Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Barry Hytinen – Vice President of Investor Relations and Financial Planning & Analysis

Mark A. Sarvary – President and Chief Executive Officer

Dale E. Williams – Chief Financial Officer

Analysts

Mark Rupe – Longbow Research

Budd Bugatch – Raymond James

Joan Storms – Wedbush Morgan Securities

Keith Hughes – SunTrust Robinson Humphrey

Brad Thomas – Key Banc Capital Markets

Matt McClintock – Barclays Capital

Joseph Altobello – Oppenheimer & Co.

John Curdy – Principle Global Investors

Joel Havard – Hilliard Lyons

Tempur-Pedic International, Inc. (TPX) Q1 2009 Earnings Call April 16, 2009 5:00 PM ET

Operator

Welcome to the Tempur-Pedic first quarter 2009 earnings conference call. Today's conference is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Mr. Barry Hytinen. Please go ahead, sir.

Barry Hytinen

Thank you for participating in today's call. Joining me in our Lexington headquarters are Mark Sarvary, President and CEO and Dale Williams, 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 10K under the headings special note regarding forward-looking statements and risk factors. Any forward-looking statements speak 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 web site at www.tempurpedic.com as well as filed with the SEC.

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

Mark Sarvary

Thanks Barry. To our listeners thanks for joining us this evening. Today I will provide our view on our performance in the first quarter and an update on the progress with respect to our key strategic initiatives. Then Dale will provide a detailed review of the quarterly results and updated guidance.

In the first quarter sales were below our expectations. Our industry continues to experience sluggish consumer traffic and many high end shoppers are deferring their purchases. Given that environment I am pleased with how well we executed during the quarter. We made progress on our long-term initiatives, most notably our initiative to drive gross margins and we kept our other costs contained.

We are pleased with the gross margin expansion in the quarter. Our operations team is performing well in driving improvements and we did a nice job containing operating expenses while continuing to commit a large amount of resources to building our brand. As a result, we delivered earnings in line with our total expectations. We will continue to tightly manage the business to ensure we maintain our financial flexibility and deliver the earnings per share guidance that we outlined in the last call.

As we have discussed before, we view 2009 as a year to optimize the business and position ourselves for growth when the economy improves. A key focus is to further lower our debt to improve our financial position. To that end we lowered debt nearly $20 million while increasing our cash balance and increasing the cushion versus our covenants.

For the foreseeable future we expect that debt reduction will be our number one objective from a capital allocation perspective. Looking forward it remains difficult to predict sales with a high degree of difficulty. We are now projecting a continuation of Q1 sales levels throughout 2009 and we have chosen to widen our sales guidance range to reflect continued weakness and low visibility in the market. Our key assumption is that the economy will not get better in the near term.

However, we are confident in our ability to improve our margins, to manage our expenses and to lower our debt. As a result we are maintaining our prior EPS guidance despite lowering our sales projections. Dale will provide more detail on the financials in a moment so I will focus the rest of my commentary on progress in the strategic initiatives we outlined in the last call.

Number one, we made significant progress on our initiative to improve gross margin with a 250 basis point expansion year-over-year. We have plans underway across our operations to expand margins including projects to improve utilization rates, a redesign of our transportation network and a range of sourcing opportunities. We expect productivity to continue to be favorable as our projects should ramp through the year.

Having said that, lower commodity costs were the biggest driver of improvement on this point. As a reminder, our goal is to drive gross margins to a level approaching 50% over time.

Number two, regarding our initiative to improve effectiveness with retail customers we continued to roll out marketing copy, messaging and video footage so that local retails can link their advertising with ours. In addition we executed on the first of a series of scheduled promotional events. The “Experience it and Win” promotion was centered on the President’s Day holiday shopping period and it encouraged consumers to try a Tempur-Pedic bed at their local retailer. Many retailers took part and given it was our first attempt at a national promotion we were very pleased with it. We were encouraged to see that even more retailers are planning to take part in our Memorial Day event, the Tempur-Pedic test drive. In this event consumers have a chance to win a variety of prizes including a car simply by trying one of our beds at our local retailers.

Events like these are relatively low cost ways to drive consumer trials in the Tempur-Pedic Sleep System. We are also working on additional ways to improve our retail effectiveness.

Initiative three we are making good progress on too and that is our effort to broaden the range of products that we offer. We completed an important consumer research study just recently and that has provided unique and in-depth insight into consumer needs within the sleep category. We are acting on this data in a variety of ways but in particular to differentiate and tailor products to specific consumer needs. Our R&D pipeline is robust and we anticipate rolling out some very competitive products as a result of this research.

Number four, we have made early progress on our goal to stabilize and ultimately grow the direct business. On a sequential basis the direct business was flat which is an improvement from recent trends. Consumers are using the Internet to research their mattress purchase before they buy and we are dedicating more resources to our website and we are marketing online to consumers who have expressed an interest in mattresses as well as consumers who are researching health and wellness issues.

