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Tempur-Pedic International, Inc. (NYSE:TPX)

Q2 2009 Earnings Call

July 16, 2009 5:00 pm ET

Executives

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

Mark A. Sarvary – President and Chief Executive Officer

Dale E. Williams – Chief Financial Officer

Analysts

Robert Drbul - Barclays Capital

Brad Thomas - Key Banc Capital Markets

Keith Hughes - SunTrust Robinson Humphrey

John Baugh - Stifel Nicolaus & Company, Inc.

Joseph Altobello - Oppenheimer & Co.

Budd Bugatch - Raymond James

Mark Rupe - Longbow Research

Robert Straus - Gilford Securities, Inc.

Operator

Welcome to the Tempur-Pedic second quarter 2009 earnings conference call. Today's call is being recorded. At this time I would like to turn the call over to Mr. Barry Hytinen.

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 10-K 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 and filed with the SEC.

And now with that introduction, I will turn the call over to Mark.

Mark A. Sarvary

Good evening everybody and thanks for joining us today.

Today I will provide a brief overview of our performance in the second quarter and then will give you an update on our progress on our key strategic initiatives. Dale will then provide a detailed review of the quarterly results and guidance.

During the second quarter we executed well. Our focus on maximizing sales, improving margins, and generating cash flow continued to show progress. From a sales perspective, volumes are still significantly down from last year and we don't yet see any clear evidence of a turnaround in trend. Sales continue to be volatile week-to-week and month-to-month and retailers continue to report the environment is tough.

But having said that, we have seen a degree of stabilization in U.S. demand and we do know the initiatives we have underway are helping. Our domestic sales performance in the second quarter clearly improved versus the first quarter, with sales up sequentially 13%. Indeed, some of the programs we had in place during the second quarter exceeded our expectations.

Productivity projects helped us expand the gross margins and together with pricing and lower commodity costs, gross margins increased 220 basis points compared to last year and 40 basis points compared to last quarter.

Throughout the quarter we managed expenses tightly and our EBIT margin of 15.9% was higher than last year and last quarter. And we will continue to manage costs tightly until we see further evidence that the macro environment is improving.

Finally, our focus on cash generation and the strength of our business model enabled us to lower debt by $31.0 million during the quarter.

Looking forward, we are confident in our ability to continue to improve our margins, manage our expenses, and lower our debt, and with each quarter we become better positioned for the eventual economic recovery.

Dale will provide more detail on the financials in a moment so I will focus the rest of my commentary on progress on the strategic initiatives that we have outlined previously.

The first key strategic initiative is to improve gross margins and talked about it and here we have made good progress this quarter. Our operations teams have improved productivity and utilization rates. The redesign of our transportation network is nearing completion and has allowed us to lower inventories and sourcing initiatives continue to drive lower raw material costs.

We expect continued margin favorability as these actions should continue to modestly ramp through the rest of the year.

We also showed progress on our second key initiative, to improve effectiveness with our retail customers. We executed the second with a series of scheduled promotional events timed with the Memorial Day shopping period with the Tempur-Pedic test drive promotion, we are successfully driving consumer traffic to retail and most of our retail customer base to start.

In addition, we successfully completed the transition of our U.S. entry level offering to the Advantage bed and we are experiencing strong sales of this model and I believe we are expanding market share.

Finally, the foundation close out event was very successful as we transitioned from our old foundation to the new, improved model now in the market. Retailers across the country took advantage of the close out price and the event exceeded our expectations. We believe it drove at least $5.0 million in incremental sales. And we continue to look for and evaluate additional ways to improve our retail effectiveness.

The third focus area is broadening the range of products that we offer. And I'm pleased with the results here, too, although I can't share the details right now. On our last call I mentioned we had completed some significant consumer research and we've been able to quickly integrate the findings into our product development plans. Late this quarter at the Las Vegas Bedding Show we plan to unveil compelling new products as a result of these efforts.

