Somnigroup International - Earnings Call - Q1 2011

Transcript

Speaker 11

As a reminder, today's Conference call is being recorded. I'd now like to turn the conference over to your host, Mr. Barry Heitman, Senior Vice President. Please go ahead.

Speaker 13

Thanks, Allie, and thank you, everyone, for participating in today's call. Joining me in our Lexington headquarters are Mark Sarvary, President and CEO, and Dale Williams, Executive Vice President and CFO. 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 forward-looking statements, including the company's expectations regarding sales and earnings, involve uncertainties. Actual results may differ due to a variety of factors that could adversely affect the company's business. The factors that could cause actual results to differ materially from those identified include economic, competitive, operating, and other factors discussed in the press release issued today.

These factors are also discussed in the company's SEC filings, including the company's annual report on Form 10-K under the headings: Special Note Regarding Forward-Looking Statements and Risk Factors. Any forward-looking statement speaks only as of the date on which it is made. The company undertakes no obligations to update any forward-looking statements. The press release, which contains a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures, is posted on the company's website at somnigroup.com, and it is filed with the SEC. Now, with that introduction, it is my pleasure to turn the call over to Mark.

Speaker 9

Thanks, Barry. Good morning, everybody, and thanks for joining us. Today, I'll provide a brief overview of our performance in the first quarter and then provide an update on our strategic focus areas for 2011. Dale will then provide a detailed review of the first quarter results and will discuss our financial guidance. We're very pleased with the first quarter results. Sales and profits exceeded our prior expectations in both our North American and international segments. Sales were up 28% from last year, and earnings per share were up 55%, with operating margins at 23%, driven by our continued focus on productivity and fixed cost leverage while making significant investments in marketing. Our sales growth was significantly ahead of the industry in the U.S. and in many of our major overseas markets. We continue to expand market share worldwide.

We believe this outperformance was directly related to the implementation of our strategic initiatives. The first of these initiatives is to make sure that everyone knows that they would sleep better on Tempur-Pedic. During the quarter, we increased our investment in advertising by nearly 60%, with considerable growth both in North America and in our key international markets. While it is still early, all these marketing campaigns are showing positive results, and in particular, our brand awareness campaign in Europe is progressing well. For example, an important leading indicator of sales is website hits, and we have seen web traffic rise considerably in the U.S., but also in the UK, France, and Germany, all markets where we've increased our advertising. In the U.S.

and in Europe, retailers report that consumers are volunteering that they've seen Tempur-Pedic advertising and are asking specifically for our brand, and our measured brand awareness is tracking at record highs. In the second quarter and throughout the year, we will continue to test and evaluate ways to make our consumer communication even more effective. The second strategic initiative that drove our growth this quarter was making sure there's a Tempur-Pedic mattress and pillow for everyone. We continue to expand our product range both in North America and internationally as we work to ensure there is a product in our portfolio that appeals to everyone. In the U.S., the TEMPUR Cloud Luxe mattress continued its rollout, and we've been very pleased with its performance. Some of our retailers report that it's their best-selling mattress, which is striking for a $4,500 King set.

Obviously, this is helping Tempur-Pedic and our retailers improve average ticket. Another factor helping drive average selling price is our commitment to the TEMPUR-Ergo adjustable system. We began advertising the TEMPUR-Ergo for the first time earlier this year, combined with a nationwide promotion. Together with a focus on driving incremental distribution and retail training, we've seen our attach rates improve significantly, and we see a lot of opportunity for further attach rate improvement. This quarter, we will begin rolling out the TEMPUR-Contour collection, our newly designed, traditional, TEMPUR-Feeling mattress line. We expect this to be a fast rollout into nearly all U.S. accounts within just a few months. Based on initial reactions, we are optimistic that we will gain incremental slots during the process. We are expanding our product range significantly overseas as well.

At the end of March, we began the distribution of the TEMPUR Cloud collection internationally, an effort we expect to take 12-18 months. As a reminder, the TEMPUR Cloud collection is our softer-feeling mattress line. It is now on retail floors in Germany and some of the surrounding markets, and we recently introduced the product line to our French and Spanish dealers. While it is early in the launch, retailer interest and initial consumer sell-through are encouraging. Now, turning to our commitment to ensure that TEMPUR is available to everyone, we expanded our retail distribution in the U.S. during the quarter. We gained incremental slots from the TEMPUR Cloud launches, and we opened a handful of new accounts. We also gained doors and slots internationally, where we will grow distribution throughout the year.

We're also continuing to execute on our own store growth plan in China, where we project significant growth over the next several years. In summary, we've had a very good quarter, and we are expecting that we will have a good year overall. In the longer run, we remain confident that there's enormous potential for Tempur-Pedic. We will continue to make significant investments in marketing, as this will be critical to capitalizing on the considerable market share opportunity we see for our brand. With that, I'll now hand it over to Dale.