The fifth and last of the initiatives we continue to see a substantial opportunity to improve our household penetration in our international markets. During this first quarter we increased the number of spots per store in our international business and that reflects retailer recognition of Tempur-Pedic’s ability to meet a wider range of their consumers. We are in the process of rolling out a new mattress, the Sensation mattress which appeals to a very broad range of consumers.

So, the first quarter of 2009 has been challenging on the sales front and we see no reason for the category to improve in the near-term. However, 2009 is off to a good start from a cash flow, margin and cost perspective. For the remainder of the year we will continue to generate significant cash flow while our focus remains on improving our competitive and our financial positions.

I will now hand it over to Dale.

Dale Williams

Thanks Mark. I will focus my commentary on the financials and our 2009 guidance. First quarter EPS was $0.18, consistent with the prior year. In total, net sales were $177 million, a decline of 28% over the same period last year. Foreign exchange rates were unfavorable during the quarter. On a constant currency basis net sales declined 24%. Domestic sales were down 28% while international sales were down 29%. Again, on a constant currency basis our international sales declined 18%.

Looking at it by channel, in domestic retail net sales were $93 million, a decline of 28% yet flat on a sequential basis. The direct business declined, however as Mark mentioned on a sequential basis the business also was flat. Internationally retail sales were down 28% to $57 million. On a constant currency basis international retail sales were down 16%. Our international third-party channel was weak as the global economic slow down spread.

On a product basis, mattresses were down 29% in total driven by a 25% decline in units. Domestic mattress sales declined 29% on a 30% decline in units. In the international segment mattress sales declined 29% with a 19% unit decline. The sales decline reflects the negative impact of foreign exchange rates. On a constant currency basis international mattress sales declined 17%.

In total, pillows were down 27% driven by a 26% decline in units. Domestic pillow sales and units both declined 25%. International pillow sales were down 29% on a 26% decline in volume. Similar to mattresses, foreign exchange rates negatively impacted international pillow sales. On a constant currency basis international pillow sales declined 20%. Average unit selling price increased as a result of positive channel mix.

Turning to gross margin, gross margin for the quarter was 46.2%, up 250 basis points year-over-year and 320 basis points sequentially. This is the company’s first gross margin improvement on a year-over-year basis since 2004. On a year-over-year basis the gross margin improvement principally related to three factors. First, commodity costs including transportation continued to drop and were slightly down versus last year. Next, our focus on driving manufacturing efficiencies is yielding benefits. Lastly, pricing actions taken earlier in the year were also a benefit. These factors were partially offset by fixed cost de-leverage as production volumes were down substantially year-on-year.

While we spent over $14 million on advertising to drive brand awareness and consumer traffic, we lowered selling and marketing expenses in total $19 million year-over-year. We also lowered G&A expenses by $5.3 million despite incurring over $1 million of incremental bad debt expense as compared to the first quarter of last year. This represents lower G&A expense run rates as a result of the actions we took in 2008.

Interest expense was $5 million, down $3 million year-on-year reflecting lower debt and LIBOR rates. Our first quarter tax rate was 38.4%. The tax line includes a non-recurring $1.3 million charge resulting from a change to a foreign tax law. Without this charge our effective tax rate for the quarter would have been approximately 32%.

Net income was $13.3 million, down $200,000 from the prior year. Turning to the balance sheet, we continued to improve our financial flexibility. Cash increased $6 million sequentially and we generated $26 million of operating cash flow. Capital expenditures were $1.4 million, half the amount spent in the prior year. Although we still plan for capital expenditures to range between $10-12 million for the full year.

Accounts receivable were down $9 million sequentially and $62 million year-over-year. Continuing a nice trend, DSO’s are down 10 days compared to prior year and 1-1/2 days sequentially and our accounts receivable aging continues to show improvement with more of the balance being current today than at any other quarter point in the company’s public history.

As sales fell below expectations, inventories were essentially flat sequentially at $61 million but down $51 million year-over-year. We continue to see opportunities to reduce inventories going forward.

We reduced debt $19 million since the end of 2008 to $400 million. Over the past 12 months we have lowered debt by $197 million. Our funded debt to EBITDA ratio was 2.38 times, down slightly from last quarter and well below our debt covenant of three times. We have taken and will continue to take the steps necessary to ensure we will be in compliance with our debt covenants in any realistic scenario in 2009. Based on the way we are modeling the business in terms of earnings before interest, taxes, depreciation and amortization we anticipate our funded debt to EBITDA ratio will remain in the low to mid 2’s for the balance of the year.

However, should economic conditions deteriorate further as we look at the business we estimate we would be in covenant compliance even if sales in 2009 were to decline to approximately $650 million with essentially no adjustments to spending from our current projections? Of course, if such a scenario unfolds we would anticipate taking actions to further reduce spending.