Fourthly, we set ourselves the goal of stabilizing and ultimately growing the direct business. Well, on a sequential basis, the direct business was up in the second quarter, which has not occurred in a long time. Partly driving this growth has been a significant improvement in e-commerce sales and Internet generated leads.

And this is also important for our retail business. We know that the majority of leads that become buyers by at retail and that almost all consumers are using the Internet to research their mattress purchase before they buy.

During the quarter we revamped our Web site and increased our online marketing effort and we will continue to develop our online presence.

Fifth and lastly, we continued to see a substantial opportunity to improve our household penetration of our international market. The roll out of the new Sensation mattress in international is doing quite well. It looks like it will be one of our most successful international launches ever.

In addition, we have recently completed a comprehensive analysis of the industry and our businesses in each of the major international markets and as a result we've developed a set of action plans customized by country.

In closing I would just like to make a couple of last comments. I've been at Tempur-Pedic for a year now and it's certainly an interesting year to join the industry in our 18 months into the worst economic period this industry has ever seen. But I am confident that the steps we've taken over this time will ensure we come out of this recession stronger than we went in and when we do, we believe we have a significant growth runway ahead of us.

In an industry that's characterized by relatively weak consumer brand and product knowledge, we have a differentiated, branded product line that consumers ask for by name and our users literally rave about to their friends.

With that, I'll now hand it over to Dale.

Dale E. Williams

I will focus my commentary on the financials and our 2009 guidance.

In total, net sales were $185.0 million, a decline of 22% over the same period last year. Foreign exchange rates were unfavorable during the quarter. On a constant currency basis, net sales declined 19%. Domestic sales were down 19% while international sales were 29%, however, on a constant currency basis our international sales declined 19%.

By channel, in domestic retail net sales were $106.0 million, a decline of 19%, yet up 13% on a sequential basis. The direct business decline, however, as Mark mentioned, on a sequential basis, it was up 11%. Internationally, retail sales were down 28% to $50.0 million. On a constant currency basis, international retail sales were down 18%.

On a product basis, mattresses were down 24%, driven by a 21% decline in units. Domestic mattress sales declined 20% on a 21% decline in units. This reflects a modest improvement in average selling price in our domestic business, which we are particularly pleased to see since our new entry priced Advance bed has been performing well.

In the international segment, mattress sales declined 31% on a 22% unit decline. The sales decline reflects the negative impact of foreign exchange rates. On a constant currency basis, international mattress sales declined 21%.

In total, pillows were down 17%, driven by a 16% decline in units. Domestic pillow sales declined 12% with a 16% unit decline. International pillow sales were down 20% with a 16% decline in volume. Similar to mattresses, foreign exchange rates negatively impacted international pillow sales. On a constant currency basis, international pillow sales decline 12%.

Gross margin for the quarter was 46.6%, up 220 basis points year-on-year and 40 basis points sequentially. Following our improvement last quarter, this represents the first time in the company's public history of consecutive quarters of year-on-year improvement in gross margin.

On a year-over-year basis the gross margin improved principally related to three factors. First, commodity costs were down slightly versus last year. Next, our focus on driving manufacturing efficiencies continues to yield benefit. Lastly, pricing actions taken early in the year continue to benefit the business.

These factors were partially offset by fixed costs deleverages, production volumes were down versus last year. While we spent over $15.0 million on advertising to drive brand awareness and consumer traffic, we lowered selling and marketing expenses nearly $10.0 million year-over-year.

We also lowered G&A expenses by over $3.0 million as compared to the second quarter of last year, as we continue to tightly manage expenses.

Interest expense was $4.5 million, down $1.0 million year-on-year, reflecting lower debt and LIBOR rates.

Our second quarter tax rate was 32.5%, reflecting favorable geographic mix from a tax prospective.

Net income was $17.0 million, down $3.0 million from the prior year, and EPS was $0.22.