Speaker 12

Thank you, Mark. I'll focus my commentary on the financials and our 2011 guidance. In total, first quarter net sales were $326 million, an increase of 28% over the same period last year. North American sales were up 37%, and international sales were up 11%. On a constant currency basis, our international sales were up 8%. By channel, in North American retail, net sales were $208 million, an increase of 45%. Internationally, retail sales were up 11% to $76 million. On a product basis, mattresses were up 29%, driven by a 14% increase in units. North American mattress sales increased 36% on a 20% increase in units. The increased average unit selling price reflects improved mix and pricing, as well as fewer floor models in 2011 as compared to the prior year. For the second quarter, with the Contour launch that Mark discussed, we expect average U.S. price to be modestly impacted by the deeply discounted floor models. In the international segment, mattress sales increased 12%. On a constant currency basis, international mattress sales were up 10%. International mattress units increased 4%. In total, pillows were up 13%, driven by a 7% increase in units. North American pillow sales increased 24% on unit growth of 17%, with the related ASP improvement due to favorable mix. International pillow sales were up 3% on a 5% decline in volumes. Sales of our other product line, which includes items that are normally sold along with a mattress, were up 36%. As Mark mentioned, we are seeing favorable attach rate trends for the TEMPUR-Ergo bed system, which is the driver of this growth. Gross margin for the quarter was 52.3%, up 310 basis points year on year and 40 basis points sequentially.

On a year-over-year basis, the gross margin improvement related to a variety of factors, including the ongoing productivity program generated improved efficiencies in manufacturing and distribution. We had favorable product mix and increased production volumes to support higher sales, resulting in fixed cost leverage. Partially offsetting these benefits was unfavorable geographic mix, as the North American business continued to grow as a percent of the total. Reflecting our commitment to ensure everybody knows they would sleep better on Tempur-Pedic, we ramped our advertising investment by over 200 basis points. Despite this investment, operating margin expanded by 250 basis points to 23.1%. Our G&A expense reflects our ongoing strategic investments, including key IT projects, to scale the business, given our long-term positive outlook. In addition, G&A incorporates higher incentive compensation related to bonus and the variable component of our equity plans. Interest expense was $2.5 million.

As I mentioned on our last call, we have initiated the process to renew our credit facility, and I currently expect this to be completed in the second quarter. Our tax rate was 33.1%. Net income was $48.3 million, up from $33.1 million last year. Given our improved profitability, EPS was $0.68, up from $0.44 last year. Now, I'll turn to the balance sheet for a brief review. Our accounts receivable balance was up, reflecting improved sales levels, and DSOs were down five days from the first quarter of last year, yet up slightly from year-end. The increase on a sequential basis reflects improving sales trends during the quarter. Inventories were up $4 million year on year, consistent with new product launches and our positive outlook for sales. We generated $56 million of operating cash flow during the quarter, and capital expenditures were $5 million.

At the end of the quarter, our funded debt-to-adjusted EBITDA ratio was 1.3x, far below our debt covenant of 3x. Now, I'd like to make a few comments about our share repurchase program. Through open market purchases, we bought back 1.32 million shares during the quarter at an average price of $47.35 for a total cost of $62.5 million. As of March 31, 2011, we had $137.5 million still available under the existing share repurchase authorization. Now, I would like to address our updated guidance for the year. We currently expect net sales to range from $1,310,000,000-$1,360,000,000 and we currently expect earnings per share to range from $2.80-$2.95 per diluted share.

Within this guidance, we expect our gross margin to be up slightly more than 200 basis points for the full year, driven by our ongoing productivity plan and fixed cost leverage, partially offset by higher commodity costs and geographic mix. Regarding the second quarter, we expect a few factors will likely result in a modest sequential decline in our gross margin rate. These factors are floor model discounts related to our new product launches and the closeout, an expectation for higher commodity costs, unfavorable segment mix, as our sales in our international segment will be down from the first quarter, which is consistent with normal seasonality and consistent with our long-term plans. We are planning to advertise at a rate of at least 10% of sales for the full year. We expect interest expense for the full year to be approximately $11 million.

For the full year, we anticipate the tax rate to be generally in line with our first quarter run rate at 33.3%. We are using a share count of 71 million shares for the full year. This assumption includes the benefit of our repurchase activity in the first quarter, however, it does not assume benefit from potential further reduction in shares outstanding. As noted in our press release, our guidance and these expectations are based on information available at the time of the release and are subject to changing conditions, many of which are outside the company's control. This concludes our prepared remarks, and at this point, operator, we would like to open the call to questions.

Speaker 11

Ladies and gentlemen, if you have a question at this time, please press star, then one, on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Mark Roop of Longbow Research. Please go ahead.

Speaker 0

Hey, guys. This is actually Andy on for Mark. Congrats on a great quarter.

Speaker 9

Thank you. Thank you.

Speaker 0

I guess as it relates to the TEMPUR-Contour rollout, could you maybe give us a little bit of an idea of what sort of is the margin implication as we look ahead to next year? I think you indicated that it'd be sort of a blended price increase of, correct me if I'm wrong, but in North America, it'd be something like maybe a high single-digit, low double-digit price increase. Also, is that sort of baked into your guidance for the, I guess, for the coming years?

Speaker 12

Yeah. This is Dale. Related to the TEMPUR-Contour, the average pricing of the TEMPUR-Contour is a little bit higher than the existing Tempur-Pedic line. As we've mentioned, the introductory model is the same price as our current introductory model, but the better and best are a little bit higher priced. This is a completely new product redesigned from the core. It's a little bit more expensive, but from an overall margin standpoint, the TEMPUR-Contour will be comparable to slightly better than the existing product line that it's replacing. Obviously, from this year's standpoint, the impact of the TEMPUR-Contour is a tremendous amount of floor models going out in a short period of time.

With approximately 7,000 retailers out there, and if you assume that they have a couple of beds on each of these beds on each floor, that's a lot of floor models going out in a short period of time. That's why we've talked all year about in the second and third quarter, when we're doing this rollout, there'll be a little bit of pressure there. Once we get through that rollout, then we would expect, obviously, to see good performance from a gross margin standpoint.

Speaker 0

Okay. Great. It sounds like most of that's going to be related to in the second quarter, most of the floor model rollouts, and it'd maybe trickle off in the third quarter. Is that the right way to think about it?

Speaker 12

Yeah. The idea is to get the bulk of them out in the second quarter, but there will be some spillover into Q3.

Speaker 0

Okay. On your international advertising, could you kind of remind us what you're sort of doing internationally as it relates to your advertising? I think you're doing some TV advertising. Is that your first time in those markets? Maybe if you could kind of give us, share with us kind of your expectations on what you're looking to see in terms of response to those ads.

Speaker 9

Yeah. It's not our first time. We have been advertising internationally for a long time. The difference here now is that we have, in Europe in general, which is where we've been for the longest, we really haven't done very much advertising on TV. We have done a bit, but really not very sustained or systematic over the years. As of now, we are materially increasing our spending on marketing, as we've said, on advertising in Europe, and in particular on TV. We have introduced a new campaign there called the Weightless campaign, which is important to recognize that while the situation in much of the rest of the world, much of the markets, many of the markets where we compete, but particularly those in Europe, we have really quite good distribution but relatively low awareness.

If we can lift the awareness, we should quickly be able to see the benefit in sales. Our focus is on raising consumer awareness of the brand. We're using this new campaign called Weightless, which is to introduce people who don't know what Tempur-Pedic is. That is running right now and so far has been quite effective. We're tracking, obviously, sales. We're tracking, as I mentioned in the prepared comments, web hits because that's a good measure of whether people are responding. Also, we're measuring awareness systematically, too. It's that that we're seeking to raise. This is not going to be a one-month or one-quarter event. This is a strategic change, and it will take time, and we're early in the process. Where we stand right now, we're pleased with the progress that we're making.

Speaker 0

Okay. Great. That's helpful. Finally, for me, could you give us maybe an idea of how sales trended throughout the quarter, maybe on a month-by-month basis for both the domestic and international businesses?

Speaker 12

Sure. Really, for both domestic and international, we were monitoring our business. We determined what the guidance was for the year and announced that in late January. Our guidance expectations at that time were in line with what we were seeing in January. We saw the business improve in the second and third month of the first quarter, which was why we overperformed in the first quarter, both domestically and internationally, and why we have adjusted our outlook for the year. We saw a step up in business in February and March.

Speaker 0

Okay. Great. Thanks a lot, guys, and good luck.

Speaker 9

Thank you.

Speaker 11

Our next question comes from Brad Thomas of KeyBanc Capital Markets. Please go ahead.

Speaker 3

Thanks. Good morning. Let me add my congratulations as well on a great quarter. I wanted to just follow up on advertising. Dale, I heard you mention about a 200 basis point increase in advertising. Could you help quantify a little bit more what the dollar spend was this quarter versus last year in the first quarter? Given the acceleration that you saw in sales, did we get a little bit more leverage on advertising than you would have expected this quarter? How is this changing your thoughts about advertising as we continue to go through the year?

Speaker 12

Yeah. In the first quarter of 2010, you know we spent about $22 million globally, which was a little less than 9%, roughly 8.5%. In the first quarter of 2011, we spent just a little over $34 million, so a significant increase in spend. That was at about 10.5% of sales, hence the 200 basis point step up. As Mark mentioned, this is a concerted strategic effort. We mentioned this last fall at our Investor Day in New York in terms of the adjustment to our strategic plans. Our long-term strategic plan is to spend advertising at roughly the 10% rate. We said this year would be 10% or more. We saw a good response. As Mark mentioned, particularly the way that we found that we can really effectively measure the advertising in the immediate term is what happens on the web.

The quick response of web hits was very encouraging to us. As the quarter progressed, we actually spent more than what we originally planned in the first quarter. We added some extra flights, particularly in the key markets in Europe. This is something that we're going to be monitoring very closely. We're committed to the planned spend levels, but as we see performance, we will continue to put a little bit more fuel in the fire.

Speaker 3

Great. To follow up on your comments about input prices, you did say you have higher assumptions for chemical prices. Could you give us an update in terms of what you're seeing and hearing from your suppliers, and what assumption for raw materials is baked into your new guidance?

Speaker 12

Sure. You know the environment around commodities is fluid, going up and down, but generally is much higher than it was at the start of the year. At the start of the year, we said that in our plan for the year was that we would see a high single-digit increase in commodity costs for the year, and that was baked into our prior guidance. Our new guidance bakes in kind of a low to mid-teens increase in commodity costs. We have upped the commodity cost impact on the business, yet we continue to improve the gross margin because of the strong productivity, because of the mix of the business, because from a product standpoint and the leverage from additional volume.

We are able to sit here today and expect a larger impact from commodities than we thought at the beginning of the year and still be able to further improve our gross margins.

Speaker 3

Great. Thank you very much.

Speaker 11

Again, ladies and gentlemen, if you have a question at this time, please press star, then one on your touch-tone telephone. Our next question comes from Keith Hughes of SunTrust. Please go ahead.

Speaker 6

Thank you. I have two questions. First, you had talked about in the prepared remarks that mix was a contributor to gross margin in the quarter. I just want to dig in that more deeply. Was that with the mattresses, pillows? Can you give us specific examples of where that was the case?

Speaker 12

Yeah, Keith. Let's talk the big one first. As Mark mentioned, the TEMPUR Cloud Luxe is performing extremely well. The TEMPUR Cloud Luxe is a very high-margin product for us. It's a better-than-fleet average, excuse me, better-than-fleet average product. As the TEMPUR Cloud Luxe has gotten into distribution and has shown very strong performance, the TEMPUR Cloud Luxe in itself is a key driver of the product mix benefit. We've seen some positive mix in pillows. TEMPUR Cloud pillow continues to perform extremely well. That's a little bit higher price point, a little bit higher margin than our average pillow. We're seeing good performance across the business. Also, the TEMPUR-Ergo attach rate, while it's lower margin than a mattress or a pillow, it's a better-margin product than a flat foundation at a much higher price point.

Speaker 6

Is the TEMPUR Cloud Luxe and the TEMPUR Cloud in general, are the raw material costs any different between it and the other SKUs and mattresses?

Speaker 12

The chemical composition is a little bit different in the TEMPUR Cloud. It's a different formula, so it's slightly different, but not dramatically different when we talk about the price increase impacts that's impacting all of our formulations.

Speaker 6

I mean, I know it's a different formulation, but the cost is similar to what we see for the other mattresses?

Speaker 12

Yeah.

Speaker 6

Okay. Final question on, you had mentioned also in the prepared comments on the brand recognition, specifically within Europe, at all-time highs. How do you measure that? Where do you stand and where are you trying to go? Any details on that would be helpful.

Speaker 9

The way that we measure it is that we measure it. We have a systematic measuring process that we've had in place for some time now that we put in place as a sort of baseline so that we could measure the effectiveness of the advertising going forward in each of the countries. Where we are is relatively low. We've got a long way to go, quite honestly. That's well understood, and it's what we're doing. We're not going to share the exact numbers. Frankly, we're three months into this process. It's very, very early. As I said, the results are encouraging. It's hard to say it's done yet. The thing that it does appear, it certainly appears as though there's a response, and it's even in such a short-term response that can be measured in awareness. It's very early, and we've got a long way to go.

By comparison to the U.S., where we have really essentially, in terms of aided awareness, almost 100%, we've got a very long way to go in Europe.

Speaker 12

Keith, I would just add the awareness measurement. We've instituted a monthly tracking measurement in Europe, where monthly we're getting feedback in terms of awareness so that we can see the impact of the advertising as quickly as possible.

Speaker 6

Okay, thank you.

Speaker 11

Our next question comes from Budd Bugatch of Raymond James. Please go ahead.

Speaker 2

Good morning, Mark. Good morning, Dale. Good morning, Barry. Let me add my congratulations on the quarter and on the performance. A couple of questions, if I could. One, productivity, Dale, you talked about the efficiency in the manufacturing and talked about the fixed cost leverage. Could you parse that a bit for us in terms of which was more important and what we might see going forward and how that worked geographically?

Speaker 12

Excuse me. From a geographic standpoint, you know we're seeing a little bit more volume leverage in the U.S. Obviously, the U.S. business is growing faster, and you know volume leverage is a key. I'm not going to break it down exactly into the various components, but volume leverage is a key contributor to the continued product or gross margin improvement, as you would expect. We continue to see very good productivity performance across the business. As we said earlier, you know the productivity plans that we had in place for this year, even with the increased commodity costs, the productivity program is performing better than the original plan so that even with the increased commodity cost, our productivity program is taking care of the increased commodity cost as we currently see it. That's where the upside leverage is coming from. The volume is coming from positive product mix, etc.

We saw a very strong increase in ASP in the first quarter, principally caused by mix. The price increase on the TEMPUR Cloud collection really had very little impact on the first quarter. That will be a benefit as the year progresses.

Speaker 2

One of the other things that jumped out at me, and though it's a small part of the business, it's indicative, the international direct business looks like it was up, I guess, on probably restated currency numbers, 80% or so?

Speaker 12

Yeah. Let me explain that. We put a note in the press release, but it's something that might be looked over easily. We did an analysis here at the end of the year in terms of the economics of our different channels. We had been including our owned store internationally, the stores that we own, for example, in China. We have some of our own stores in Japan. You know we have a store here or there in Europe. Those were included in retail, but we determined, particularly as we're starting to ramp stores in China, that it didn't make sense to have those stores listed in retail anymore because from an economic standpoint, those stores look more like our direct business. We've shifted the reporting of stores that we own out of retail into direct.

You see a huge growth in direct internationally, and that's a reallocation of these owned stores. We've given you in the release also the prior year numbers are restated to this new basis. On that restated basis, you see a big growth in direct, and that's because of ramping stores in China, some increase in stores that we had through the year last year in Japan, and sporadically here or there across Europe having a store or two being put in place.

Speaker 2

That is more to the stores in place internationally as opposed to web traffic or web-based sales internationally.

Speaker 12

Correct. Internationally, except for in the U.K., we don't have the same kind of direct business that we have here.

Speaker 2

Okay. One of the other numbers that jumped out was healthcare not doing as well. What can you tell us about that, and what may be a focus going forward to try to improve that performance?

Speaker 9

Yeah. You're right, Budd. The medical business is down. The medical is something of a catch-all in the sense that it's different in the different parts of the world. For example, in the U.S., it's primarily our source, us supplying major hospital bed manufacturers, whereas in Europe, it is the sale of normal Tempur-Pedic mattresses through sort of semi-pharmaceutical-type retailers. They're sometimes subsidized by the government. From country to country, the medical business is quite different. One driver of the decline overall is because increasingly consumers are finding that the price advantage of going through these pharmaceutical retailers is not significant, and they're going to regular retailers. Having said all that, it is an area that in time we will focus on. It is something that we think there is more opportunity in, and we will focus on. Quite candidly, at this minute, we have bigger fish to fry.

We're putting our focus in other areas. It is something that we will turn to at some stage.

Speaker 2

Lastly, for me, Mark, you had said that you're gaining incremental slots through TEMPUR Contour and I guess the discontinuation. I think the only bed that I see in the stores now that is being closed out is the Classic at this point in time. I thought you were going to replace two other models, if I remember right, the Deluxe and the Advantage.

Speaker 9

Right. The Deluxe will be closed out as well, and you'll see that, too. The Advantage is, as Dale said, that the Luxe and the Classic are being replaced with the Select and the Signature, two new TEMPUR Contour products that are different both in terms of their core and their cover. The Advantage is being replaced with a product which is going to be called the TEMPUR Contour, which has the same core as the current Advantage, but a different cover. What we're going to do there is we'll replace the covers on the floor models, and therefore, there won't be a closeout on that.

Speaker 2

Right now, you're only closing out the Classic, right? When do you start to see the discounts or the closeout on the other two models?

Speaker 9

They both are right now.

Speaker 12

You should see it any day.

Speaker 2

Okay. All right. Thank you very much.

Speaker 9

Thank you.

Speaker 11

Our next question comes from John Bao of Stifel Nicolaus. Please go ahead.

Speaker 5

Thank you. Good morning, and congratulations likewise. On the advertising, the Weightless campaign in Europe, will that also be done in any areas outside of Europe, number one? Number two, as you roll out Cloud through the world, will there be any product-specific advertising around Cloud throughout the world?

Speaker 9

Yeah. First of all, Weightless will, I say Europe because Europe is much of our business, but Weightless will be used in other parts of the world, for example, in China. It will be used in other parts of the world. What we see it as, it's a good ad for the purposes of introducing people who are not familiar with the brand to what is the promise of the product. It does work in other countries, and we will use it. We are, and we will continue to use it in other places. At the exact other end of the spectrum, in countries where the brand is well known, the news or the importance of the new communication is the fact that we now have the Cloud line, which is new to the consumers. This is the news to the consumer.

For example, in Benelux, which is one of our most developed European markets, we are advertising the arrival of the Cloud because the consumers there are familiar with Tempur-Pedic. It is being used more broadly. In every country, we are evaluating what the state of the consumer awareness is and what the most relevant piece of communication that we should use. We're using whichever is the right one from our portfolio of communication vehicles.

Speaker 5

Staying on advertising for a second, is there a long-range number, and let's just talk U.S. here, where the awareness and whatever metrics you're measuring hit a level where the incremental ad spend is not as effective? If so, sort of where is that in the timeline from today? What might a more mature ad spend as a % of revenue be in the United States once you hit that level?

Speaker 9

That's a big theoretical question. The fact is that clearly there comes a stage when the incremental value of an incremental dollar is not worth it, and we're well aware of that. However, quite candidly, we're not there yet. Remember that one of the things I said before was that our aided awareness is very high. If you say to somebody, "Do you know Tempur-Pedic?" they say, "Yes, I do." Unaided awareness, which is, "Tell me the name of a mattress brand," while higher than it's ever been, is still lower than we'd like it to be. That is the one that's correlated to purchase intent. We want unaided awareness to be higher than it is, and we will continue to invest in that. As we've said, our long-term sort of strategic objective is a 10% spend on advertising.

It is a rule of thumb type of target, but that seems appropriate. At this moment, in this quarter and for this year, we're expecting to spend a little more than that because we're still moving up the path. Once we get to the level of brand recognition that we would want, we theoretically would be able to ramp down and probably will. Bear in mind that what that then changes to is communicating news. One of the things is that once consumers are aware of the brand, the next job is to make sure that they're continually aware of the new news from the brand. It is a moving target. We're some years away from where we finally intend to end up.

Speaker 5

Okay. Thanks. Lastly, I don't expect you to tell me all the products you've got planned here, but the IMAX theater seating caught my attention. I'm curious how you could convey to us how you think about non-mattress, non-pillow opportunities globally, either in terms of size or market. Are you going to go automotive? Are you going to go home furnishings? Any kind of help to think about that would be great. Thank you.

Speaker 9

You're right. I'm not going to tell you. In all seriousness, of course, you're right. I mean, we do, we are at some stage, it will be appropriate for us to move beyond the range that we're at. Frankly, we're not there yet. We've got a lot of opportunity with the product range or the categories in which we compete right now, and that is going to be our primary focus for the next year or for the foreseeable future. Ultimately, we do believe there is expansion beyond, but not in the planning cycle that we're talking about right now.

Speaker 12

I would just add that the IMAX item in particular, you know that's the capability of doing that goes back to the entrepreneurial days when we were doing a lot of different things. We got out of a lot of those adjunct peripheral opportunities when the business decided to focus on its core. This situation with the IMAX in Boston was a unique opportunity that we found compelling. We had the capability because we knew how, we still had the molds, etc. We could very easily make those seats. What we make is just the temporary material for the seats. We don't manufacture the whole seat.

Speaker 5

Thank you.

Speaker 12

Thank you.

Speaker 11

Our next question comes from Bob Drabble of Barclays Capital. Please go ahead.

Speaker 4

Thanks. Good morning. Just a couple of questions for you. First, on the industry, when you look at your sales results versus the industry, can you maybe just give us a little bit of quantitative numbers around your market share gains and the trends in premium and specialty bedding segments? What do you think is happening in the industry thus far this year?

Speaker 12

Yeah, we can, Bob, just to a degree. At this stage, we don't have full industry data for 2010 yet. We have the ISPA sample, which represents somewhere in the neighborhood historically of 70% of the industry, but we don't even have the full industry data for 2010 yet. However, as we look at 2010, we think we gained quite a bit of share from an overall industry standpoint. For 2011, so far, all we have is January and February ISPA data. We don't have March yet. I'm not sure exactly when it will come out. Typically, it would come out sometime here in the next week or so. Looking at January and February, on the monthly data, it's only the total mattress market. There's no split between spring and specialty.

Sitting here today, looking at how the industry performed in January and February, we continued to take a tremendous amount of share. We continued to be a significant portion of at least the ISPA-reported growth of the industry. Realistically, what we believe is going on is we are seeing a strong growth in the industry in premium and even stronger growth in terms of our share of premium as well as specialty share of premium. We're actually kind of curious to see the full 2010 data ourselves.

Speaker 4

Okay. As you look at the expanded distribution in the U.S. and some of the international distribution expansion that's underway, can you just give us an idea? When you look at your door count in the U.S., I think you had talked about 500-1,500 additional doors. Is that still a good number in North America? On the international side, I think it was the largest bedding retailer, Dreams, you guys added them as a distributor. What are the other sort of big opportunities in terms of chains on the international rollout, door count, etc.?

Speaker 12

Yeah. You know, domestically, we still believe that we have a lot of growth opportunity in terms of doors. We added some doors in the first quarter, as Mark mentioned. We added a couple of key new accounts, which had some sizable door numbers. Domestically, we're just a little over 7,000 in the furniture and bedding stores now. Internationally, as you mentioned, we added Dreams last year, which was the largest bedding retailer in the UK. We have opportunities in almost every market to expand our distribution. We're not going to name names. We generally try not to do that even with existing customers, much less new customers. However, we do have targets in each country.

We do have prospects in each country and the ones that we think make sense to give us the right level of distribution, the right depth of distribution in each country, and retailers that our brand fits with in terms of having a good reputation and having a good premium business.

Speaker 9

It's also important to recognize that what's important, and it's kind of interesting to recognize that country by country, the structure of the industries is quite different in terms of the proportion of total sales that are owned by large chains is very different from one country to another, particularly when it comes to products that are premium. The strategy that we have for each country is customized to that country, and the target customer type is customized to that country.

Speaker 4

Thank you very much.

Speaker 11

Again, ladies and gentlemen, if you have a question, please press star, then one on your touch-tone telephone. Our next question comes from Joe Altobello of Oppenheimer. Please go ahead.

Speaker 8

Thanks. Good morning, guys. Most of my questions have been answered. Just had a couple of quick ones. First, in terms of the industry, Dale, you talked about that a little bit, but you also mentioned that your trends in the quarter improved in February and March. I was also pleasantly surprised to see overall growth, particularly in North America, reaccelerate in the first quarter. What do you attribute that to? I mean, obviously, market share gains have been going on for quite some time. Is it more advertising, or is there something else going on that really drove that reacceleration in February and March?

Speaker 9

It's a combination of things. The advertising is helping, and obviously, advertising is cumulative. The longer you do it, the better it continues to build. That's one important part. The other thing is the TEMPUR Cloud is continuing to be a very important driver. Dale mentioned the TEMPUR Cloud Luxe, a new product that is doing really well and, frankly, a little better than we'd expected. We also ran an effective promotion, a nationwide promotion on the TEMPUR-Ergo base, which again lifted not only the sales of TEMPUR-Ergo but the sales of beds. It contributed to our overall volume. The advertising and other things that we're doing drove people to the web, too, which has also lifted our direct business. There wasn't one thing; it was the combination of the different things that we've been focused on over the last 18 months or so.

Speaker 8

Great. Thanks, Mark. That's very helpful. Secondly, in terms of pricing, you mentioned the pricing you took on Cloud Supreme. What is the appetite right now amongst consumers and retailers if commodity costs continue to rise for additional price increases later this year?

Speaker 12

Certainly, we're very confident in our business. We're very confident in our ability to take price if we were to determine that we needed to. We just raised the price on the Cloud Supreme, and it was not a factor in the marketplace on that product. As we introduced the TEMPUR Contour, the two higher-end, the better and best TEMPUR Contours are higher priced than the products they're replacing. At this stage, we're not concerned about that from a market reaction standpoint. I think that we're in a little bit of a unique position, particularly given the breadth of our range and the depth of our range, where we can opportunistically take a price here or there if we felt like we needed to because of commodity costs.

As I mentioned earlier, right now, as we sit here, we're seeing overperformance in our productivity programs, which are right now compensating for the increased commodity costs, where our current commodity cost expectations are quite a bit higher than what they were at the start of the year. Our productivity program is compensating for that.

Speaker 8

Got it. Okay. Perfect. Thank you.

Speaker 11

Our next question comes from Eric Holloway of Stevens Corp. Please go ahead.

Speaker 1

Hey, guys. I wanted to dig into China for a moment. Could you refresh us on the number of stores that you have there now, and how you're thinking about the ultimate opportunity there, maybe in terms of number of stores?

Speaker 9

We haven't actually shared the number of stores that we have, and we're not going to at this stage. It's a relatively small number, although growing quite fast. We think that there is an opportunity in China to get a substantial number of stores across the country, but we're relatively early in that process right now. I'm afraid that's really all we can say about it at this stage.

Speaker 1

Sure. Understood. Maybe then, if you could help us understand, what's your approach to positioning of the brand there? Are you seen as maybe what you call a luxury brand? If you could just help us get our heads around how you position the brand relative to the competition, that'd be great.

Speaker 9

Yeah. Clearly, we're a luxury brand. We're a premium. We would be perceived to be super premium. At the same time, in China, the malls in which our stores are carry many brands, and many of them are super premium. In China, there are a lot of very large, what they call furniture malls, which carry many, many brands, most of which are Chinese, but by no means all. Many of them are European and American, and they are selling super products that are in the same ballpark of price as ours. We are super premium, but we are not alone in the retail outlets where we are. These are very big malls.

Speaker 1

Okay. Great. That's very helpful. Thanks very much and good luck.

Speaker 9

Thank you.

Speaker 11

Our next question comes from Jon Anderson of William Blair. Please go ahead.

Speaker 7

Morning, everyone. Thanks for taking my questions.

Speaker 9

Welcome.

Speaker 7

I just wanted to come back to the distribution opportunity for a minute and the door count. As you look forward and continue to add doors, both in the U.S. and outside the U.S., do you believe that the new doors have the potential to be as productive as your existing doors, or would you expect some cannibalization or lower velocity through those? If you expect them to be as productive, I guess, why would that be?

Speaker 9

In simple terms, I think the answer is yes, we do expect them to be essentially as productive. Remember, we have about 3% market share. We really have only a small proportion of the total in the U.S. We have really only a small proportion of the total market, so we have the opportunity to grow well beyond where we are. Insofar as consumers don't have easy access to our products, one of our key strategic initiatives is to make sure it's available to everyone. You know, getting the appropriate more distribution is important, and we will do it. What we've seen is that the productivity is as high.

In Europe and in China and in Asia in general, we definitely have the opportunity to open more stores because we clearly do not have, we clearly have opportunity to open more stores because we are not as fully penetrated as we should be. We at least expect the productivity to be consistent.

Speaker 7

Great. Thanks. In terms of the demand, both in the quarter and the outlook for the year, it is ahead of initial expectations. I know you have quite a bit of excess capacity in aggregates, but I'm wondering if there are any constraints within individual plants, any of the three manufacturing plants, or on specific product lines.

Speaker 12

Yeah. No. From a capacity standpoint, we have ample capacity in all the plants. Obviously, the Denmark plant is serving the international business. The international business growth rates for the last couple of years have been significantly less than the U.S. growth rate. Within the U.S., the production at the two facilities in the U.S. is relatively balanced. They both still have ample capacity. I'll just reiterate, we've said for quite a while now, with our existing capacity, we could have support revenue in the neighborhood of $2.5 billion. We still have quite a ways to go before we get concerned about capacity utilization.

Speaker 7

Terrific. Just one more quick question on the TEMPUR Cloud Luxe. Is the rollout complete now on the TEMPUR Cloud Luxe, or is there still more to go? Also, are you seeing cannibalization for the Luxe that's kind of in line with your expectations or maybe less so? Who is the TEMPUR Cloud Luxetaking share from?

Speaker 9

The TEMPUR Cloud Luxe is mostly rolled out now, but there's still more opportunity for rollout. It's mostly rolled out. It is, as we said, doing well. It does cannibalize, clearly, like any product, to some extent from within our line. Interestingly, if anything, it's cannibalizing from lower-priced products. We're okay with it doing that. We are clearly taking from other, in aggregate, it appears we are growing. Much of the growth is coming from, or the TEMPUR Cloud Luxe is coming from, other premium products in the marketplace.

Speaker 7

Terrific. Thanks a lot, and congratulations.

Speaker 9

Thank you.

Speaker 12

Thanks.

Speaker 11

Our next question comes from Tony Gikas of Piper Jaffray. Please go ahead.

Speaker 10

Good morning, guys. Thank you for another great quarter. A couple of quick questions. Just on the rollout of the Cloud in Europe, I know you commented a little bit. It appears to be off to a good start. Maybe just elaborate on the initial weeks that the product has been out relative to the trajectory of sales here in the U.S. when it rolled out last year and/or relative to your expectations, maybe just a little more color there. Second, as it relates to your consumer, it seems to be pretty healthy at this point. Do you think that there's still a lot of pent-up demand from the slowness that we saw back in 2008 and 2009? Do you think that there's really some sustainability in the business over the next couple of years? I have one follow-up.

Speaker 9

Let me do the TEMPUR Cloud first. First of all, honestly, Tony, it is too early to talk about sell-through at this stage. It really has been on the floor for literally weeks. Too early to tell. I think the best indicator that we've got right now is dealer reaction, which is always a good indicator, although not perfect, of what the reaction is going to be. The dealer reaction in Germany and Austria and some of the Benelux has been very positive, very positive indeed. We've got the distribution that we're getting at least as good as we'd hoped, as quickly as we'd hoped. So far, so good in the German-speaking countries. In France and Spain, we've just shown it with the retailers. Again, very, very positive reaction. We're very confident we're going to get very good distribution very quickly. They're very good indicators.

The one thing I will say, though, is that in Europe, people claim to prefer firmer bed. When we're kind of modeling how we think this is going to, you know, what share this is going to give, we recognize that it's not the same as the U.S., and it's going to be hard to tell. All that said, though, what people say they like to sleep on is not necessarily the same as what they actually end up buying. We're learning from it as we go. It's too early to say from a sell-through point of view, but from an initial reaction, it's certainly meeting our expectations. As far as the consumer pent-up demand is concerned.

Speaker 12

Yeah. Let me take a crack at that one. From a pent-up demand, it's hard to completely gauge, obviously. If you look at the run rates for the whole industry prior to the recession, you saw run rates for several years in the low 20s. The industry kind of peaked near 25 million units, and then it started gradually backing down. In 2008 and 2009, we had dramatic downdraft in terms of unit in the industry. Last year, we saw an improvement in industry units, again, based on the ISPA sample. We don't have the full industry data. We saw kind of upper single-digit growth in units last year for the industry, but the overall units were still well below what the norm was, even taking out the kind of ramp-up to the peak in 2005.

The industry was running at a 21, 22 million units a year, and it has been well below that for three years now, 2008, 2009. Even though 2010 was better, it's still well below what we would think is a normalized run rate. That would tell us that there's still tremendous pent-up demand out there. Is the price point of that demand that's pent up? It's anybody's guess. What we're trying to do is pull everybody up to Tempur-Pedic. We're having success with that.

Speaker 10

Great. Let's see. Last question then. You know your consumer seems to be feeling better and opening their wallets. New products working. Marketing campaigns are very effective. Execution's been great. What's keeping you up at night right now? What would be your leading one or two concerns looking at the balance of the year?

Speaker 12

First thing I'll say is nothing keeps us up at night because we sleep on Tempur-Pedic.

Speaker 9

You're going to realize it. Commodities, obviously. We're focused on commodities. We're focused on the fact that we're all watching the macro environment, particularly in the U.S., in Europe and in the U.S., both where we have significant sort of macroeconomic issues that are faced, the decisions that have to be made from everything from debt and taxes and everything else. Clearly, that is one concern. Beyond that, it's hard to, you know, there's no other systemic thing that is keeping us awake other than we have a, you know, we're in a very competitive industry, and we have very good competitors. You know, it's always going to be necessary for us to continue to perform in order for us to continue to grow. We're very conscious of that.

Speaker 10

Okay. Thank you, guys. Good luck.

Speaker 12

Thanks, John.

Speaker 11

That's all the time we have for today's call, and I will turn it back to the company for any closing remarks.

Speaker 9

Thank you. Thanks, everybody, for joining us today. We look forward to talking to you again in July when we'll review the second quarter. Have a good day.

Speaker 11

Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.