Now I would like to address our updated guidance for the full year 2009.

The company has maintained EPS guidance in a range of $0.70 to $0.90 per diluted share but reduced net sales guidance to range from $700 million to $740 million. I would like to note that the economic environment makes sales difficult to predict. Visibility is low so we are widening our sales range to incorporate a broader set of potential outcomes.

At the mid point of our range we are assuming only a modest seasonal benefit to first quarter unit volumes. The low end assumes modestly worsening trends with no seasonal benefit. The high end assumes volume levels consistent with the first quarter with a more normal level of seasonality.

I would like to take a moment to remind investors of our typical sales pattern. Historically, our sales are down modestly in the second quarter from the first quarter followed by an increase in the third quarter and the fourth quarter is usually slightly down from the third quarter. Our EPS guidance assumes gross margins are up in 2009. At the low end of our guidance we would anticipate gross margins for the year in line with the first quarter despite lower production volumes going forward. At the high end we anticipate additional margin expansion from the first quarter rate principally driven by production efficiencies. We anticipate a slight worsening of commodity costs in the second half of the year. For the full year 2009 we anticipate gross margins will improve on a year-over-year basis by at least 300 basis points.

I would like to note that for the second quarter we anticipate the combination of domestic and international segment mix as well as fixed cost de-leverage may result in gross margin being flat to slightly down as compared to the first quarter. Our plan is to continue to invest in advertising at rates slightly higher than the rate incurred in the first quarter. We know our advertising dollars go further in times like these and this further demonstrates our commitment to our retail customers.

Regarding interest expense I would like to remind investors that $300 million of our debt is currently swapped for fixed interest rate. Therefore we would recommend investors anticipate interest expense to approximate $19 million for the full year. We are using a share count of 75 million shares.

Regarding our tax rate, I previously discussed the reasons for the higher than normal rate in the first quarter. Based on our current expectations we anticipate the full year tax rate to approximate 34.5%. This takes into account the elevated rate in the first quarter. 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.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Mark Rupe – Longbow Research.

Mark Rupe – Longbow Research

Looking at the unit volume growth obviously in the first quarter or in the fourth quarter you had an easier compare than in the first quarter. I was just curious to see if you are seeing anything going on as we head into April here if there has been any kind of stabilization at all at the high end or within your products has there been any kind of trade down?

Mark Sarvary

We have said this before and we continue to say it and we keep our eye on it quite closely. We still are seeing no material, no significant difference between our sales level and our difference price points. There is a little bit of movement up and down but it really is noise level. So we are seeing a very consistent decline across the board. As we have said for some time we believe this primarily is driven by [deferral]. It is not as though we are seeing something which is more weighted to the low end. The decline is not more weighted to the high end.

Mark Rupe – Longbow Research

On the selling expenses during the quarter typically you see somewhat of a seasonal up tick in Q1. That obviously didn’t take place in this quarter. Just curious if there was anything kind of one-time in nature in there?

Mark Sarvary

Not really. There is a bit of traditionality but the fact is last year we did invest quite heavily in the first quarter in marketing. We said some time ago we were going to stage it more evenly this year, planning it to be more quarter-by-quarter with the biggest quarter is the third quarter. We will stage it more evenly according to sales. So, there was no one-time event.

Operator

The next question comes from Budd Bugatch – Raymond James.

Budd Bugatch – Raymond James

My first question just really goes to the gross margin and I don’t know, Dale you walked us through a little bit of what the qualitative changes were between commodity costs and improvement in manufacturing efficiency, pricing benefit and then the fixed cost de-leverage. I wonder if you can give us some quantification or order of magnitude of those four items?

Dale Williams

As we came into the year we had started to see commodity costs decline so we had an expectation of what we would have in commodity costs. The commodity costs actually improved a little bit more than what we thought they would where in the first quarter the costs were actually slightly below the prior year costs. From the overall benefit looking at a 250 basis point improvement on a year-over-year basis or a 320 basis point improvement sequentially, half of that improvement was commodity costs. Some of that was expected. Some of it was better than expected. Then the other half was fairly evenly between the impact of the price increase and the impact of our factory productivity initiatives. As the year progresses, as I said, we are anticipating that commodity costs may actually start to increase again in the second half of the year and the continued margin expansion we believe we will have in the business will be driven by the factory productivity and cost improvement initiatives continuing to pay benefits throughout the year.

Budd Bugatch – Raymond James

On the fixed cost de-leverage can you quantify that? I know that was caused by volume. Can you remove that with some structural actions in the manufacturing side?

Dale Williams

We are always looking at fixed costs to try to make them unfixed. There are a certain level of fixed costs that are not attainable without closing a facility. But we continue to run the numbers periodically and continue to look at that. At this time we have no plans to remove a facility because the transportation costs to this point offset the cash fixed cost that we incur.