Turning to the balance sheet, we continued to improve our financial flexibility. Cash increased $4.0 million sequential and we generated $39.0 million of operating cash flow.

Capital expenditures were $3.3 million, in line with last year.

Our accounts receivable balance was flat sequentially despite higher sales and we lowered DSOs by two days from the first quarter and six days from last year. Improving even from last quarter's excellent showing, our accounts receivable aging continues to improve with more of the balance being current than at any other quarter point in the company's public history.

With a more streamlined distribution network and improved efficiencies, we lowered inventories $9.0 million sequentially to $52.0 million.

As a result of the strong operational performance, we reduced debt $31.0 million to $369.0 million. We have reduced debt $50.0 million this year and over the past 12 months have lowered debt by $188.0 million. Our funded debt to EBITDA ratio was 2.29 x, down slightly from last quarter and well below our debt covenant of 3.0 x. This is the first time since we began feeling the effects of the recession in the first quarter in 2008 that this metric has improved on a year-over-year basis.

Now I would like to address our guidance for full year 2009. I would like to start by echoing a point Mark made earlier. While we have seen a degree of stabilization, sales visibility remains low. We have not seen any clear signs that a turnaround is underway. We enter the second half with a cautious with a cautious outlook.

The company has confirmed its prior sales and EPS guidance, which I reviewed in detail in last quarter's call. We currently expect net sales to range from $700.0 million to $740.0 million. We currently expect EPS to range from $0.70 you $0.90 per diluted share.

There are a few minor updates to the details I mentioned last quarter that I would like to go into. When investors review Tempur-Pedic's historical second half sales, they should not that typically a third of the fourth quarter sales are roughly equivalent. This was not the case last year when the economy and our business substantially weakened in the fourth quarter.

For interest expense, I would like to remind investors that $300.0 million of our debt is currently swapped for a fixed rate, such that we pay approximately 4.75%. Therefore, we recommend investors anticipate interest expense to approximately $17.5 million for the full year. This is down from the amount I mentioned last quarter, as LIBOR rates have continued to be relatively low and we exceeded our expectations for debt paydown in the second quarter.

In light of the price per share, as well as modest option grants, we are using a share count of 75.5 million shares for the full year.

Regarding our tax rate, based on our current expectations, we anticipate the full year tax rate to be approximately 34.0%. This takes into account the elevated rate in the first quarter and the lower rate we experienced in the second quarter.

As noted in our press release, our guidance and these expectations are based on the 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 we would like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Robert Drbul - Barclays Capital.

Robert Drbul - Barclays Capital

Can you elaborate a little bit more in terms of the trend of the business when you say you are seeing a degree of stabilization?

And from the consumers' perspective, are you seeing signs of credit filing at all for sort of a bigger ticket item, like a Tempur mattress from your consumer's perspective?

Mark A. Sarvary

From a stabilization point of view is that in the fourth quarter of last year, obviously there was a collapse in the demand, or a very fast decline. And we projected the first quarter based on a continuation of the fourth quarter and then the second quarter based on the first quarter. And what we're seeing right now is sort of a stability. And there is not a marked increase but on the other hand, we don't see any ongoing decrease.

It's a little bit more complicated if you look around the world, because in some parts of the world there is more of a decrease as some of the bigger countries in the rest of the world sort of catch up with the U.S.

But essentially what we're seeing is we feel like so far, what we experienced in the second quarter, is a sort of stability in demand. And that's what we're projecting looking forward.

And in terms of your question about credit, we are seeing some easing of credit. It is getting a little easier. Both our retailer and our direct people are seeing more, or it's better than the worst situations that we saw in the fourth quarter and the first quarter. But it's still back to its normal levels.

Robert Drbul - Barclays Capital

Can you discuss the expectations about how much in sales were pulled forward, given some of the close out movement that you had?

