys.

That market to me looks like they haven't been able to demonstrate profits.

Although their unit growth -- they may have some unit growth, it's still coming from overinvesting and customer acquisition cost.

And it looks to me like they're trying to run to retail because they're having trouble with growth.

So I still -- I haven't seen the BedInABox industry in general as being much of a competitive threat, although I think it's a niche business.

But I don't think anybody in North America is doing it in any large size at a profit.

China imports, I think, was maybe the other one you mentioned.

We continue to work through that.

It's delayed a little bit, as we said in prepared remarks.

We expect to get some help there.

But we're not just sitting around waiting for help from Washington.

We have some processes and task force that are being worked on here to go after the below $1,000, and we expect over the next few quarters we'll be able to report on that performance.

And our next question comes from William Reuter of Bank of America.

I just have 2 questions.

The first is now that you're within your target leverage range on capital allocation, how are you guys thinking about debt reduction compared to either share repurchases or, I don't know, anything else that you guys would -- in terms of growth initiatives?

And then secondarily, with regard to the increase in your retail stores, can you talk about where you see the mix of retail and wholesale being maybe 2 or 3 or 4 years from now?

Sure.

On capital allocation, what are we?

3.8 turns, Bhaskar?

3, 3.9, yes.

Yes.

We slipped -- just slipped under the high end of our target of 3 to 4 turns.

We call the midpoint 3.5.

I think -- you have to think we're probably going to be in the mode of paying debt down a little bit more for a little while.

But we've always said we're going to -- this business generates a lot of cash flow.

The business gets the first call on the cash flow to the extent that the business doesn't have use for the cash at a high rate of return.

Then we'll look to give it back to the shareholders in some form or so.

But I think we're probably really at 3.8.

I think we'll probably pay down a little more debt in the near term.

And then what's the second part of the question?

Retail stores, where we see that in the future, I think.

Yes, retail stores, again, we're probably talking about North America.

We're -- I guess we'll do worldwide.

I mean, we're 10% direct to wholesale.

If you're talking a few years, I could see that number inching its way up to maybe 20%.

I can't see it being much over 20% from a strategy standpoint.

And our next question comes from John Baugh, Stifel.

I guess 2 quick ones.

One, the $15 million incremental testing new product, is there a way, Scott, to put that in the context of a percentage increase over whatever you call R&D or normal testing is the first one.

And then the second is, I appreciate that iMS is not a strategic change.

But what's the -- what are the chances in the next 24 months with brick-and-mortars struggling that we'll see 1 or 2 more of these types of deals?

The way I'd look at the $15 million, there's some testing and there's -- it's specifically identified on a few products, and I would consider them to be a little bit out of the norm.

This wouldn't just be the normal stuff.

I'm going to beg off and ask you to wait a quarter or so, so that we can talk about it in more detail.

But I don't think those are special projects.

I think they will have incremental EBITDA that will probably benefit us in 2000.

2020.

-- 2020.

So I'm going to beg off a little bit on that one.

But I think you'll be pleased with those investments when we can talk about those in more detail.

As far as iMS, I don't -- I'm not -- I don't know of any other iMS situations.

But at the same time, you can't say never.

And some of the retailers have been under a little bit of stress, but I'm not anticipating any more situations like that in North America.

And our next question comes from Curtis Nagle of Bank of America Merrill Lynch.

So I was wondering if you guys could maybe just contextualize low end of the guidance a little more, which I think technically doesn't imply any -- at least dollar EBIT growth.

Just kind of looking at things from like a revenue perspective.

The business is accelerating.

You've theoretically got a handful of good margin drivers like mix, as you had mentioned, Sealy perhaps getting better, sales leverage, pricing, all that kind of stuff.

And some of the headwinds you've called out like advertising and incentive comp should be indicative of growing profitability.

So yes, I mean, just kind of how should we think about that?

What would have to happen for no EBITDA growth?

And just slipping one quick question, since you guys did comments on October trends in last call, what can you say about Sealy and Tempur in January?

Okay, let me do a little bit of that, and I'm going to let Bhaskar talk about it.

First of all, I guess I -- the way I think about guidance is we usually work on our best guess, what's the middle of the fairway, then put a range around it after some stress testing.

So I guess the middle of range is 450, admittedly not as much growth as we would have liked.

We certainly are pushing for more, but I think the midpoint is 450.

You got any comments about guidance, Bhaskar?

I mean...

No, (inaudible).

Then as far as the January trends, as we said in the prepared remarks is that quarter-to-date, the trends in the U.S. we're talking about here for both Tempur and Sealy improved slightly from the reported revenues in the fourth quarter.

So in layman terms, look, it's been a pretty good start to the quarter.

But we try to be also a little bit cautious because it can be volatile.

But it's been a pretty good start to the quarter.

And our next question comes from Laura Champine of Loop Capital.

As you launch the Breeze products in stores, is there a period where you see disruption on the Tempur business as retailers sell through their floor samples?

And then if you can just sort of quantify the sellout of floor samples and then the sell-in just to set the floors and what the timing of that impact will be in the first half.

Sure, good question.

The Breeze launch is how we've thought about it as it will happen right after Presidents' Day and that currently, the way we're thinking about it is the majority of that will happen all within the first quarter.

So unlike what we saw last year where we had a phasing between the first and second -- or, sorry, first and second quarter, what I would anticipate is the impact of the Breeze sell-in be primarily in the first quarter.

As I think more broadly about floor models in total is what we've indicated, is, is that I would expect floor models to be flat on a year-over-year basis.

However, one things about phasing, since the majority of our launch this year, whether it be Stearns & Foster or whether it be the Breeze, it's all within quarter one, is I would anticipate the biggest impact -- negative impact would be in Q1, we're seeing favorability for the rest of the year.

And our next question comes from Carla Castella (sic) [Carla Casella] of JPMorgan.

I just wanted to dig in a little bit more on the Chinese import question.

How much would you say the industry in '18 was the Chinese imports?

How much was it impacted?

Yes.

Or how much is the -- I mean, how much of the market share did those imports get?

Yes.

I don't have a specific estimate.

We'll have to get back to you off-line as far as some of the stats we have.

But I don't have that on the top of my head as to exact percentage.

I would say significant increase over the last 3-year period at price points that would be below cost.

(Operator Instructions) And our next question comes from Keith Hughes with SunTrust.

Yes, just a follow-up.

You had discussed in the prepared comments 24%, I believe, was year-over-year growth at Tempur-Pedic.

I assume like the third quarter, the units were up more than that, which is an outstanding unit result.

Can you give us any sort of feel what units looked like in the quarter?

Yes, the units were up 36%.

That is correct, in the fourth quarter.

Yes.

Yes, that's very robust unit growth.

And that concludes our question-and-answer session for today.

I'd like to turn the conference back over to Scott Thompson for closing remarks.

Thank you.

To the over 60,000 employees worldwide, thank you for what you do every day to make the company successful.

To our retail partners, thank you for your outstanding representation of our brands.

To our shareholders and lenders, thank you for your confidence in the Tempur Sealy leadership team and its Board of Directors.

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

This does conclude the program.

You may all disconnect.

Everyone, have a great day.