Budd Bugatch – Raymond James

And you have them as reduced as far as you have them nailed down as tightly as you can nail them right now?

Dale Williams

We feel like we have the fixed costs we can impact pretty nailed down. But we are always looking.

Budd Bugatch – Raymond James

Lastly, during the quarter were there any notable changes in differences in the sales dynamic month-over-month? What happened as we went through the quarter? January looked like it was a terrible month for most people at retail.

Dale Williams

From our standpoint we saw January and February pretty much consistent with the run rate we saw in the fourth quarter. We saw a slight weakening globally in March but that is what we are basing our outlook on is what we saw throughout the first quarter and traditionally the mattress industry slows down a little bit in late March and into April and then picks up again as the second quarter goes on. What we have seen in April is consistent with our expectations so far.

Budd Bugatch – Raymond James

I understand it can change sequentially but I was looking year-over-year. Was March worse year-over-year than January and February were year-over-year?

Dale Williams

Good question. Let me look at a number real quick. March was pretty much on par with what we saw last year by month. So we did see the business slowing down last year as the first quarter progressed. So kind of the year-over-year decline was fairly consistent within a few percentage points.

Budd Bugatch – Raymond James

For each month during the quarter?

Dale Williams

Yes.

Operator

The next question comes from Joan Storms – Wedbush Morgan Securities.

Joan Storms – Wedbush Morgan Securities

First of all, the direct business continued to be weak although I guess more flat on a sequential basis. What exactly are you doing on initiatives in that category to improve that business? What is trying to drive that business?

Mark Sarvary

As we said, the quarter-over-quarter in the direct business was flat. That doesn’t sound like a great victory but that is the first time in a long time that has been true. So we are actually quite pleased with that especially given the environment is declining. I don’t want to declare victory by a long way. All I would say is we are quite pleased with that result. There are two or three things, but there are two things I would point to that are going on. One is one that I mentioned on the last call and is a big focus for us going forward. We really believe that the Internet is an increasingly important source for us for leads, for sales direct and also guiding people to our retail partners. Also obviously for selling directly online.

The effectiveness of advertising online is very good relatively speaking. We continue to move more of our spending to that method. What we are seeing is a substantial lift in the number of leads that we achieved in the first quarter. As you can imagine the benefit of leads don’t pay off in the quarter that you get them. They come later. We are seeing that is quite good. That is one thing I would point to as a result of what we have been doing is the increased focus on the web has increased leads and if it plays out as it has in the past that should be good going forward.

The other thing is that we dropped an effective catalog at the beginning of the year in January and it was a good catalog with a good offer and it resonated quite well. So it was effective, old fashioned DR marketing which is paying off.

Joan Storms – Wedbush Morgan Securities

Can you talk, I missed a little bit on the promotions you were running for President’s Day and the one coming up for Memorial Day.

Mark Sarvary

The thing is one of the things that obviously, as you all know, we don’t price promote and we don’t have periods where we have sales on our products. As a key holiday period almost all, I think all of our retailers use these periods as times of promotion and they advertise to bring consumers into their stores. They have traditionally advertised low prices and so forth and special offers. We have not in the past been able to participate because we are not able to do that. But working with retailers we have tried and have been quite pleased about our success at creating a promotion that is interesting for their consumers and therefore interesting for them and gives consumers a reason to buy now or at least come into their store. One of the key things is that retailers across the board are saying that the thing they are lacking is people coming into the stores. So the first two promotions have been very much focused on getting people merely to come into the store and try a Tempur-Pedic. In the first one it was a relatively simple principle that if you came in and tried a Tempur-Pedic you got a game piece and if you took it home you could check it on the Internet and if you won you got a series of prizes. We got a heck of a lot of names through that. A lot of people came through to the retailers and the retailers did see a significant new footsteps they didn’t anticipate they would have gotten. As a result, this next one, the one coming up on the next holiday we have got even more retailers. We have frankly more retailer participation than we thought we would on the first one and we are getting even more on this one.

Joan Storms – Wedbush Morgan Securities

Dale, I just want to make sure I understand the gross margin guidance for the second quarter in that flat to slightly down versus Q1?

Dale Williams

Right. And that is because of the mix of the business between the U.S. and international. We expect the international business as a percent of the total to be a little bit lower in the second quarter than what we have seen recently because of the comparisons on a year-over-year basis. The international basis experienced the economic slow down later than the U.S. business did so its decline was a little bit delayed relative to the U.S. business. So that mix is different. The relative gross margin of the businesses are different and so that puts a little bit of downward pressure on the next quarter.

Operator

The next question comes from Keith Hughes – SunTrust Robinson Humphrey.

Keith Hughes – SunTrust Robinson Humphrey

Back to the gross margin again, you talk about raw material prices perhaps moving up as the year progresses. Is that just your read on petrochemical markets or are your suppliers actually telling you that is coming?