Mark A. Sarvary

Quite honestly, I don't think any was. I mean, it's hard to be absolutely definitive but we don't believe there was. And the promotions finished a couple of weeks before the end of the quarter so whatever would have happened has happened. So I don't believe that's the case.

Operator

Your next question comes from Brad Thomas - Key Banc Capital Markets.

Brad Thomas - Key Banc Capital Markets

I wanted to follow up on the question about the sales. Can you talk about the product assortment? Is there any change in the pace of sales about upper end of the range versus the lower end of the range?

Mark A. Sarvary

We said throughout this period that contrary to what one might have expected, we haven't seen a kind of a decline in the higher-end product greater than that decline in the lower-end products. And we continue not to see that if you aggregate it as a whole. If you look at our more expensive items as a whole and compare to the lower ones as whole, it's roughly the same.

The one thing that has changed is that the mix of our entry-level products has switched somewhat because the Advantage, which is our new product that we launched in the fall of last year and has really rolled out this year, has gone quite well. And it is taking a large part of the lower-end items. But in aggregate, there is no change in the overall shape of the price curve.

Brad Thomas - Key Banc Capital Markets

On the gross margin, would you mind sharing a little more color on those three drivers of your gross margin improvements. I know you mentioned commodities down just slightly. I would have thought it was a little more than that but I would be interested to hear your thoughts on gross margin.

Dale E. Williams

Well, on commodities, remember that commodity prices were increasing throughout the year last year and not at the same curve as what oil is doing. So there was a delay in the commodity increases.

But we did see commodity improvement year-over-year. At the end of the first quarter we talked about that half of the gross margin improvement was related to commodities, about 25% was related to the productivity, and 25% related to the price increases.

Based on the second quarter, trying to look at it now, is that we think that it's about 40% of the improvement was related to commodities, 40% related to productivity, where we saw a nice step up in productivity in the second quarter, and that left pricing at about 20%.

All these things are all positives. Certainly there are some negatives that occurred within the business. Volume is down, which means that our fixed cost leverage is a hurt and there are various mixes that we see that sometimes tend to put some pressure on margin, but overall we are seeing very good margin performance and we expect that margin performance to continue.

Brad Thomas - Key Banc Capital Markets

And any update on the outlook for the year on gross margin? Are you still feeling like 300 basis points of improvement is a goal or is the minimum you would expect to see?

Dale E. Williams

Yes, certainly I would say that it's probably the minimum if you look at what we've done in the first half. Our gross margin for the first half is about 46.4%. Last year, for the full year, it was 43.4% roughly. So we're at about, compared to the full year last year, we're at about 300 basis points better compared to the full year rate. And so we would expect for the year to see 300 basis points, or a little bit better than 300 basis points of improvement in gross margin.

Operator

Your next question comes from Keith Hughes - SunTrust Robinson Humphrey.

Keith Hughes - SunTrust Robinson Humphrey

On SG&A spending, you've been at mid-50s per quarter for several quarters now. Is that what we should expect until you see a real improvement in revenue or volume levels?

Dale E. Williams

Yes, that is kind of where we should expect. On the first quarter call we said we thought we would see advertising pick up a little bit, as a percent of revenue. It did pick up modestly but not to the 9% level that we thought it would be. You know, business did a little bit better in the second quarter, on the top line. Also, advertising rates continue to be in the 10% to 20% less than the prior-year cost.

So while we're getting good performance in our advertising, we had planned to spend a little more in the second quarter as a percentage, and out performed on the top line.

Keith Hughes - SunTrust Robinson Humphrey

In the last call you had talked about, I guess you built in some of your forecast some higher raw material costs as 2009 progressed. Could you give us an update where sequentially prices have gone.

Dale E. Williams

Yes. From Q1 to Q2 commodity costs were basically flat. We did say in the first quarter that we expected in the second half to see some commodity cost increases. The current situation is that the chemical companies have nominated some price increases. We continue to have that built into our second half forecast, that there will be some increase in commodity costs.