Dale Williams

No, that is just our read on the market. We saw oil kind of bottom out down in the $30’s and it is up into the low $50’s. I didn’t see what it did today but oil has stabilized and if anything has moved up a little bit. We have seen in some of the intermediary chemicals like propylene bottom and move up a little bit like oil did so our anticipation is as the year goes on there may be a little bit of upside pressure on commodity costs from where they are at today. Just as that continues to flow through the chain. In terms of trying to be conservative in our outlook for commodity costs we have built into our estimate that they will increase some in the second half of the year.

Keith Hughes – SunTrust Robinson Humphrey

Would you still, based on your estimate, still be down year-over-year towards the end of the year?

Dale Williams

Yes. Our commodity costs peaked in November of last year. So we will still be getting year-over-year improvement but on our sequential basis we expect the second half of the year commodity costs will be a little bit higher than the first half.

Operator

The next question comes from Brad Thomas – Key Banc Capital Markets.

Brad Thomas – Key Banc Capital Markets

I wanted to follow-up on the gross margin as well. Dale you mentioned this is the first quarter since 2004 that you have had year-over-year gross margin improvement and obviously very strong quarter in terms of gross margin improvement year-over-year. It seems like there are a lot of things that if you keep working in your favor both in terms of things you are doing as well as the environment. How should we think about the sustainability of this if the commodity prices don’t turn around and start going way up? If sales do start to stabilize?

Dale Williams

I think the gross margin improvement that we are seeing this year obviously last year our gross margin erosion was worse than any year in history because the commodity costs kind of went crazy. This year we are seeing good gross margin expansion. We except that to continue through the year. So unless commodity costs were to go crazy again we think that we can maintain if not continue to grow our growth profit on a go-forward basis. As Mark said we do have a longer-term goal of getting back to about the 50% level. We have told the story several times, you know last year when oil and commodity costs were escalating significantly almost on a daily basis we got our best scientific and engineering minds together and did a lot of brainstorming around how we could substantially improve the COGs structure of the business and they came up with a lot of ideas and plans. It is a multi-year plan but they are implementing that and they are working those plans and driving cost improvement in the business and plan to continue to drive cost improvement in the business for the foreseeable future.

So we believe that we will be building into this our business cost reductions and ongoing cost reductions that will enable us to mitigate future increases in commodity costs unless they just go crazy.

Brad Thomas – Key Banc Capital Markets

As we think about the price increase benefit and the factory productivity benefit how much of the quarter would have benefit from those initiatives? Will we start to see an increasing benefit as we get into the second quarter?

Dale Williams

The factory productivity overall cost improvement initiatives that are going on in the operations group that is something we expect to build upon itself as the year goes on. So that will be an escalating benefit to the business. The price increase benefit that happened about mid-way through the first quarter so there is a little bit of additional help there incrementally. Then that is pretty stable through the rest of the year because at this time anyway we don’t anticipate any additional changes in pricing.

Brad Thomas – Key Banc Capital Markets

With your new guidance you are expecting a lower level of sales. Are there additional steps you want to take to bring your cost structure down a little bit more? The same question as far as inventory. Do you think you are going to try and bring that down a little bit more?

Mark Sarvary

From a cost point of view we are permanently obviously focused very closely on our costs. We have taken some costs out of all three of our plants this year. At this moment we feel we are at roughly the right place where we need to be. If things change they change. As we stand today, as we look at it today we feel like we are roughly in the right place. We continue to focus on all elements of our spending. We are pleased to have been able to maintain our advertising significantly this quarter and we intend to keep that going through the rest of the year. Obviously we are watching everything every day because it is such a, as you know very well, the economic environment is hard to predict so we are being as flexible and responsive as we can be.

Operator

The next question comes from Matt McClintock – Barclays Capital.

Matt McClintock – Barclays Capital

Dale I just want to be a little bit more clear on the $650 million break point you set for the covenants on a sales level. When you make the statement that includes no adjustments to spending I just want to understand what that specifically means. Does that mean no adjustments to your existing full-year spending plan including what we would normally consider variable expenses such as advertising?

Dale Williams

Yes, when we say looking at no adjustments to our spending that is basically what we do from a modeling standpoint is degradate gross profit versus what we are expecting due to lower volume, negative leverage there and less opportunity to achieve benefits of the cost improvement programs. Then from an operating expense standpoint there is a little bit of natural reduction, keeping advertising if you will at about 9% of sales, highly variable other components of operating expenses but it doesn’t take into consideration measured, thought through, additional cost actions that if we saw the economy take a further leg down we would do. We wouldn’t just let things flow through on a strictly variable basis.

Operator

The next question comes from Joseph Altobello – Oppenheimer & Co.

Joseph Altobello – Oppenheimer & Co.

I guess I will just follow-up on the advertising number since you mentioned it Dale. It sounded like you said advertising in the quarter was a little over $14 million. Is that right?

Dale Williams

Right about 8%.

Joseph Altobello – Oppenheimer & Co.

You had said it was going to be around 9% for the full year so it sounds like the first quarter was somewhat artificially low?

Dale Williams

Well we said we thought we would spend about 9% for the year. It was a little bit low in the first quarter at 8% in a very difficult environment and so we tried to keep a tight reign on all of our expenses. We do anticipate getting back to a 9% kind of level and trying to as the year progresses but we did start the year a little bit under that.

Mark Sarvary

We had always planned the fact the first quarter was going to be relatively lower. We still project for the full year we are going to be in the 9% range for the company as a whole.

Can I just add one other thing? The cost of advertising particularly on television and in print has come down quite a bit especially for our type of advertising. In fact the number of impressions that we have got has been at least as high if not higher than we had anticipated when we were projecting a higher percent of a higher number of our sales. So in fact it was a very considered decision. We took it down quite thoughtfully.

Joseph Altobello – Oppenheimer & Co.

So is there a chance that advertising could actually decline as a percentage of sales and you still got the same number of impressions?

Mark Sarvary

It certainly has this quarter. It is hard to predict going forward but for the rest of the year we haven’t changed our assumptions about that for the rest of the year. Again it is just so hard to know. We haven’t projected that.

Joseph Altobello – Oppenheimer & Co.

Secondly, on the top line guidance it sounds like the big obviously driver of the change is the macro environment and it sounds like it worsened a little bit in the first quarter from where you thought you would be three months ago. If that is the case is it the U.S. that has worsened? Or is it the international market that has worsened? If that is not the case are there other drivers to that? Is it something competitive that is going on?

Mark Sarvary

I’ll just give you one piece of color there. I think you are framing the question correctly but the way we are thinking about the year is we took the fourth quarter and said let’s assume that just carries on. That was how we thought about how to plan because it was so hard to get visibility. We are down modestly from what we had projected in the first quarter and it is more down in international than it is here relative to Q4 run rate. That is the change that we have seen and that is now what we are using as our base as we project forward.

Joseph Altobello – Oppenheimer & Co.

This is probably more of a longer term question but in terms of your leverage you have done a good job of paying down debt and maintaining your leverage ratio. Is there a point where maybe later this year or early next you feel comfortable enough with your leverage ratio and where the market is where you could potentially reinstate your dividend or perhaps buy back stock?

Dale Williams

Boy we would love that Joe. Can you tell me when we are going to feel comfortable with the economy? That is really what it comes down to. Seeing a sustained change in the environment. We are not going to get out on a limb on this. Our first and foremost responsibility is to protect the business and as Mark said in his comments at this time our primary usage of cash flow is going to be to reduce debt.

Joseph Altobello – Oppenheimer & Co.

Is it a leverage ratio you want to get to? Is it 2 times or 1.5 times? Or is it just sort of a moving target?

Dale Williams

There is not a specific leverage ratio that we want to get to. We just want to until we see a different environment we want to continue expanding the amount of cushion we have. So we are going to be sure that we keep the business protected. I appreciate your comment that we have done a very good job of doing that and that has been a primary focus for us. Making sure we are driving cash flow, reducing the debt, maintaining cushion to our covenants and we have been able to expand that cushion a little bit. We want to be able to continue to expand that cushion until such time as we feel different about the environment.

Operator

The next question comes from John Curdy – Principle Global Investors.

John Curdy – Principle Global Investors

First off, with respect to the timing of the repatriation of cash and taxes if you could speak to that and its potential impact on the timing and magnitude of your debt reduction for this year. Are you still planning $80 million in debt reduction?

Dale Williams

Yes. Let me give you a little bit of clarity on the repatriation. From a technical standpoint the repatriation is completed. It is not completed from a movement of cash standpoint. We declared a $150 million dividend that has technically been completed. To coordinate that we took the cash on hand out of our international businesses and brought it back to the U.S. That occurred in the fourth quarter. The balance of the dividend was set up as an inter-company loan where the international business now owes the U.S. business the money for the balance of the dividend. They will pay that money out of their cash flow primarily over the balance of the year. Now, I think going back three months ago we said we thought we would get the cash flow all moved by some time in the first 2-3 quarters of the year. With the international situation being a little bit weaker than we were anticipating at that time now it will take pretty much the bulk of the year to pay off the inter-company loan. Is that helpful?

One other thing, you mentioned tax. In the first quarter we paid half the tax of the repatriation of the cash outflow. The second half of the tax related to the repatriation will be an outflow in the second quarter.

John Curdy – Principle Global Investors

Would you anticipate if you are able to pay off the $80 million in debt that it would occur relatively evenly throughout the four quarters or is it going to be more back end loaded?