We're sitting here today, since oil has pulled back a little bit in the last couple of weeks, we'll try to fight that off as long as we can, but we do still have that built into the second half plan.

Keith Hughes - SunTrust Robinson Humphrey

On revenues, are you seeing any sort of distinction in terms of business, whether you're looking at sleep shop versus a multi-line furniture retailer, or any sort of distinction among the channels.

Mark A. Sarvary

Not really. I mean, there are individual situations but in aggregate we're not seeing anything like that.

Operator

Your next question comes from John Baugh - Stifel Nicolaus & Company, Inc.

John Baugh - Stifel Nicolaus & Company, Inc.

Utilization rates, what did you run in the second quarter? Inventories were still coming down. Kind of how do you feel about that number going forward and what is the inventory goal for the year in light of the second quarter performance?

Dale E. Williams

From the utilization standpoint, you know, our utilization rates in the factories continue to be relatively low. However, we do believe now that we have inventories at the right level and realistically probably a little bit low.

So I would expect in the second half of the year you will see some modest increase in inventory levels, to continue to provide support to the retail community and other elements of our working capital.

Receivables will track with revenue, accounts payable will track with COGS, but we do think that we probably have gotten inventories as well as they can go at this stage, and maybe even a little bit too low. So we may see a small increase in inventory in the back half.

John Baugh - Stifel Nicolaus & Company, Inc.

If I'm not mistaken, I think the average selling price point per unit of mattress domestically was flat or slightly down, was it? And the question is, you get some moving things, you raised your prices on roughly half your line, that's a plus, you've introduced Advantage. I know that was last year but it's a much higher part of the mix this year. So what's the sort of give and take of those and I think you made the comment earlier that you're still not really seeing much of a mix shift outside of the Advantage.

But is the Advantage mix increase more or less offsetting the price increase? Is that the right way to think about it?

Dale E. Williams

Let me just give you a little data. As we calculate ASPs, we see in the U.S. that ASP was up about 1%. So in the first quarter I think ASP was up about 2%. It's not quite up as much as it was in the first quarter and that is partly because of the success of the Advantage. But that's why we did the Advantage. We expected to have success there and we wanted a stronger entry-level model.

Mark A. Sarvary

And it's been an—it's an important—and remember, it replaced two other products. It is a strong entry-level product at a good price and frankly, given the environment, given the economic environment, we knew and we were right that it was something that was important to focus on and it has and will continue to grow. It is an important thing.

But at the same time, the Rhapsodies or the more expensive products are also selling proportionately well. So what we believe and the strategic rational for it is that while at any time you risk by offering a product that is at that price, you know, you risk people trading down. What we're also doing and what we believe we are being able to be effective at, is trading people up who would otherwise buy a bed at a cost a thousand or twelve hundred dollars and trading them up to buy a Tempur-Pedic.

Operator

Your next question comes from Joseph Altobello - Oppenheimer & Co.

Joseph Altobello - Oppenheimer & Co.

Let me go back to something you mentioned earlier about the typicality of the business as you said is third quarter and fourth quarter generally in line, the third quarter is usually slightly bigger. And it sound like, given your guidance and comments earlier, that the third quarter and fourth quarter you expect this year to be roughly equal.

One, is that the case? And two, if so, it seems like it would indicate that you expect an acceleration in the sales decline in the third quarter versus what we saw in Q2, and actually potentially even a sequential sales decline. Is that the case?

Dale E. Williams

Let me explain that. Thank you for asking that question. Historically, and let's split the business between domestic and international. The domestic business tends to be a little bit stronger in the third quarter and a little bit softer in the fourth quarter. The international business is the inverse. It is a little bit weaker in the third quarter and stronger in the fourth quarter.

If you go back and look at the last three or four years, with the exception of last year, when everything kind of fell apart in late September, what you see is third quarter and fourth quarter, within a percent or two, roughly equivalent.

But from a guidance standpoint what we have, the position we have taken with guidance, going back several quarters now is, we are going to take our current run rate and roll that forward. Because we're not economists, we're not going to project further deterioration or further improvement in the business.

So at year end we took the fourth quarter run rate and projected that for the year. At the end of the first quarter we took the first quarter run rate and projected that through the year. So if you look at the year and you take the first half revenue and double it, you get kind of to the middle of our guidance. If you take the first half and then repeat the second quarter two times, you get a little bit closer to, but not at, the high end of our guidance.

So we're just continuing our run rate projection, based on what we've seen in the second quarter, in terms of the overall business. Does that make sense?

Joseph Altobello - Oppenheimer & Co.

It does. Are you seeing any post-July 4, are you seeing any trends in your business that would indicate that the typical seasonal bump up in the U.S. is not happening?

Dale E. Williams

No, but the seasonality in the third quarter typically occurs much later. What we have not seen in the business in the last year or so is seasonality at all. We haven't really seen much seasonality in the business. So we're not trying to project seasonality. What we've seen in July so far is that based on what we did in the second quarter and the run rates, rolling that forward, that's how it's going.

But even back in the 2004, 2005, 2006, 2007, where seasonality impact is later in the quarter, and there's nothing today that would say that there's going to be seasonality or there isn't going to be seasonality. We just don't know.

Joseph Altobello - Oppenheimer & Co.

So basically you're not ready to commit to a seasonal bump come Labor Day, for example?

Dale E. Williams

Right.

Joseph Altobello - Oppenheimer & Co.

And then in terms of your earlier comments about variability from week to week, in terms of consumer demand. I mean obviously we know what's going on in the economy but is there anything beyond this macro factor that is maybe causing that variability? Because typically, if you look historically, the mattress industry has been pretty stable so I'm just curious is something driving demand this time around that's different, that's been driving demand historically.

Mark A. Sarvary

No. And what I mean is I don't mean it goes 50% up and down, I just mean that's it's not as though there's any sort of steady trend that one can see. And when you average it out over an extended period of time it looks like a relatively flat line. I don't want to imply more or less by it.

Operator

Your next question comes from Budd Bugatch - Raymond James.

Budd Bugatch - Raymond James

My first question kind of goes to the gross margin for the balance of the year. If I did the calculation right, at the second half of last year I think gross margin was about 42.2% and it seems to be with the 300 basis points of improvement, that may be just a bit conservative, given what you're comparing against, the second half. What am I missing here?

Dale E. Williams

I'm talking for the year. And like I said just a second ago, through the first half our gross margin rate through the first half is a little bit over 300 basis points better than the prior year in total. So we would expect a little bit, hopefully, of continued gross margin improvement in the business, but we do feel and have been notified of some chemical price increases coming so that will moderate a little bit, the productivity efforts that we continue to have.

So that's why we think that we will be 300 basis points or a little bit better than 300 basis points on a year-over-year basis on gross margin at this stage, because we're slightly over that now.

Budd Bugatch - Raymond James

But if you build inventory a little bit, even just modestly, and if you do get some seasonal bump in the second half, or the third quarter particularly, you probably see something improve in terms of utilization factor—right?

Dale E. Williams

Yes, it all depends on what the flow is. But projecting a continued flow, I mean, we're not talking about a big increase in inventory here. We're talking a small increase in inventory that really is not material enough to impact the utilization rates.

Budd Bugatch - Raymond James

So inventory at year end would be let go versus in terms of days, cost of sales, or however you would like to give it. What do you think is kind of a rational goal?

Dale E. Williams

I think a rational goal is maybe to have a couple more days of inventory from where we're at right now, which would translate into, at this run rate, single digit million dollars higher.

Budd Bugatch - Raymond James

A million dollars higher?

Dale E. Williams

No single digit million.

Budd Bugatch - Raymond James

And at the year end, what about the debt, what do you think that will look like at year end and how are you planning to use the excess cash of free cash flow?

Dale E. Williams

We said at the start of the year we thought that we would do, at a minimum, $80.0 million of debt reduction this year. We're a little bit ahead of that, so I would say we will do a bit better than $80.0 million since we've done $50.0 million through the first half.

Budd Bugatch - Raymond James

Should we double that? Like you're doing with the guidance.

Dale E. Williams

I think that that's possible and likely probably that the performance that we had in the first half would continue on a debt reduction basis.

In terms of what we're doing with cash, for the time being we're investing where we think we need to invest in the business, in the areas that need some capital, it's not significant. But we are going to continue for the time being, until we decide differently, to focus our cash flow on debt reduction.

Budd Bugatch - Raymond James

Capex for the year and FX, shouldn't that now be a little bit of tailwind for you?

Dale E. Williams

We expected capex for this year to be in the $10.0 million to $12.0 million range. Based on what we see as investment opportunities in the business, it maybe a couple of million dollars higher than that.

Budd Bugatch - Raymond James

And the FX affect on revenues, it should be starting to be a little bit of a tailwind—right?

Dale E. Williams

Well, FX cost up 11 points on the international business. On a composite basis it cost us about three points. FX will continue to be a headwind on the business, certainly through the third quarter, depending on what rates do. As we look at the bank forecast rates in the fourth quarter, FX would be anywhere from a slight headwind to a slight tailwind. It will get easier in the fourth quarter on FX.

Operator

Your next question comes from Mark Rupe - Longbow Research.

Mark Rupe - Longbow Research

It appears that you took a decent amount of share in the specialty category during the quarter. Is there anything you were doing differently in the quarter or the competition might have been doing differently?

Mark A. Sarvary

From our point of view, as I said, we put our focus on being as effective as we could be both in direct marketing to the consumers and also the promotions that we ran with the retailers, which seemed to be reasonably effective.

From our competitors' point of view, there is a lot of turmoil going on and there are a lot of different things going on. It's hard for me to comment on that.

Dale E. Williams

And we won't really know what happened from a specialty share standpoint for several more weeks because there's no specialty numbers—you know, ISBA doesn't report specialty numbers except the one for the quarter and that would come out typically in early August.

Mark Rupe - Longbow Research

Any movement in the door count during the quarter?

Dale E. Williams

The door count was down just slightly. We continue to clean up the retail community. You still have some retailers in various forms of financial difficulty. We have continued to take some retailers out that are not meeting our performance requirements. Within the quarter it was just down a little bit.

Mark Rupe - Longbow Research

And then on the new product development front, I know that the Advantage is doing a lot right now and you have probably some spots or gaps in that kind of thousand to two thousand dollar price range. Have you given any more thought about possibly putting some product development efforts in that price range here in the near future?

Mark A. Sarvary

Come to Vegas.

Operator

Your next question comes from Robert Straus - Gilford Securities, Inc.

Robert Straus - Gilford Securities, Inc.

On regional performance, can you talk a bit more about any difference in performance you saw domestically and then separately, internationally?

Mark A. Sarvary

There have been differences in different parts of the country and there have periods one side of the country or the other was doing better or worse. But there's not that we've seen any systematic difference in America. In the rest of the world, there have been and you've been reading the same newspapers that we have.

There have been some of the big European countries that in this year have been hit quite hard economically. And the movement of the economies have been incredibly correlated to our ups and downs in those major overseas businesses.

What we've seen is a, you know I said that the rate of decline in some of the big overseas countries has now come down to the level to match roughly, where as you heard, we're down about 19% in international and roughly 19% in America.

What we haven't seen, though, while there are ups and downs in different countries, it appears to us as though there is no reason to believe there is going to be a market turn down in international right now. But frankly, it's more volatile than America at the moment.

Dale E. Williams

I think you hit it on the head there.

Robert Straus - Gilford Securities, Inc.

On the retail side in the U.S., I know that you are tracking quite closely how the retailers are doing. You're not going to name names but any group of retailers that are customers or one or two retailers that you are particularly concerned about that could be a significant adverse impact to the business?

Dale E. Williams

We continue to monitor our entire retail base very closely and the credit and collections team and the sales team and the whole U.S. team that interacts with customers have collectively worked together wonderfully to continue to make sure that we are getting the payments that we're due. And if we have difficulty there, we take action.

I think the key thing that you're driving at, and I would agree, is at this stage it's not over, in terms of the economic situation and the essential economic impacts. We don't have any one or two people that we think are significantly more in danger than others, per se, but we continue to monitor everybody pretty closely.

Robert Straus - Gilford Securities, Inc.

On the inventory side, your comments earlier about your expected inventory levels in the back half of this year, do those comments include the new product introductions and the builds for the product coming out in Las Vegas?

Dale E. Williams

Yes.

Robert Straus - Gilford Securities, Inc.

Given that the Las Vegas market is shifting a little bit from July to September this year, tell us, if at all, that shift, how it impacts you in terms of your roll out and/or anything we should be thinking about third and fourth quarter, first quarter kind of roll outs in sales and that sort of thing.

Mark A. Sarvary

It's hard to be explicit. It's hard to be helpful without being very explicit but the—

Dale E. Williams

Let me try it. I think that what historically we were in Vegas was late in July, we would start shipping products two or three months later than we showed at Vegas. With Vegas moving to September, essentially what we're having to do is shorten the cycle between when we show a new product and when it will be available.

Robert Straus - Gilford Securities, Inc.

And are you thinking that product roll out will still take kind of that six month period? Is that within an acceptable range?

Dale E. Williams

Yes, certainly it depends on the economic environment at the time. The products that we introduce last summer at Vegas, the Advantage being one, it took longer to get rolled out because shortly after we introduced it everybody's world collapsed a little bit. So it took a little bit longer to get the Advantage out but once we got it distributed, as Mark commented earlier, it is performing very well. But getting new products out into the market and the time of the roll out certainly depends on how the retailers are feeling at the time.

Operator

Your next question is a follow-up from Brad Thomas - Key Banc Capital Markets.

Brad Thomas - Key Banc Capital Markets

You had mentioned that you had completed a comprehensive review of your international markets with an action plan. Could you share a little more color on what steps you hope to take in your international business.

Mark A. Sarvary

The thing is obviously international is a very non-homogeneous group and what we did was that we have businesses in different countries and in different both states of development. But also countries that are quite close to each other geographically which have very, very different mattress markets, consumer preferences, and brand awareness and so forth.

But also, macro factors. Like their GDP and their GDP growth and their average income and so forth, and what we found is that by looking at it country by country and taking some of the analyses across the board, is that it made it quite good for us because it enables to give quite clear focus areas for which elements of the marketing mix we have to put the biggest emphasis on by country, whether it be gaining distribution, gaining spots for store, increasing customer consumer awareness, you know, brand awareness and so forth.

There are different challenges by country. And it just makes it very clear and it also helps take the best learnings from one country and apply it to another.

Brad Thomas - Key Banc Capital Markets

Any sense of the timing with what you could start to implement some of the initiatives you hope to put in place or where you think the business is right now versus where you would like it to be?

Mark A. Sarvary

I think that first of all, this starts immediately but it's something that takes time. It's a question of how you focus the organization. It will take time but it starts immediately.

The second thing is I think it's an important thing to recognize that in the U.S., and even more in the rest of the world, we have really very small market share and we have enormous potential. It's not as though we're nearly where we need to be. We still have a long way to go and a lot of potential.

Operator

There are no further questions in the queue.

Mark A. Sarvary

Thanks again for joining us and we look forward to talking to you all again in October when we will review the third quarter.

Operator

This concludes today’s conference call.

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