Dale Williams

We paid down $19 million in the first quarter so that is a quarter of it. I would expect to pay down in the second quarter probably a little bit lower just because of the timing on tax payments both domestically and internationally. We tend to have a little bit higher tax impact in the second quarter. We will see debt reduction throughout the year. You have roughly about a quarter of the $80 million in the first quarter and we will have a little bit less than that in the second quarter and then the balance across the third and fourth.

John Curdy – Principle Global Investors

With respect to your SG&A levels it looks a little like the last three quarters you have run just slightly over $22 million on average. Is that likely to be a good run rate for the rest of the year or is that likely to come down a little bit more as you continue to kind of take out some extraneous expenses? Are there anything of a kind of one-time nature that would take it up or down?

Dale Williams

No. The primary one-time nature within G&A has been the lumpiness around bad debt as we have experienced some bankruptcies and as we have been more conservative in our receivable policies to get protection against those bankruptcies. That is certainly an item that for about the last three quarters has been much higher than normal and again that is something that we will probably continue to run a little bit higher than normal until we see a change in the environment. But as I mentioned in my earlier comments, from an overall balance sheet health standpoint our receivables are in basically the best condition they have ever been in because we have been so diligent about it. So we will by and large we have taken the cuts that we think we need to take. Every day we are challenging every day we are questioning expenses. There is not another big cut to come unless circumstances would warrant it.

John Curdy – Principle Global Investors

Lastly, could you talk a little bit about what is going on with the number of doors both domestically and internationally and what you kind of see or what you are planning for with the balance of the year?

Mark Sarvary

In the first quarter doors were approximately flat quarter-over-quarter. They were up last year but this first quarter they were approximately flat. Interestingly though both in the U.S. and overseas slots in the door are up somewhat. In a quarter to be measured to be up is a good thing. I think increasingly that is important particularly in the U.S. because of the fact that we are largely available pretty much everywhere. I think increasingly we are going to be putting our focus on sales per door rather than number of doors. Anyway, the number of doors is about flat for the first quarter and the number of slots per door is up slightly both for the U.S. and overseas.

Dale Williams

Let me just add that we typically talk about doors in terms of our furniture and bedding stores. Then we separately count doors in what we have called specialty which seems to be the mattress stores and pillow only stores and we have had department stores in that specialty category because department stores was an experiment. We are and have made the decision to back off the department store channel, not entirely but we are pulling back in terms of the number of doors we are in department stores and that is a conscious decision we have made to try to get it down to really only bigger stores that have a much broader furniture business as opposed to being in all the little department stores out there that may have a very small furniture or bedding department and those just aren’t working for us.

Barry Hytinen

Just to give the exact number, that number is now about 140 department stores in the U.S. down from about 500.

John Curdy – Principle Global Investors

From what, 500?

Dale Williams

Yes.

John Curdy – Principle Global Investors

You mentioned you are getting more slots per door. Are you seeing some of your competitors having to give up slots because of financial difficulties or products that are not meeting what consumers want and you are offering a little bit better financial staying power and also introducing some new product so you are able to take more slots?

Mark Sarvary

I think the key driver of it is in aggregate it is a measure of the retailers’ belief in the portion of the customers they can meet the needs of with these beds. So what it reflects is the fact we are able to appeal to a wider range of the bed buyers for the retailers. Obviously we are in the more expensive range. From a retailer point of view given a straight choice they would rather sell one of our beds than another just because one of our beds is going to be higher priced and therefore a greater dollar margin for them. So it is ironic but in this very tough environment with an environment where people are finding it hard, the phrase that is used is the low foot steps, not enough people coming into the stores. Where you have somebody coming into the store you can find a bed that appeals to them which is a Tempur-Pedic and obviously it is good for the consumer and given the breadth of different beds that we offer it is in their interest to have more and increasingly that is what we are seeing they are recognizing.

John Curdy – Principle Global Investors

In terms of the few SKU’s that really compete directly against you in one form or another of product are the competitors being forced because of their own financial difficulties or whatever reasons to be a little less promotional and a little more rational in their promotional practices and pricing or are they getting a little more desperate?

Dale Williams

We have seen, if you are talking about knock offs…

John Curdy – Principle Global Investors

Basically that.

Dale Williams

What we have seen from the knock off side of the business is a little bit of re-trenching and some of the knock offs losing floor space and some of the retailers focusing on us and removing some of the other brands that are on the floor. It is a mixed bag out there. We have seen some very promotional activity and here I am talking beyond Visco. I am talking mattresses in general. We have seen some curtailing of certain types of promotional activity but then at the same time we have seen some significant promotional activity in cutting bed prices in half. It is not at a level that is something that we feel impacts us but we can see some significant promotional activity and you see in general a focus more around the low end of the market than the high end of the market.

Mark Sarvary

I think one of the things we have learned is that, we have said it for some time, we really now are very compelled about this but there are people and it is for us a very pleasingly large number of people who know of and are aware of the benefits of the Tempur-Pedic and aspire to have one and are not buying one right now because they are quite frankly nervous about the environment. This is not the sort of person who is going to say let me see if I can save $200-$300 and buy a knock off. It is sort of what you call status. You don’t say well I was going to buy that and it is much more sensible to wait. I think what is happening in the retailer world is bifurcation. You are having what they will describe which is people advertising beds in order to get foot steps in the store at literally $299 and $399 and half priced sales and so forth and realizing that everybody who comes in and pays $399 for a bed they are not paying enough to keep the doors open. So they need people to be buying beds at the higher prices. So there is sort of this split between the top and the bottom. If you are in the middle with an undifferentiated product which doesn’t have a name you are hard pressed to compete.

Operator

The next question comes from Joel Havard – Hilliard Lyons.

Joel Havard – Hilliard Lyons

Dale I thought I was the only one that would bother you on details on the debt side, but the repatriation loan is that being treated as an interest income offset to your domestic debt interest expense?

Dale Williams

No because it is inter-company. The loan between the U.S. and the international to complete the repatriation and any interest income, and there is an interest rate associated with it, however that is all inter-company and on consolidation it all gets eliminated.

Joel Havard – Hilliard Lyons

Is it an income statement issue at all?

Dale Williams

No.

Joel Havard – Hilliard Lyons

To that end then you had said if I caught it right interest expense for 2009 you had penciled in at about $19 million?

Dale Williams

Correct.

Joel Havard – Hilliard Lyons

But you are, or at least I am presuming, you are going to pay down a little bit more debt from where you were at Q1 end?

Dale Williams

Absolutely.

Joel Havard – Hilliard Lyons

Are you allowing for higher interest expense in the second half of the year?

Dale Williams

Well that is kind of built into our model. We had it roughly about $5 million of interest expense in the first quarter so if you annualize that it is $20 million. We will be reducing debt as the year progresses which would create some downward pressure or opportunity there on interest expense. We do anticipate a little bit of increase in interest rate. However, $300 million of our debt is fixed so any interest rates only affect us on the margin there.

Operator

The next question comes from Joan Storms – Wedbush Morgan Securities.

Joan Storms – Wedbush Morgan Securities

A quick question on some of the declines in the other smaller channels like healthcare and third-party, any sort of explanation there in particular on the healthcare side of the business?

Mark Sarvary

Well healthcare is down as you know. There is a lot of retrenching in healthcare right now. Everybody is tightening their belts and it is true here and it is true internationally. So if you look at it percentage wise you will find it is sort of comparable to the rest of the business as well. It is down but not differentiated down from our overall business. Obviously the root cause is not consumer spending but government spending largely but it is down. In the case of third-party, across the board there are a couple of countries in our third-party international business which have been decimated by some of the economic goings on where we have seen a material loss just because they are countries that are not in business anymore. Then again, overall across the board countries where in aggregate their third-party sales are down.

Domestic the largest business is in Canada. Canada is down. Their business too and their sales for their customers is down. It is sort of down we think roughly we think the same as us. We think maybe a little less bad than it is south of the border but they have been taking some pretty tough actions in terms of making their costs straight and really lowering their inventories. So we think in the fullness of the year or in the next three quarters of the year they will actually be more like a normal rate.

Joan Storms – Wedbush Morgan Securities

Just to follow-up on John’s question about doors, so should we expect for the year then going forward essentially flat? I think you had commented on the quarter.

Dale Williams

We have kind of gotten out of the practice of trying to guide on doors. I think the safe thing is to say it will be roughly flat.

Joan Storms – Wedbush Morgan Securities

If you are going to be on the tax rate I have the annual at 34.5% but the Q2 if you are going to be paying the rest of the tax there will that be similar to the Q1 tax rate?

Dale Williams

No, that doesn’t effect the tax rate at this point in cash. Basically the balance of the year the quarterly tax rate will be less than 34.5% to get the full year back to 34.5%. The tax law changed and essentially what that was it caused us to lose some NOL’s.

Joan Storms – Wedbush Morgan Securities

Lastly, I was wondering if you could comment at all on the test with that new little store within a store format that we saw at the Vegas show?

Mark Sarvary

The experience center?

Joan Storms – Wedbush Morgan Securities

Yes.

Mark Sarvary

That is going very well. We are accelerating the roll out of that. We had when we were in Vegas we said we were going to roll out 50 in the first quarter and depending on how well that went we would perhaps roll out more. We have already committed to 100 and we anticipate that will continue to grow. Where it is, it is still doing very well. We are very pleased with it.

Operator

At this time I would like to turn the call back over to management for any additional or closing comments.

Mark Sarvary

Thanks everybody. We look forward to talking to you again in July when we will review the second quarter. Thanks for joining us today.

Operator

Again that does conclude today’s conference call. Thank you for your participation. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Tempur-Pedic International, Inc. Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts