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Tempur Sealy International Inc. (NYSE:TPX)

2013 Investor Day Conference

September 10, 2013 10:00 am ET

Executives

Mark Rupe - Vice President of Investor Relations

Mark A. Sarvary - Chief Executive Officer, President and Director

Dale E. Williams - Chief Financial Officer and Executive Vice President

Analysts

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Budd Bugatch - Raymond James & Associates, Inc., Research Division

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Peter J. Keith - Piper Jaffray Companies, Research Division

Joshua Borstein - Longbow Research LLC

Jessica Schoen - Barclays Capital, Research Division

Mark Rupe

All right, you guys. Good morning, everyone. Welcome to 2013 Tempur Sealy Investor Day. Welcome to those on the webcast as well. I'm Mark Rupe, Vice President of Investor Relations. With me this morning are Mark Sarvary, President and CEO; Dale Williams, EVP and CFO; and many of you may recognize Barry Hytinen in the back of the room, Senior Vice President of Corporate Development.

We're going to go through our formal presentation this morning, you have the slides in front of you. Those on the webcast have the slides, the slides have been posted. After the conclusion of the presentation, we will open it up for Q&A here in person, also to those on the webcast. For those listening if you have any questions, send them to investor.relations@tempursealy.com. We have a lot of content to go through this morning. I'm going to read the forward-looking statement, and then we will get started.

Forward-looking statements that we make during today's event are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements included in the company's expectations regarding sales, adjusted EBITDA, adjusted EPS and operating and gross margins or the integration with Sealy involve uncertainties. Actual results may differ due to a variety of factors that could adversely affect the company's business. The factors that could cause actual results to differ materially from those identified include economic, regulatory, competitive, operating and other factors discussed in today's presentation, and included in the copy of the presentation filed earlier today with the SEC on Form 8-K. These factors are also discussed on the company's other SEC filings, including, but not limited to, annual reports on Form 10-K and the company's 2 most recent quarterly reports on Form 10-Q under the heading Special Note Regarding Forward-looking Statements and/or Risk Factors, as well as the company's press releases. Any forward-looking statements speaks only as of the date, which it is made, and the company undertakes no obligation to update any forward-looking statements.

With that introduction, I will now turn the presentation over to Mark Sarvary.

Mark A. Sarvary

Good morning, everybody. Thanks for coming today. It's good to have you all here. These are the topics that I'm going to cover, and then I'm going to hand over to Dale, who will talk through the financial aspects in more detail. I'm going to give a 3-page brief introduction and context just to set the context for today's meeting. And then for those of you who are not as familiar with the industry, I'm going to give, again, a relatively brief update on the industry, a macro industry perspective. And then I'll talk about the new company, Tempur Sealy, I'll give you an overview of that. And I'll talk about the vision of Tempur Sealy as we go forward.

And then I'll talk about the growth targets that we have for 2014 through 2016 and the drivers of those growth targets, the drivers of growth that will enable us to achieve those targets. And then I'm going to talk about the revenue synergies and the revenue synergies are somewhat separate. The drivers of growth are inherently organic growth. The synergies are things that we'll talk about, but they're not factored in directly into the numbers that we'll be sharing with you. And then before -- I'll summarize before I hand over to Dale.

The last time we had an Investor Conference was 18 months ago, February 2012. And I think it's fair to say that a lot has happened since then. At the time, Tempur-Pedic was a highly specialized single technology company growing very rapidly. I believe 2 major events have happened since then. The first is that there has been a significant change in the competitive environment in the U.S. specialty component of the mattress market. And obviously, secondly, Tempur has made a very significant acquisition of Sealy in the last 6 months. So today, the company that you see standing here in front of you is very different from the one that was here 18 months ago. We are now the largest bedding company in the world, and we have an unmatched portfolio of both brands and technologies.

Now the bulk of today's discussion, essentially all, except this page, is going to be about our long-term 3-year view. But obviously, I know a lot of people are very interested to know how our current trends are. I want to take just a minute to talk about current trends. As you know, as a company, as we said at our last earnings release, our performance of the Sealy business and of the Tempur International business is broadly in line with our expectations, but we have been disappointed with our performance at Tempur North America. We said that we are going to focus on 3 key strategic initiatives, which we are confident that are the right ones, but are taking more time to make the turn than we'd hope, but we are very confident they are the right things.

First of all, continued investment in advertising, and particularly bringing back the Ask Me campaign; effective and accretive product rollouts like Breeze and Choice; and more effective promotions. And we have been doing those 3 things, and we -- as we said we would. And our recent trends have been in line with our expectations, the expectations that we gave. And we have been encouraged by the brand portfolios performance over the Labor Day period, including that performance of Tempur North America.

So with that, on current trends, last page of context, let me just talk about the thesis for the company, the investment thesis for the company as we view it. Tempur Sealy has a comprehensive portfolio of iconic brands and products, and I'll show you more about this in a moment, but we have a very complete and broad portfolio, both the brands, strong brands and products and technologies. We are the largest bedding company in the world, but importantly, we're the only truly global one. And as I'll show you in the presentation today, that global aspect provides us great opportunity. Third is that the strategic acquisition of Sealy has provided us with significant cost synergies. We had anticipated many, but we're getting more than we thought, and we're getting them faster than we thought. And we have significant growth potential. We have, in this plan, we'll talk about it more during the presentation, a 3-year projected compounded annual growth rate of 6%. But in addition, we believe there is $500 million of revenue synergies potential over the coming period, that we expect to exit 2016 with growth, top line growth, approaching double digits. And we have strong financial characteristics. Our 2016 target of 6% growth would project also a CAGR of 10% on EBITDA and 15% on EPS. And we will have leverage of less than 2.5x by the end of 2016. So on a page, that's Tempur Sealy.

So with that as context, I'm going to switch now to a brief update on the macro industry. This is the U.S. industry. This includes mattresses and foundations. And I know many of you are familiar with this. It's growing at 5%. It's $7 billion -- give or take $7 billion. It's a big, consistently growing business. The subset of that, the bulk of it, but the subset, is the U.S. Mattress business. That, too, obviously shares a very similar growth pattern. It's been growing at about 6% over the last 20 years. And recently, or in 2012, we -- the industry achieved its peak ever sales. 2007 have been the prior peak, there was a downturn after the recession, and now it's back again at peak levels.

Interestingly and importantly though, units are not back at peak levels. This red line shows the unit sales, and you can see that units are still well below peak levels. For example, if you look at the 2012 units, it's comparable to sales in units that we had in the '96, '97 time period. Back then, the population was 40 million people less than it is today. So clearly, there is some degree of latent demand within the industry.

And the last -- this last -- the chart now illustrates the split between specialty dollars and innerspring dollars. And what you can see is that specialty has been a growing component of the market. Now obviously Tempur competes in specialty, Sealy competes in specialty, to some extent, but the Specialty market has been growing as a proportion of the total over the last 10 years largely driven from -- most of this time, by Tempur-Pedic.

Now the combination of the fact that the top line is growing faster than the units are growing, and because a lot of that is driven by the fact that specialty is growing faster, now surprisingly, the difference between the red line and the blue line effectively made up by price increases. The average selling price of mattresses has gone up systematically, pretty much without break for 20 years. Now this is the average price of all mattresses sold in the U.S. But the point is, it has been a consistent trajectory upwards. But I think, and this is the backbone of the growth of the industry, really, this is very important to the industry's growth. But it's important to look at this slightly more -- at a more positive -- at a more narrow level.

If you look at the price points above $2,000, if you look at the average price of mattresses sold above $2,000 over the last 5 years that, in fact, if anything, is coming down. So while average prices are going up, the prices of beds above $2,000 is, in fact, coming down. Now this is something that -- while this few pages are meant to be about the macro industry, I'm just going to talk a little bit about Tempur in this, because it's important as a context, is that crucially for the industry to continue to grow and for the industry to continue on the path that it's been doing, average selling price is critical across all price points, but it's particularly important at the highest price points because that provides the top level under which all the others play. And Tempur systematically continues to raise Tempur's average selling price. These are Tempur's average selling price over that same period. And as you know we introduced, for example, Simplicity last year. So we have, even despite that, raised our average our selling price consistently, and we will continue do so because we believe that's a critical component of this part of the portfolio of Tempur Sealy.

Now switching, because we always tend -- not always, but one tends to focus on the U.S. industry of the global mattress business. But it's important to recognize the size of the total industry, $21 billion, 3x the size of the U.S. one. And it has a CAGR that's even faster than the U.S. business, and over this last decade is consistent. So a very large business growing very fast. And if you look at it by area of the world, in this picture, in this graph, North America includes Canada and Mexico, and that's why the numbers are slightly different, but the point is that the comparable of North America to Asia/Australia, Asia/Australia is bigger than North America. Now, to be fair, that number includes Chinese estimates of sales. And frankly then, we're not as confident of those. But nonetheless, it's a very big number, and it's growing at 16%.

Europe is obviously just as established as the U.S. And while not as big, is pretty nearly as big, and it's a very large and established market. Now obviously, because of the situation in Europe, the economy in Europe is not growing as fast, but nonetheless, a very big and important business. And the rest of the world, which is largely South America, is $1.5 billion in itself and it too is growing very fast. So it's important to recognize that the market is very global and very big.

One last point on the macro industry, before I talk about Tempur. I'm kind of stating the obvious when I say that there's been some change going on here in this industry. There has been consolidation. There's manufacture consolidation, obviously, with Tempur and Sealy. As everyone here knows, Serta and Simmons are owned by the same company. And there's been consolidation in the retailer front. And so as far as the retailers, the big retailers are getting bigger, they're acquiring other retailers and they're growing very fast organically. So there is consolidation in both sides of the industry. And perhaps, related to that, but in any case, there is an accelerating rate of innovation. There is an expectation and a need for an accelerating integrated innovation on the shop floor, on the retailer's floor, in order to continue to drive growth and differentiation.

So with that as a background on the industry, let me now switch to Tempur Sealy. The combination of Tempur and Sealy, which just happened 6 months ago, provides us now with, as I said, this comprehensive portfolio of iconic brands. A complementary product offering, complementary meaning that the products overlap, that the 2 companies have different sets of products and different strengths, that don't overlap like this but that complement each other. We're truly global, and I'll spend a few minutes talking about the implications of that. We have significant value created from the synergies, which as I'll say -- I'll show you later, both obviously helps our margins, but is going to help us invest for growth going forward. We have a strong management team and we have very strong financial characteristics, good strong cash flow which will enable us to pay down our debt quite quickly.

So this is a diagram of the portfolio of brands that we have. Brands ranging from value to luxury. Tempur-Pedic as the super luxury at the top, Stearns & Foster, Optimum, Sealy Posturepedic and Sealy. Each of them has a role and a positioning to the consumer. And the way to think about this is that each of them has a role as far as the consumer is concerned. Each of them has a position in the mind of the consumer. And each of them has a job or a role to do in the mind of the retailer. Each of them is providing -- meeting the needs of a different group of consumers. Together, or as a whole, we have a portfolio that meets the needs essentially of all consumers.

And while I say that they have the strongest brands, or they're a very strong brands and -- they're the strongest brands in the U.S., it's not just hyperbole, this is true. This is data from the Gallup industry survey. It's done every 2 years. And what you can see on the left-hand side is brand awareness of Tempur-Pedic, Sealy and the other major -- our competitors. And what you can see is that, from a brand awareness point of view, Tempur is now at a level which is comparable to all the others. And that has built very much since 2006, when this data started. And Sealy has the highest awareness of any brand. But in terms of -- on the right-hand side, purchase intent, which is the answer to the question, if you're going to buy a bed in the next 6 to 12 months, which one would be your first choice?

Tempur-Pedic is, by far, the leading contender. People, if asked, which bed are you going to buy in the next -- everybody, which bed are you going to buy next? By far, people say Tempur-Pedic first. And intriguingly, second they say Sealy. So -- and you can see, particularly with Tempur-Pedic, how this has grown dramatically over the last 6 years. Now in the case of Sealy, Sealy has been around for well over a century. It's an extremely well known and respected brand, and that awareness and purchase interest is not surprising. Tempur's, obviously, has been built by a sustained investment in advertising over the last 10 to 15 years since we've been competing in the U.S. And so that's the same investment in advertising is a key component of why -- how Tempur has been able to achieve the position that it has. Tempur North America -- we spent, as you can see here, hundreds of millions of dollars a year. We've spent over $1 billion globally. We have and will continue to invest in advertising to build our strength and preference to the consumers.

So we have strong brands. But we also have the complete range of mattress technologies. This is a remarkable chart that we can put out. We have strength in innerspring, strength in hybrids. We have adjustable firmness beds with the new Choice products that we've just launched this year. We have latex, we have visco and of course, we have Tempur material, the complete range of products. We have a complete price range. If you look at these, these are the prices from top to bottom of each of the different ranges that I showed you on the pyramid, and you can see that they go from $399 to $799 and this doesn't include the adjustable bases, which make a significant contribution to Tempur products. But we have a broad range at all price points and all technologies.

And it isn't just mattresses. Here, you see adjustable bases and foundations. Obviously, most beds are sold with foundations but increasingly, beds, particularly the high end, are sold with adjustable bases. And I've said this before, but adjustable bases on a rough measure, approximately double the price of the bed. And when I showed you the data earlier on about how Tempur is raising the prices of its bed over time, I wasn't including in that chart the contribution that the adjustable bases make. So if you add the value of the adjustable bases, that too is an increment to our retailer in terms of value and incremental sale of a person coming into the door. And adjustable bases are an area of very significant expertise. You can see, we and Sealy, both have adjustable bases. We have pillows. Pillows are very important around the world, particularly in our rest -- outside of the U.S. Important in the U.S., but even more important outside. And we have them both at Tempur and Sealy. And then we have accessories from toppers to slippers to travel pillows and so forth.

And we are the industry's only global company. Now this picture shows the countries in which Tempur and/or Sealy compete. It's well over 100 countries. So we are in 100 countries, which is a very impressive thing. But I think it's important to go again one level deeper. If you look at the countries on this blue chart, what it shows is the countries where Tempur Sealy is, where we own the market, where these are wholly-owned subsidiaries. And you can see that while we've lost some of -- some countries were not covered -- we don't cover, the majority of our business comes from these markets. $2.75 billion of sales across the world. And while a big chunk of it, $2 billion, is in the U.S., $750 million is outside of the U.S. It's a very significant global presence of wholly-owned markets. And when you add in the value of the remaining markets, the markets that are either joint ventures or licensees or third parties, and count the value of the branded sales in those countries, then Tempur Sealy is approximately a $3.3 billion global business. So again, when we say we're global, we are in many countries, but we're in many countries in a meaningful way.

The next component that the value of the Tempur Sealy joining together provides us is this value creation from the integration, the cost synergies. Now Dale is going to talk more in his presentation about some of the details behind what's driving this, but where -- the key areas of growth, our warehousing and distribution, sourcing and manufacturing, and corporate and other SG&A expenses. But when we made the acquisition, we anticipated that we would achieve $40 million in cost synergies by the end of 2014. We have said recently that we anticipate being able to achieve that $40 million by the end -- sorry, we had originally said we do it by 2015. We have now said we'll do it by the end of 2014. We now anticipate that we will be able to achieve $70 million by the end of 2016 and $100 million, ultimately. So the synergies have come in faster and bigger than we had anticipated.

The combination of the companies has a strong and established management team. We have a very good team of which I'm very proud. We have people with -- everybody in our team has extensive consumer products, experience and personal international experience. And we've -- and the group has come from some of the biggest consumer goods companies in the world, as well as from the mattress industry. So we have a very powerful management team.

So that's what we are. That's what Tempur Sealy is, that's what the result of putting these 2 companies together has done. So now let me talk about, with that set of assets, what are we going to do with that. First of all, let me set the vision. This is the vision that we have developed for our company, the new company, Tempur Sealy International. Leading the transformation of the global bedding industry. The industry is transforming as I said a little earlier, and we see our role as a leader in this to be leading that transformation. And as we think about what does that mean, we think about it in the -- with a view toward the 3 primary constituencies: consumers, retailers and our associates. So for each of those constituencies, we have made a promise. And so the vision -- we call our vision the 3 promises.

To the consumers, the best bed and the best sleep of your life. And what that means is, we need to provide -- we have to set ourselves internally, everybody in the company needs to understand, our objective is to have the most preferred bed at every price point. And we need to have the best brands so that the consumers are aware of and understand the value of all the best mattresses that we've made. And we need to be available. We need to be readily available no matter where you live and no matter where you shop. So that's a promise to the consumers.

To the retailers, the promise is growing the industry. We are trying to make the pie bigger rather than to fight for a bigger share of the pie. This industry has the potential to continue to grow. Everybody knows people only buy beds every 10 years, people only buy beds when they wear out, and there is a strong bias in the industry to have a price competition at low prices. We want to make sure we're focused on raising ASP. So we want to have, we want -- but the measure of that, how we will -- from a retailer perspective, how can we make the world a better place, if we may the pie bigger. So from a retailer perspective, we want to be able to offer a complete and optimal range of products that allow them to place on their floors a collection of products that will maximize their ability to trade up, maximize their ability to -- or minimize the amount of duplication they have, maximize their ability to trade up and make it logical so that they can use their floors most efficiently. We also need to invest in advertising. And we need to work with them to make sure our advertising is coordinated to maximize the number of people coming in to the stores. So we want to make sure that as many people come in as possible. And once they're there, that there was focus is raising the ASP.

And finally, from a retailer perspective, we want to make ourselves easiest to do business with. Now one of the benefits of the merger, and I will talk a little bit more about it, is that because of the manufacturing process of Tempur, Tempur has historically been -- has had a slower retailer replenishment cycle than Sealy. We believe that by combining the 2, we can get effectively the best of both worlds, which is going to lower the costs of doing business with Tempur Sealy which, again, is going to make it more desirable for retailers to deal with us.

And then finally, on the -- from the 3 promises, our associates. We want to attract the best people to work at the company, and we want to keep the best people here. And the key to that, we believe, is maximizing people's potential for personal growth. And so we are very focused on providing an environment where people can learn and grow. And we're excited to do that. We believe that with those 3, we will drive sustained and profitable growth and obviously, enhance stockholder value.

Another document which we have shared, and we continue to share and will forever -- but also its not just a document, it's a kind of a code within the company, is our core values. And I'm not going to go through it right now, it's not something of direct relevance, but I wanted you to know about it because it's very important to us. These are the core values that inform, not just what we do within the company, but how we do it. And it's very important, it means a lot to us. And what was interesting was, this was created as one of the first tasks of the management teams of the combined Tempur Sealy. And what was intriguing was how relatively easy it was to come up with, because it was something that mattered so much to both sides and how much commonality there was.

And while, in some cases you can say, well, these things always look very similar. To some extent, that's true. But I would say the first one is one that really matters to us. We are passionate people. And that's a powerful -- we are passionate people. We care about our brands, we care about our team, we care about winning, and we have a bias for action. So I just wanted to share this with you, I'm not going to go through all the details of it.

So that's the vision written in words. Now let me put it in numbers. For 2016, we are projecting that our sales will be $3.3 billion, which is approximately -- which is a 6% CAGR from the midpoint of our guidance for this year. That our adjusted EBITDA will be $550 million, a 10% CAGR. And our adjusted EPS, a little over $4, a 15% CAGR. And then our leverage at 2.5x will be 2x less than it is now. Now that CAGR is an average of the 3 years, obviously. We are expecting to -- we expect, over time, that this will ramp. Obviously, our growth right now is well below that, so there's going to be a degree of ramp in this. But we expect that we will be expecting 2016 approaching double-digit growth. And a large part of the reason for that is these numbers don't really include the fact -- an estimate of the contribution of the revenue synergies that I'm going to speak about in a moment. So this -- we expect those synergies will come in over time, and they will enable us to ramp as we grow going forward.

But we're going to use the cost synergies that we have described, or what I would say as a cost synergies over and above what we had initially estimated, to invest to drive this growth. I'd said that we have -- we're estimating right now something between $70 million and $100 million of synergies. $40 million of that, the amount that we had originally estimated we were going to get, we're going to use for margin expansion. But the remainder, we're going to use very deliberately to invest in driving growth. And the 3 areas we're going to use it to invest in driving growth are in marketing, product innovation and making us more -- easier to do business with from a retailer's perspective.

So the drivers of growth, the next topic of my comments. Not surprisingly, in North America and international our marketing, innovation and making our supply chain easier to do business with. From marketing, it's -- in the U.S., that is advertising, but it's certainly not only advertising. It's promotions. It's in-store marketing. And importantly, it's our direct marketing. And innovation is both new products and new categories. And obviously, making -- I'll talk briefly about making our supply chain easier to do business with.

Internationally, it's very similar. Again, advertising, promotions, distribution is very important, growing our distribution internationally is a very important component. But our direct business, in the rest of the world, is different than it is in the U.S. and provides great potential for growth. Innovation, again, new products, new categories. And one of the opportunities we have internationally is new market. New market expansion, which will be a substantial part of what we think is going to drive our growth over time, but also our revenue synergies.

So first, talking about the U.S. We will invest in advertising, and we have. I said earlier, that we have, over a sustained period, and we will continue to do so. I think everybody in the room also knows that in the last 12 months, we have not advertised as much as we would have preferred to have done, frankly. In the 2 -- you can see this is the -- this chart shows our advertising spend by half since the first half of 2010. And I've highlighted 2 in red here because those are the first 2 where we have spent less in the half than we spent in the matching half from the year before. So we spent less in to the -- the second half of last year than we did in 2011. And we spent significantly less in the first half of this year than we did in the first half of 2012.

Now we've said that we have addressed that in the second half of this year, and we have. And we're already seeing the benefits of that, and we'll spend more in the second half than we did last year. So we've said we're going to address that, we are. We're already seeing the benefits of that. But more than that, we are committed to investing and spending in advertising and we will continue to spend more each year than we did the year before. We are committed to that. And that's an important part of our -- of the underpinning of our plan going forward.

And we will advertise, not just Tempur. Clearly, Sealy is important too and our other brands. But let me be clear, the bulk of the advertising is going to be about Tempur. Tempur is -- this is -- we will advertise, we're building all of the brands. They're all powerful, but Tempur is the one that is built on advertising, that's the one which we are very committed to advertising more every year. But as I said, advertising isn't the only thing. And it's important to understand, it's not advertising and other little stuff. It's all important.

So promotions, in-store marketing are both very important. The promotion you can see on the top left here, Share the Tempur Love, is one we just ran for Labor Day. It was an effective promotion. There's a box spring promotion for the Sealy hybrid. Promotions are more and more important and creativity or effective -- the effectiveness of promotion is going to be like it is in the consumer packaged goods. It's going to become more linked to the creativity and the way that they attract the attention of the consumers. This is going to become a more -- it's going to become an increasingly important component of being successful in the marketplace. But so is in-store marketing, and you can see here on the bottom left, the in-store marketing of Optimum, the in-store marketing of Tempur. In-store marketing is critical. It's something that we will continue to invest in.

Direct marketing though is also important. Advertising, for example, online is clearly very important. For the first time, it now appears that advertising online is as effective as advertising on TV. It doesn't replace it, but advertising online can be very effective. One component of that is having a very effective website. As you know we have a strong Tempur website and a strong Sealy website. The Tempur website provides us significant revenue as well. But the web and the website is a very important part of our direct marketing. We will continue to focus on that. The direct marketing is also stores or flagship stores. These -- we have 3 flagship stores. These are the pictures of the Tempur-Pedic flagship stores. We have 3 of them. Their purpose is to raise the image of the brand. To make people realize that this brand is something special. And I think that you would agree looking at these pictures that the products and the brand are very well represented. It looks like it -- it pays off the promise of the Tempur brand. And we will continue to open these stores. These are not a distribution arm, they're our marketing arm. But these stores are very effective and we will continue to open more.

So I said one part is marketing and in all aspects, advertising, but the other aspect as well. The other thing though, of course, is investment in innovation. Now here are 2 recent innovations, the Tempur Choice products, which are the ones that have the adjustable firmness, which are unique in the industry and that there are 3 separate areas for each person on the bed to adjust the firmness in those areas. The first time we've had a Tempur adjustable firmness bed. And on the right-hand side, you can see the new Breeze technology, which was introduced last year and is selling very well. And the 3 beds, which we now have available in Breeze.

Many companies talk about innovation. And frankly, you have to talk about -- you have to be focused on innovation in any industry, but we are particularly so. And while it's a bit bragging, I would say we have a track record. I would say that if you look at the track record of Tempur innovation, we have quite a credible track record. The little picture on the left-hand side there is the picture of the Rhapsody.

That was the first high-density Tempur material bed that we introduced back in 2006. That bed is still a bestseller, but it's sold just about $1 billion since we launched it. The Ergo base that we introduced when people thought adjustable bases were for sick people and old people, we've now sold 0.5 billion of those -- $0.5 billion worth, and it's growing every year. The TEMPUR-Cloud, a new version of Tempur that was different than the firm feel that had been the traditional Tempur that provided the soft quick response Tempur, that Cloud has sold $1 billion, and I'm only talking in the U.S. In the rest of the world, it's another 1/3 of $1 million -- $1 billion. It's a big deal. The TEMPUR-Breeze is quickly becoming a top seller. Many of our customers report that the TEMPUR-Breeze, which by the way, costs $3,500 or $4,000, is the best-selling bed in their store, best-selling bed of Tempur in their store.

So these innovations are not just decorative stuff on the side. These are fundamental to our ability to grow. And I think the TEMPUR-Choice is going to be the next big one, the next one which has great potential for growth. And it's not just Tempur. Sealy, too, has great product innovation. The hybrid, which was just introduced, is doing well -- much more than expected. It's a very, very good product. It's very much liked and it, too, is at a premium price point, $1,299 to $1,799, a good bed, differentiated. By defining hybrid as being 50% foam, 50% springs. Sealy has created a market and has taken ownership of it. The Stearns & Foster brand went from very -- frankly, from being a big brand to a small brand back to a $300 million brand due to innovation and design and how it looks. And that bed has done remarkably well. It's a great product and it sells very well, but that had gone almost very, very small, back to $300 million. And then Optimum, Optimum in itself was an innovation. But Optimum latex, which was just shown in Vegas this year, that too was very well received.

So innovation is in Tempur and in Sealy. And it isn't just in mattresses. I think one area, which is not a surprise, but one area where we believe innovation is going to be very important going forward is in adjustable bases. You can see the picture in the middle there of the TEMPUR-Ergo Premier, which is the top-of-the-line Tempur mattress -- sorry, base, controlled by an iPad or an iPhone. But adjustable bases are increasingly important, increasingly significant portion of beds are attached to them and their functionality and price are going up. And of course, there are things beyond mattresses -- beyond the adjustable bases. Pillows will be important. Pillows is important in the U.S. and as I said, particularly important overseas.

So we have a track record, but we also have the capability. We have -- unmatched R&D capability. We have facilities in Denmark, Virginia, North Carolina and Kentucky, and we have significantly invest -- increased our investment in R&D every year since 2008 and again, this year. And as you can see, we have experience in, obviously, the Tempur material but springs, pocketed coils, hybrids, latex, adjustable bases, we have experience across all these different areas in-house in our facilities.

And the last topic, on the drivers of growth in the United States, is making ourselves easy to do business with. Now, what I mean by why is this a driver for growth is obviously, from a retailer's perspective, being their preferred supplier is going to influence the proportion of their businesses they're going to do with any given supplier. So it's our desire to be their preferred supplier and part of that is making it easier to do business with us. And what you can see here just illustrated very simply are those places from which Tempur and Sealy distribute mattresses. And the fact is that Tempur has -- the key to this is that we can provide support nationally and we can provide support to the biggest retailers wherever they are located. So they can order centrally, but take delivery wherever they are located from one central system. But by combining these 2 systems, we'll be able to improve our frequency of delivery and we'll be able to improve our efficiency, both of which will be very desirable.

So now turning to international, the international opportunity is significant. As I said, in Europe, it's a $5 billion market; Asia, $7.5 billion; and South America, $1.5 billion, a big market. And we are big players in these markets. So if I talk just briefly, 1 page on each of these big areas. In Europe, look at the green box first, it's a $5 billion bedding market and it's had a negative growth, minus 2% CAGR from 2009 to 2012. In that period -- sorry, today, Tempur has a $300 million business, and I should say in this part of the world, in Europe, it's Tempur. There's a very, very small component of it that's Sealy, $300 million of business growing at 7.5% since 2009. You can see the advertising that we run in most of the countries -- the rest of the world called Weightless, and you can see a flagship store in the bottom right, Tempur U.K. We have a flagship store similar to the one we have in -- the ones we have in the U.S. But our 4 biggest markets here are Germany, France, the U.K. and Benelux. And while Europe is -- got some things in common, each country is very different and our strategies and our approach is slightly different by country. Germany, the big focus there is investment in advertising and that continues. It has been working, we will continue to do it. In France, the big objective has been to expand our distribution, and we continue to do that. And as we do so, we are also ramping up advertising in parallel. In the U.K., we have very strong distribution and it will continue to get stronger. And in the U.K., we advertise -- advertising is very effective. Benelux, which sounds like a small country, but actually for us has been quite an important business because Benelux has a very premium mattress industry, premium-priced mattresses and Tempur has a very substantial business there. But that -- and it has been strong for years, but it has been very much challenged recently. The premium market has become very challenged in Benelux. And it seems -- driven by weak consumer spending, but it has disproportionately affected the mattress industry. And you can see on the picture there in Holland, we have a picture of one of our stores. We are opening stores in Benelux, in the malls, and they're working quite well. And it provides us an alternative way of distribution and an incremental source of growth. It's important and it will continue to be, particularly in Benelux. And I'll -- and I'm going to talk more about direct in all of these countries.

In international -- sorry, in Asia and Australia, again look at the box, look at the green box. Now, this is the $7.5 billion I referred to. It includes China, so it's a little bit -- I'm not going to -- I'm not 100% confident in the China number, but it's still a very big number. It's been -- projected to be -- have been growing an 18% since 2009. And we've got $100 million business there. Now, again the bulk of this business that is wholly-owned is the Tempur business. I'm going to talk a little later about the joint venture that we have in that area, but the wholly-owned business is Tempur. And that's had nearly 40% CAGR since 2009. Again, we run -- the way the Weightless ad, but you can see it's translated there into Chinese. In Japan, which is really an interesting story, our sales had peaked many years ago when we were primarily selling pillows. But we're back again now in Japan at peak levels of sales, and a lot greater proportion of our sales are mattresses and also a lot of it is through direct stores. In Korea, which I'll talk -- we just took over last year, just became wholly-owned last year, we had enormous growth driven by distribution in Korea. It's going to be a standout market for us, very important, fast-growing, very wealthy, very important. Australia, we've added distribution and we're increasing advertising and we're growing steadily in Australia. And China, it's -- China is going to be big. But it's not going to -- it's taking time. It's coming. It's coming in and it's on its plan, but China is going to be big and we're starting to see good growth there. But China is almost entirely our own stores. You can see here on the bottom a picture of an Australian department store, our own Tokyo store and a Korean department store.

Finally, on this section on Latin America, about a $1.5 billion market, 6% CAGR since 2009. Here we have about $100 million of sales as well, but here, it's almost entirely Sealy. So this infrastructure here in South America is Sealy. This is where -- this is an example of where we have a different balance of share. And then Sealy has been growing at about 15% since 2009. Largely in Argentina through their own stores, the bedtime stores. We also have some -- we do have some participation from Tempur, there's a Brazil store there and Sealy has a significant business in Mexico, much bigger than Tempur.

Now in advertising that I referred to in the U.S., advertising is important internationally. It's not a blanket approach because you have to have enough distribution for the advertising to make sense. But in those very established markets in Europe and Asia, it does. We've invested significantly in advertising over the years and it's continuing to ramp, and we will continue to going forward. And you can see that sales are influenced by advertising in the rest of the world as much as they are in the U.S.

The Direct business in international or using direct marketing, which in some ways similar, is very important too and different than the U.S. We have over 100 stores across Europe, Asia and Latin America, and it's growing. And we also have 100 -- over 100 joint venture and licensee or third-party, company-branded stores. As I say on the third bullet here, we also have an -- we have a small but growing e-commerce business and there is no question that e-commerce is going to be a source of growth in every country. But if I talk about the direct stores in -- the primary drivers of direct stores, you can see that it is growing at a 50% CAGR, that in the last 12 months, we've done $45 million of sales there and that's twice as much as we did -- nearly twice as much as we did in 2011. And believe me, there's a long way to go. There's a lot of opportunity. It's country by country, but the economies -- we can leverage businesses that are -- the infrastructure that's already existing to open stores, and we can leverage the skills we develop in one country and apply them to another. So we have stores in Norway, Singapore, Japan, China, and as I said before, Holland. This is going to be an important business going forward.

So we're going to invest -- I said we're going to grow. The drivers of growth are marketing, innovation and distribution while making ourselves easy to do business with. And that is the underpinning of the numbers that I quoted as the targets for 2014 to '16. But let me talk now about the revenue synergies, which we -- which are very significant. We think that there's something in excess of $500 million of long-term revenue synergies. $200 million approximately in North -- $200 million plus approximately in North America and $300 million internationally.

Let me talk just a little bit about why -- how we see these opportunities manifesting themselves. First of all, I referred to the fact that we have strong R&D and I referred to the fact that we have strong innovation. But what we now have is this ability to cross-pollinate. We have, within our capability, expertise in Tempur material, gel material, adjustable bases, latex and so on. The opportunity to create new and innovative specialty products, with the combination of these technologies, is significant. We also have the opportunity to take traditional products and enhance them. You can see obviously springs, pocketed coils but also hybrids. There is potential here for a significant cross-pollination. So in products, I think that, while I don't want to tip my hand here, we have the opportunity to create products and in with, not only technologies that can be cross-pollinated, but leveraging brands effectively one against the other. So we have enormous potential for new products in -- from leveraging the 2 sides of technology and also the 2 brands, the 2 sets of brands.

In adjustables, as I said, adjustables is a big opportunity and it will continue to be and until now, we have 2 different parts to developing adjustables. That, too, will be a significant opportunity going forward. And finally, other product categories. Again, I'm not going to talk about that now, but we believe there's potential for product categories beyond the ones we compete in now. And as we think about what would be an appropriate expectation that we, as a company, have of ourselves for how much this set -- this component of the revenue synergies as well. Whenever we make a -- when we have a kind of a hurdle rate for a new product, we expect the new product to have in its -- when it's achieved the full potential to have a run rate of about $100 million a year. So we have set ourselves internally a target to say we need at least one incremental product out of this at the run rate of what we would normally expect. So we -- this cross-pollination in order to put ourselves a balance, and we've set ourselves the objective of we need at least one that is worth $100 million. Now there's no science to that beyond that's the level at which we would expect a normal product from the 2 companies individually to target.

The second area for North America is channel synergies. And the way to think about this is leveraging the infrastructure of one to benefit the sales of the other. So the first 2 refer to what -- well, to our growing share with retailers. But if you -- let me take them each individually. Category management, I'm sure everybody has heard the term, but it's a term very often used in consumer packaged goods. But category management is a way of thinking about how to maximize the profitability of a given floor space or a given shelf space. If we -- what our objective is to design how we go-to-market in a way that provides a category profitability maximization for the retailer. So that means making sure, for example, that our trade spending is augmenting the building of the business rather than fighting against each other. It means making sure that the product assortment provides the ability for a retailer to have a complete range of products that appeals to every type of customer without having multiple levels of duplication. And it requires having the advertising being, again, augmenting and coordinated with that of the retailer. So from a starting point, we start from a profit maximization of the floor space of the retailer as kind of the guiding principle for how we develop our assortment, our advertising and our marketing. And then on the other side, on the supply chain, making ourselves easier to do business with. We want to make it -- clearly, a large component from a retailer's perspective is how much cost is associated with the selecting, sourcing and inventorying of products. If we can have a significant portion of their product line be easy to do business with, cheaper to do business with, both from a cost of doing and from a lower amount of inventory required to be carried and frequency of delivery, we believe we can gain share. So leveraging the infrastructure of both sides to make something that is better for a retailer, we believe, will drive revenue growth, our share and ultimately revenue growth. And then from a different perspective, if you look at the Canadian business, Sealy's Canadian business is 5x larger than Tempur's. So we have an opportunity there to leverage the infrastructure and the relationships to grow our business in Canada and we have -- Sealy has a $300 million club department store and hospitality business. Tempur has a relatively negligible component of all of those. Again, leveraging the infrastructure, the relationships and the delivery and the systems, we believe that in combination, there is again at least $100 million worth of opportunity here.

So with $200 million of opportunity in the U.S., now let's talk about international. Now the first component of international is the -- if you remember, I described at the beginning that there is the Tempur Sealy wholly-owned component of the international business, and then there is the joint ventures, licensees, so on. And I said that it goes from -- it's approximately $500 million of everything else, everything that isn't wholly-owned. The non-consolidated branded JV licensee and third-party revenue. These are the sales, $500 million of sales in all these countries, which is not wholly-owned. Now, I'm not going to be very -- I'm not going to go into all the level of specifics about country by country, but we have analyzed it country by country, area by area. And we estimate that of that $500 million, there's $200 million of revenue that is a long-term opportunity that can become integrated into the Tempur Sealy wholly-owned subsidiary.

The most tangible of that -- that's not true. The one that I -- let me talk a little bit which is the Asian JV. Today, we own 50% of an Asian JV that was created with -- by Sealy, and we have the option to purchase that in 2020, to purchase the remaining 50% in 2020. The JV partner is Sealy of Australia, which is a Sealy brand licensee. The licensee in Australia is one of the best licensees that we have. Peter Aeti [ph] is an exceptional business and businessman, and he is -- he and his team are leading that joint venture in Asia. As of today, we -- or as of last year, we had $70 million in Asia and a 30% growth since 2009. And it continues to grow very well. It's a significant business. It's continuing to grow very well, and it's in China, Hong Kong, you can read the list. It's a very significant business, and in 2020, we have the option to purchase that. That's one very tangible example of where we can see revenue synergy.

But there are others. As I said, we see about $200 million in total. And we have a track record. Tempur certainly has a track record of acquiring distribution or distribution rights and then integrating them into the whole. Since 2007, you can see we've acquired Australia, Austria, New Zealand, Canada, China, Korea, Poland, Portugal, Brazil and Ecuador. Each of these has been -- were independent distribution that have been brought into the Tempur-fold, and we will do that for the -- in the new Tempur Sealy world. But it's important to understand that we don't just bring them in. Once they're brought in, we then have the opportunity to grow them, and we have grown them substantially. So, for example, Australia is twice as big as it was when we acquired it; Austria is 3x as big; Canada twice as big; China twice as big; Korea, which we just acquired in 2011, is 3x as big. But in this context -- think about this: in America, in the U.S., Tempur is roughly the same size as Sealy. In Japan, Tempur is roughly the same size as Sealy. In England or U.K., Tempur is roughly the same size as Sealy. In Europe, Tempur is 10x as big as Sealy. So the potential for growth in some of these European countries should be quite significant.

The other place where we see beyond simply -- beyond acquiring distribution rights is leveraging existing infrastructures. Now, the most -- one of these is South America, which I referred to, which in Argentina and Uruguay, Sealy has a large and rapidly growing business of wholly-owned stores in South America. In Mexico, Tempur has a small -- it has a business, but a relatively small business where Sealy is #1 and is a wholly-owned business in Mexico. In direct in e-commerce, Tempur has businesses around the world in e-commerce, Sealy does not. And there are areas where Tempur has distribution and there are secondary brands like Optimum, for example, and Stearns & Foster, which are unlicensed. Now we would work, obviously, with our licensees in those countries, but there are opportunities to capitalize on our existing infrastructure to use brands that already -- that are not, at the moment, being capitalized on. And again, we believe that's another $100 million opportunity. So in -- as I said, these long-term potential opportunities of $500 million are very significant and frankly, possibly quite conservative. We're very excited about the potential, and it's something that we think is going to drive us in growth for years to come.

So in summary, before I hand over to Dale here, we have a comprehensive portfolio of iconic brands and products, a portfolio of brands and products, the largest bedding company and the only global one. The integration has provided significant cost synergies, and those cost synergies are being used to drive and capitalize on a significant growth potential. As Dale will explain in more detail, we have very significant cash flow. We have strong financial characteristics, which will allow us to quickly reduce the debt that we have. So with that, let me hand it over to Dale.

Dale E. Williams

Thanks, Mark. It's a pleasure to see everybody today. Let me grab my water, I have little bit of a throat problem today. I'm going to go over some of the financial aspects of the business, giving the synergies a little bit more detail, peel back a little bit the 3-year target and then also address capital structure and cash flow in the balance of our time here.

First of all, just as a reminder, we bought Sealy almost 6 months ago. So we've come a long way in 6 months in terms of having just completed that acquisition in March 18 on a -- if you look at the guidance that we gave for the year, the midpoint of that guidance would say we're a $2.4 billion. Remember that's using a stub year only for March 18 forward for the Sealy business. On a full year basis, Tempur Sealy combined is about a $2.7 billion business. So we see tremendous opportunity for this business, as Mark has outlined for you on a go-forward basis. But we are encouraged in terms of the opportunities that this business is giving us. We're encouraged in terms of the performance that we're starting to see in the business. A lot of work has gone into integrating these businesses, a lot of work has gone into trying to turn Tempur North America. We said on our second quarter earnings call, we try to call the turn earlier. We weren't going to call the turn anymore. Some day, it's going to turn, but while I'm not calling the turn today, we are seeing positive signs. So the work that we're doing is having an effect. The advertising, bringing back Ask Me as a promotional activity, Labor Day was a good holiday period for the overall business and also specifically for Tempur North America.

Let's look at the revenue in a little bit of detail on a combined basis, most of you have not seen kind of -- what is this new combined business? So if we look at it from a geography standpoint, the acquisition has made us more of a U.S. business, 72% of the business being in the U.S. 8% in Canada and then 20% all the other markets that we participate in. From a segment standpoint, we are running the business in 3 segments: Sealy, which is about half the business; Tempur North America; and then Tempur International is the way that we will report the business from an SEC segment reporting standpoint. Roughly the -- old Tempur and old Sealy half-and-half as we go forward.

From a distribution standpoint, we are very much a retail distribution business. 91% of the combined global revenues is wholesale. We sell to the retailers, the retailer sells to the consumer. However, we do have other distribution channels. Other essentially is represented by the third-party markets where we have a third-party distributor that sells the product for us in that market. It also includes hospitality, includes medical. That's all in Other. And direct, while still a small piece of the business, as Mark has indicated, we believe is going to become a bigger and bigger piece of the business, particularly on the international side. Our -- the Tempur International business started experimenting with owned stores or probably 4 years ago. We gradually added more. We've experimented with it, we've played with it, we've worked on developing the model. International right now we have -- Tempur has 60 stores, as Mark mentioned. Sealy has about 40 in Argentina. So they've also been working with -- in one market. But combined the learnings that we have, we believe that on a go-forward basis, the own-store concept, flagships or other types of stores around the world is going to be a significant growth driver for us in the future on our international side of our business.

From a product standpoint, we now, because of the combination of the business, look at products in 2 categories: there's bedding and other. Bedding is mattresses, as you could guess, foundations, adjustables. We're very excited about, as Mark just talked about, the adjustable business. Tempur's adjustable business continues to grow. The attach rate continues to grow. We expect that even -- be even more pronounced as we move forward. The new TEMPUR-Up product that gives consumers an alternative to flat. For not much more money, consumers now look at TEMPUR-Up. Product can, instead of having a flat foundation, have one that just the head raises. We're very excited about it. The retailers are very excited about the opportunity of this product line, and we believe it can be a significant growth driver as we move forward. Sealy also has developed a pretty good business in adjustables and the combined use of the technologies and approaches we believe is significant opportunity on a go-forward basis. Others, essentially pillows and other accessories. As you look at the different geographies, you can see internationally Others a much bigger component of the business. That's typically -- and particularly Tempur International. And that's primarily because for a lot of the new markets, when we enter a market, we usually enter as a pillow and accessory company. It's the easiest way to get in, it's the easiest way to get distribution. Particularly in Asia, we're more known as a pillow business, so -- than a mattress business over there.

As you look at the different geographies, you can see internationally others is a much bigger component of the business. That's typically -- and particularly, Tempur International, and that's primarily because for a lot of the new markets, when we enter a market, we usually enter as a pillow and accessory company. It's the easiest way to get in, it's the easiest way to get distribution. Particularly in Asia, we're more known as a pillow business, than a mattress business over there. But we're seeing that change in time. We're seeing -- we've talked historically about Japan was predominantly a pillow business. Well, now, Japan is becoming a mattress business. And it's becoming a mattress business because of our mixed distribution model of regular furniture stores within our own Tempur stores. We have quite a few Tempur stores in Japan now. They're performing extraordinarily well and Japan has really been a test bed for us in terms of what's the right number of stores, how do those stores interact with traditional retailers and how they drive the brand.

Japan is a market where advertising is extraordinarily expensive. But the stores advertise for us. They are in high-volume, high-traffic places. Consumers see it. They recognize the name and we're really developing a great business in Japan because of that presence. And we're seeing the international business become more and more of a bedding business, as opposed to just an accessory business.

So let's get into the synergies a little bit. A key thing on this slide, as long as the information is similar on these 2 slides, so I'll go into more depth on the second one. But we are seeing, as I said before, we're very encouraged. We're very excited about the progress of this combination, almost 6 months to the day. I guess a week less than 6 months, together. We not only have seen the synergy opportunities that we identified during due diligence as being there -- they are there, where we're finding the synergies, where we're getting the synergies are in exactly the areas where we thought they would be, they're just coming faster and bigger. Where at the time of the -- that we announced the transaction, we said we thought there would be $40 million of synergies in the first 3 years, now, in the first 3 years, we're thinking $70 million. And we're going to hit $40 million next year, in the first full year of being together, but 1.5 years or so since the acquisition.

So let's dig into those a little bit more. The timing of synergies is laid out here on this chart. This year, we're seeing $18 million of synergies. Next year, $40 million. By 2016, $70 million in synergies. And they're coming predominantly in 3 categories: corporate or SG&A synergies, that's related to streamlining the corporate infrastructure, it's related to reducing professional fees. We don't need -- we're not -- we don't have 2 public companies anymore. We have one public company. So we don't need 2 audits. We don't need 2 D&O policies. We don't need 2 listings on the NYSE. Sorry, Bob. We don't need 2 PCOB (sic) [PCAOB] fees.

So there's a lot of professional fees that go along with being a company that we get synergies on. And indirect cost is an area that we're really just starting to get into, it's an area that we see a lot of opportunity. But indirect cost covers the gamut, everything from combining our travel programs, combining our supply programs, a lot of areas. Everywhere that we spend the money that is not related to producing a product is what we call indirect, even marketing. By combining our marketing efforts, by combining our advertising buys, we can see opportunity to get efficiency, to get better prices, which would allow us, for the same amount of money, to get more advertising.

Warehouse and distribution, this is an area that we thought all along would be a very good opportunity for us. Initially, what we've done is, Sealy has a fleet of trucks out there. Tempur has always used third-party distribution. While it is very expensive for Tempur to send a truck out to a retailer just to pick up a product that was being returned, Sealy already has trucks at that retailer. They're just taking our returns for us. And as Mark mentioned, as we get further into this process of becoming easier to do business with, we're going to be delivering Tempur and Sealy product on the same trucks.

Now we have to do some work in our warehousing and distribution system to accomplish that. We need to merge centers where the Tempur products can be put together with the Sealy products. This is something that is going to happen over an extended period of time, but it's something that has already started. We're already starting to see that. We're already -- Sealy trucks are already making some deliveries of Tempur products. It's not wide scale yet, but it is an area that will continue and that's really going to give us 2 significant benefits. A, it improves our cost; b, it improves our customer service to the retailer and improves the cost of service. So those logistics opportunities are significant savings. And you can see, as time goes on, we expect that the warehousing distribution logistics savings is going to significantly increase.

Sourcing and manufacturing is another key area of synergy opportunity. Again, in 2013, sourcing is the biggest piece of the savings. Because as soon -- the day after we closed the transaction, we went to some of the common suppliers and said, "Our business is now double, what are you going to give us?" So we're able to get some significant sourcing improvements right away. But there's a lot of opportunity -- continuing opportunities on that, as we look at refining specs and refining the capabilities so that if we're buying 2 different things that are almost the same, but slightly different, can we buy the same thing and get the volume benefit of that?

This merger was not about combining manufacturing. The Sealy plants produce the Sealy products; the Tempur plants produce the Tempur products. Sealy can't make Tempur materials. Tempur can't produce a spring, but that doesn't mean there's not opportunities in manufacturing. Tempur sources products. Sealy sources products that they -- that we don't have the capability of making. Sealy has started already manufacturing foundations for us. Significant opportunity, better cost than what we can buy out externally. It fits into the logistics and distribution opportunity. So that process has started, of Sealy manufacturing some things for Tempur that Tempur sourced, and vice versa. We're looking at opportunities where Tempur can make things for Sealy, like adjustables.

So there are a lot of opportunities in sourcing and manufacturing that we continue to see as we go forward. And as Mark said, we believe the cost synergy opportunities will ultimately be more than $100 million on a run rate basis.

So let's look at our 3-year target again in a little bit more detail. As Mark mentioned, right now, we're saying, okay, over the next 3 years, we're looking at, from a total business, 6% compound annual growth; 10% growth in EBITDA; 15% growth in EPS; 2x reduction in our leverage ratio and with the growth accelerating through this time period and I think one thing that's really important to understand, is as you know -- but first, we have to turn Tempur North America around. Tempur North America through the second quarter, was still declining. You can't grow it until you turn it around. So that's why this trajectory is a little bit muted and we believe we'll ultimately be accelerating as time goes.

One other important thing, these numbers do not have any of the revenue synergies in it. As Mark mentioned, we see $500-plus million of opportunity in revenue synergies. Hopefully, that turns out to be a very conservative number. As Mark showed, there's -- in the revenue synergies, we basically have one new $100 million product idea. That would be extraordinarily disappointing, if we only had one new $100 million product category that came out of the revenue synergies.

But we're just assuming at this stage, one. But that is a continuous part of our process of identifying where the opportunities are in the market, what is the best product based on the combination of the businesses' capabilities and technologies that can take advantage of those opportunities.

So if we look at the revenue in a little bit more detail, 6% total consolidated top line growth. We believe Sealy is going to continue to grow, excluding synergy opportunities at market rate, roughly about 5%. Skipping down, Tempur North America, we're saying, is going to grow about 6%, a little bit over the market rate but, again, we have to get Tempur North America turn to positive first. So this is a 3-year average growth rate.

Tempur International, we actually see a lot more opportunity. We're showing a double-digit growth in Tempur International. You may say, "What's driving that this year?" Tempur International is flat to just slightly up, given the issues that we're experiencing from a macroeconomic standpoint in Europe. While we see a lot of opportunities in Tempur International. One in particular, our Asia business continues to grow at a very rapid clip. It is becoming more and more substantial in size. So if you have a $50 million business that's growing 10%, that's not contributing a lot. If you have a $100 million business that's growing 20%, that's starting to make some good contribution to the overall top line.

Our Asia business, as Mark showed, is about $100 million now. It continues to grow at a strong double-digit clip and we see tremendous opportunities to continue that type of growth. And over time, that's going to put more and more benefit on the macro picture for our International business.

Europe. We're not calling a dramatic economic turn in Europe. Someday, Europe will improve economically, but that's not something that we're calling. What we are calling internationally is our direct business is becoming bigger, faster, and we're going to put more and more focus on it. The direct represents not just the stores, but also e-commerce that we've -- are rolling out internationally, e-commerce capabilities. We're seeing good growth in our e-commerce business. So we're supplementing the difficult economic situation in Europe with our direct business and putting more emphasis on that and really trying to drive the direct business, which increases as multiple benefits, one, we're selling the product to the consumer; two, it helps build the brand. The direct business can attract -- access additional advertising to make consumers more aware, et cetera.

So as we think about bottom line impacts, the drivers, positive and negative across the business, these are the kinds of things that we've thought about, that we're focused on, that we're trying to comprehend in this equation. Synergies, obviously, is a positive. We're seeing more synergies, we're seeing more synergy opportunities. As Mark said, we're baking in the first $40 million of synergies to impact the bottom line. Beyond that, we're looking to use some or all of those synergies to fund the growth drivers. On the negative side there, that's where we're going to fund, we're going to fund advertising, we're going to fund new products. So we're going to take the benefits of the synergies, take some of that overperformance and fund advertising and new product development that will ultimately allow the business to grow faster.

Back on the positive side, volume leverage and scale. Obviously, we get the business growing, volume leverage impacts not only the gross margins but it affects the ratio of G&A spend or whatever, to sales as well, gives you benefit. One other key synergy opportunity, as we continue to move forward, not only are we -- from a sourcing standpoint, not only are we seeing short-term opportunities of sourcing. But as we are becoming more global, as we're getting more global in our information, there are a lot of opportunities from a cost standpoint of taking advantage of global scale.

Right now, we're getting advantage of significant scale in the U.S. But in the future, we're going to get global scale opportunities. That's one of the side benefits of being the only truly global mattress company is we're going to get global scale across this business.

Productivity will continue to be a positive driver. We talk about productivity frequently in these discussions. Just to give you a couple of examples of what we mean by productivity, we've got all these cost synergy opportunities that we're working, but we still have our standard productivity initiatives also. Standard productivity initiatives are things like making the plants more efficient, improving the processes, finding ways to take cost out. For example, we -- one of the negatives down at the bottom and I'll talk a little bit more about it in a minute, with the pace of innovation, when you introduce new technologies, those new technologies, by definition, start out being more expensive. The first time you build something, it costs more than after you've been building it for 20 years. There's a learning curve. And you learn over time how to produce it more efficiently.

Productivity is that learning curve. So we have new technologies that are in our cost base now, that new technologies that we'll continue to put in to our cost base, a significant component and effort of the business will be getting the cost of those technologies down, so that they're less negative on the overall mix of the product.

And then the international mix. Basically, what that means is our International business, both within Tempur and within Sealy, the international segments of our business, are higher margin businesses than our U.S. business.

So with the international business growing faster, that gives us positive mix, where we're seeing more growth in a higher-margin business line. On the negative side, we've already talked about advertising of new products. That's going to be -- continue to be some -- an area that we invest in. Customer concentration is something that we're very cognizant of. It's something that we have modeled in here. As Mark mentioned, the industry is consolidating somewhat. As customers get bigger, they're doing more volume. They get more volume rebates. So that's something that we are very cognizant of, but it also creates opportunities through making ourselves easier to do business. And the key component of making ourselves easier to do business is reducing the over -- the cost to serve. Large customers, while they get bigger volume rebates, et cetera, it's also less expensive to serve those customers, because they're concentrated. You're sending full trucks to them, as opposed to less-than-full truckloads.

So it's something -- that's an area that we're cognizant of. It's something that can be a negative, but it can also be a positive on a total basis. And if we are a key preferred supplier for those large customers, it drives and insures, continued growth of the business.

Commodities -- we always assume commodities are going to be negative. It's something that we have absolutely no control over. On a merged basis now, our commodity exposure has changed a little bit. But it's still a lot of the same. It's still foam, still chemicals to make foam. That's been traditionally the commodity exposure for Tempur. With Sealy, now, obviously steel becomes a bigger commodity exposure with the springs, but also with the growth of our adjustable business, steel has even become an exposure for Tempur.

And innovation, as I mentioned earlier. As you bring new technologies to market, those new technologies generally inherently are a little bit more expensive than your old technologies that you've been making for 5 years, 10 years, 15 years. It's the classic learning curve situation. So we have built into, plus, as you bring new technologies just like this year, you have your floor model. As you bring in new technologies out, you've got to replace floor models on all the floors of all the retailers. As we get bigger, that becomes a little bit more expensive proposition. So we're balancing those. And in general, we're looking for improving profit performance, though.

So from a gross margin standpoint, again, ideally all these numbers will turn out to be conservative, but we go from the philosophy of you don't want to be a hero in projections. And so we're trying to take a very realistic, conservative view of the business. What could it be, what could the expectations be, what could we follow through. You can't look at the -- key important point is you can't look at the historic margins of Tempur and say, "What's going on?" The combination with Sealy radically changes the margin structure of the business, particularly the gross margin structure.

On top of just that Sealy had a historic lower gross margin than Tempur, as we conform the accounting, Sealy accounted for a significant portion of freight in SG&A, where Tempur has always had it in all of our freight and logistics in COGS. So we've -- now accounting for Sealy similar to how Tempur has accounted for it, that, in itself, cost about 600 basis points versus the historic norm. Changes the SG&A equation from the historic norm of Sealy, but it affects the overall company gross margin by about 600 basis points.

We do expect to see gross margin improvement. A lot of the synergies are impacting gross margin. The cost opportunities that we see are impacting gross margin. As we get volume, we see leverage in gross margin. So we're expecting a couple of hundred -- over the next 3 years, a couple of hundred basis points of gross margin improvement. We're going to turn around and invest some of that and particularly in advertising. But from a gross margin standpoint, we are looking to see improvement in gross margin over time.

A question that we frequently get and so we thought, given the combination, we need to just give people an update in terms of understanding the COGS on a -- this is now on a combined basis. It's a little bit different than what we've talked about historically in terms of the COGS mix, when you put Sealy and Tempur together, but not radically different. So about 30% of our COGS is what we call commodities. Chemicals, steel, foam, a little less than what it was just on a Tempur basis. About 35% of our COGS is other materials. Other stuff that goes into the products, the covers, the ticking, the packaging, et cetera. About 15% is overheads; about 15% is full logistics, transportation, warehousing, all those kind of things. And labor continues to be about 5% of the COGS.

So as we work down the P&L, from an operating margin standpoint, we've got a 2016 target and a long-term target. We're not happy with the 2016 target. It's something that we think we need to improve. It's something that we need to do better on, but we're not constraining ourselves on a timeframe of when we would get there. Now, let me point out that June year-to-date, that's GAAP. There's a lot of transaction, a lot of acquisition cost, a lot of integration costs in that. On a pro forma basis, in 2013, we would expect the operating margin to be about 12% for the business. So over the next 3 years, while we're getting 200-basis point improvement in gross margin, we're going to spend a little bit of that. But we expect to see 150 basis points fall through to the bottom line.

And we have goals to do even more than that, which is the long-term target. But sitting here today, looking at where we want to invest, where we need to invest, we want to make sure that we have the flexibility to take the actions necessary to drive the growth of the company and ideally, exceed a 6% compounded annual growth. But we don't have -- unfortunately, we don't have a crystal ball. But that's what we're trying to do and that's where we're trying to go.

All that would lead to adjusted earnings per share, going from $2.33 this year at the midpoint of the guidance and this is adjusted, taking out the transaction cost and integration cost, to over $4 of EPS in 2016. Again, as usual, we will -- we'd like to do better and only time will tell. But, again, we're trying to give the business the flexibility to make the right type of investments to ultimately drive growth. And the thing that would drive this better really is getting more growth.

So quickly, let's look at capital structure. As part of being able to do the acquisition, obviously, we funded the acquisition totally with debt. So there's no equity dilution related to this acquisition. On -- at the same time, we refinanced the existing Tempur debt. So in total, we raised about $2 billion. And we have a very -- actually, I believe, a very good structure. We have a revolver facility, we have a Term A facility, a Term B facility, a senior note facility. We have a carryover from the old Sealy structure, where there are some Sealy notes that are still there that expire in 2016. Some capital lease obligations.

But not only do we have a very good structure -- capital structure, we are able to even improve the capital structure after we put it in place by -- we had the opportunity to refinance both the Term A and Term B and -- or we'll be saving approximately $13 million a year in interest cost, just because of that refinancing. So that's a significant benefit for us.

From a maturity profile standpoint. I want to point out in 2013, you'll see maturity there. What we did was, as we were refinancing the Term A and B, we actually paid down part of the Term B. So we've already reduced the Term B during the refinancing. The next real maturity comes in 2016, when the Sealy notes come due. And then 2018, the Term A comes due. But the cash flow dynamics and profile of this company, we're going to be paying down this debt well in advance of the maturities, is our expectation.

So let's talk a little bit about cash flow. Obviously, Tempur has historically been a very strong cash flow driver. Sealy has actually been a good cash flow generator as well.

But the cash flow dynamics and profile of this company, we're going to be paying down this debt. Well in advance of the maturities is our expectation.

So let's talk a little bit about cash flow. Obviously, Tempur has historically been a very strong cash flow driver. Sealy has actually been a good cash flow generator as well. We absolutely believe, on a combined basis, we will continue to be a very good cash flow generator. Just a couple of key components about it. If you look at our CapEx versus D&A on a combined company basis, yes, we are expecting to spend a little bit more in CapEx. We do need to integrate systems. That's going to be a multiyear program. So we are spending a little bit more in CapEx, primarily around IT, then let the 2 businesses historically to spend. But we're still going to have a significant add-back from a cash flow standpoint because the combined company D&A will be at least $30 million higher than what the CapEx is on an annual basis. By 2016, again, this kind of rough modeling, I would say that we're going to be generating $250 million of free cash flow, not operating cash flow, free cash flow, after paying for CapEx, after paying -- which gives us the opportunity to reduce our debt on a fairly rapid clip.

The other key benefit that we'll remind you of is as part of the acquisition, we were able to set up an efficient tax structure. For as long as it takes us with our international operations, under this new tax structure that we have in place, we're going to be able to bring back an excess of $1 billion of cash from our international operations without additional tax. Typically, if you repay trade with foreign earnings, that costs you somewhere between 14% and 20% in additional tax. But because of this tax structure, we're going to be able to bring back an excess of $1 billion as our international businesses generate free cash flow to be able to rapidly pay down the debt of the acquisition.

So all that rolls together forth from an EBITDA standpoint, looking to see a significant EBITDA growth on the business. $378 million, the midpoint of the guidance. I would also point out that is a financial number. That is not what the banks would consider. The $378 million is a step period. On a full year basis, what we would report in our credit statistics, et cetera, would be a full 12 months of both Tempur and Sealy would be about $406 million for 2013, though we expect EBITDA increase about $550 million in 2016, which will allow us to delever very quickly. We expect to pay down debt quickly but also grow EBITDA, which balances. We will use our cash to pay down debt for the time being.

Our long-term capital structure, though, our long-term capital plan, continues to be -- to run the business ultimately with between 1.5 and 2x debt-to-EBITDA. So in the short term here, we're going to be using cash flow to pay down debt. Once we get -- we don't have to get to 1.5 to 2x before we start considering other alternatives for cash flow or other alternatives for -- to use for a portion of our cash flow, but we do need to get closer. We do need to get in -- heading in towards that range before we start considering other alternatives like dividends or share repurchases. But as you know, share repurchases is something that is -- has historically been very important to us as a business, as a means of returning value to shareholders.

So let me just summarize here. The Sealy acquisition doubled the size of our business and transformed the business. It transformed the margin structure, but it completely transformed the business. It transformed the opportunities for the business. The opportunities not only in North America but globally, we believe, are immense. And in time, we think that the revenue synergies, ultimately, will be ideally pale in comparison to the reality that we'll be able to take advantage of.

The cost synergies are going much better than expected. The integration is going much better than expected. The 2 businesses are truly working together as one at this stage. The teams have been put together. The teams are working as one. And we're truly looking at what is the best for the entire business, not just what's the best for Sealy or what's the best for Tempur. We're looking at the entire business, and you can feel that in the business and see it every day in the way that people are working together and acting.

The 3-year target assumes significant investments to drive growth. We are planning to invest a lot of the synergies. We're planning to spend money in those key areas of advertising and product development. But we think also that there is a significant opportunity to grow more. We're already establishing the 15% long-term operating margin target. The company has outstanding cash flow characteristic that continues to have outstanding cash flow characteristics as we look forward, and we expect to be able to delever the business very rapidly.

So that's the end of our prepared remarks. We'll [indiscernible]

Question-and-Answer Session

Mark Rupe

Q&A right now for 20, 25 minutes. I'll bring the mic around if you want to raise your hand. If you wouldn't mind, Brad, speak into the mic your question.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

First, the question about the $500 million in synergies that I believe were not included in the revenue guidance. Could you just talk a bit about the timing with which you could start to see a material amount of those synergies? And then secondly, what sort of contribution margin or profitability we could expect from the synergies?

Mark A. Sarvary

Well, some of them that we have been obviously deliberative by. And some of them, like the one I described, the joint venture, has kind of a date fixed. One thing I didn't make clear is we own half of it all the way. So the date fix is the conversion buildout. But some of them can be done more quickly. And we don't certainly expect to see -- what I -- but I'm going to be a little vague about this. We definitely will -- we will definitely be able to see examples of revenue synergies within the 2016 period. We will see a portion of that. But I don't want to be more specific than that. There are things that are going to happen that you will see next year that you'll be able to say, "Okay, that's part of what it is." But be -- so it is going to range from 1 year to 7 years. It's a sort of timeframe, and it will ramp over that period. So some of it, you will see next year to be starting to happen. And -- but we have been deliberately vague about this, and -- but it will affect it. It will happen within this period. What proportion of it is, I'm not going to give a specific number.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

And profitability?

Mark A. Sarvary

Insofar as the international business, so a big part, 2/3 -- I mean, 3/5 of it is international. And international, in general, both for Tempur and for Sealy, is more profitable. So it's going to -- those ones I would see as being accretive. The U.S.-based ones, I would see them as being comparable, as comparable today to the north. There is inherently better or worse other than the mix associated with where they are.

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Budd Bugatch with Raymond James. Mark, historically, Tempur's had a philosophy of premium products over $1,000. Last year, there was an issue with the product introduced between $1,000 and $2,000. And traditionally, Tempur's also only been in the Tempur material and foam type of products. Now with the new IP, has the philosophy changed? Does Tempur still believe that they're under -- for the Tempur brand name, to be over $1,000 is where you want to play? And you can play within $1,000 and a $2,000 mark. I realize you have a $1,799 product now, but the bulk is about $2,000. And what is your philosophy on material? Is it just foam or now can you see Tempur or its brand name moving into a different part of the IP and a different part of the market?

Mark A. Sarvary

Well, let me answer that in 2 -- but you're laughing before I even start. But let me -- no, let me answer that in 2 parts, though. I think first of all, I think one really important thing is that we now have a portfolio of brands, and that it is important, as I said in my prepared comments, that each brand has a job to do for the consumer and for the retailer. So in the mind of the -- we're trying to get an idea about what the brand means into the minds of every consumer, not just in the U.S. but around the world. What does it mean? And so to some extent, a relatively narrow definition is easier to get into the mind of the consumer than a broad one. So to some extent, I want to make these products each have their own -- my understanding in the mind of the consumer. From a retailer's perspective, we want to minimize duplication and maximize the degree to which the retailer has an ability to step up through the brands and through the products that they have on their floor. Both of those things would say that it makes sense for Tempur to be positioned in the superpremium area, effectively using your number there above $2,000. As you also say, we're below $2,000 now, and I don't see that, that -- an aberration, I can't see that continuing on. So my expectation is that Tempur is always going to be in that superpremium area and that although it will probably help some components in the lower area, I anticipate standing here today that that's where it's going to stand. And the other elements of the portfolio will fill out the rest of it. So that's the -- I mean, nothing is forever. That's how I'm -- that's how I think about it. But I do believe in branding. It's very important to be clear about -- in the mind of the -- what it is that this brand stands for? What are the components and what do you expect about it? And that's -- that will do for every brand. As far as using different technologies, I've said this before and I'll say it again, I'll never say never about anything. I don't want to tip my hand about anything either because it's a lot of -- I don't want to tip my head. But on the other hand, one thing that it will never get away from is that Tempur support is a key component of the whole Tempur brand in the minds of these consumers I've just been talking about. So nothing we will do, like you've just seen with the TEMPUR-Choice. It's a Tempur bed that's adjustable. It's not some other bed. It's a Tempur bed, and we will stay with that.

Unknown Analyst

Just 2 questions. I guess first, Mark, I want to go back to a slide you showed earlier where your average selling price is going up and the industry above $2,000 is going down. So could you talk to us about maybe are you -- your pricing strategy is moving you away from the core customer? First of all. And then second of all, internationally, in Japan, you've got this hybrid model where you've got your own stores, as well as selling to retailers. What's been the feedback you've gotten from your retail customers in Japan from that model?

Mark A. Sarvary

So on the first question in terms of raising our price -- or having -- not raising our prices, introducing products that systematically provide more value on its sale to consumer. But yes, very focused on raising the top end of the tree -- of the category. Yes, we are. And we will continue to do that. And I don't believe we are moving away from customers. I -- or from the bulk of consumers. What I believe we're doing is we are providing a product that has value to a consumer that they're prepared to pay $3,000 for. Our job is to provide a product that somebody says, "I could buy one for $2,000 or I could buy one for $3,000. I'd rather buy the one for $3,000 because the extra $1,000 is worth the money." And I think that's a win for the consumer. Our satisfaction rate levels are second to none. So win for the retailer, it's a win for us. But moreover, if we have the -- if unless we have the very high end of the price brackets moving up, it's going to constrain every price bracket. So this is something that's necessary for everything else. But as in the new Tempur Sealy portfolio, we participate in every one of these segments. We are clearly targeting those customers who want to pay $1,000 to $2,000. We're clearly targeting those who want to pay $500. But we are going to try to make sure that we're getting the -- people, consumers are getting -- are prepared to pay at the high end of what they would have expected because they perceive the value. And critical to that -- it's not the only thing but critical to that, is that the top end has to continue to have room at the top. And your second question was about Japan. We are cautious as we expand in Japan because of -- for the obvious reason that we don't want -- we have very strong distributors in Japan and we have very good relationships. We have the -- most of the stores we've opened in Japan have been outlet stores, although we have opened some non-outlet stores as well. I believe as we've -- is that -- and in fact, in Japan, it seems to be -- well, in fact, it's unquestionably true is that both can grow, that even as the outlets and the -- what are they, flagship stores, the Morris [ph] non-flagship stores, both are growing. The retailers in the nearby areas are growing, too. But we're very conscious about being focused on that, and we are conscious of measuring. And in the U.K, for example, we opened a flagship store in the U.K., in a very big shopping mall outside of London, and right in that mall is a very big anchor tenant, one of our customers. And we track the sales of both us and the anchor tenant to make -- both the direct and the anchor tenant, and both lifted. I believe that this is not a zero-sum game, and it seems to be playing out across the world. But I'll answer. But the other things on the side of it, every country's strategy is different. So how we're opening in Benelux is different than in the U.K., different than Japan and definitely different in Germany. So we have to think about it both in terms of the distribution environment, how can we go to market and how we do it. But we've been cautious about it. But what we are learning is you can do both.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

John Baugh, Stifel. My question's on your advertising. And could you refresh us on the agency you're using today when you hired and maybe get into some of the creative. Are you pleased with the creative you're getting? How are you tracking the effectiveness of it? And are you essentially guiding a 50 basis point increase in ad spend as a percentage of revenue when we put that gross margin with the EBIT assumptions.

Mark A. Sarvary

Our -- the -- let me step back here a minute. We have been running a commercial, a series of commercials, a campaign based on this. It's called Ask Me and has worked well, and we liked it. And we saw it to evolve it, to take it to the next level. We hired a new agency, a very, very reputable, a very good agency, and we developed some new commercials, which we tested and they tested well. But when we ran them on air, we found they were less effective than we had anticipated. And so we have decided, as we have told you to go back now to the Ask Me campaign, and we are reassessing how we're going to do our campaign going forward. And we haven't -- that is still being worked on at the moment. But I would tell you and any of you who've been involved in advertising is that you can test -- the first thing is advertising is very important. It and -- although it -- some -- it's often the standard line is that people change the advertising before the consumers want you to change the advertising. That said, you still have to evolve advertising. So it is a necessity to continue to evolve advertising. The second thing is that it is very important to test advertising, that, as anybody who's been involved with testing advertising will know, testing advertising is very difficult, and it's very -- it's not a great predictor. So then when you're running advertising, the most important thing is that you measure its effectiveness while it's running, and if it doesn't work, change it. And that's what we do. So we're doing our best, and I'm not -- I'm kind of -- I'm sad and disappointed, and I wish that hadn't been the case. But I'm not apologizing for trying to evolve and straighten our advertising. Once we recognize it didn't work, then we'll change it. And I -- we will continue to do this forever. You're never going to hit every ball out of the park with advertising campaigns. But the important thing is to do it very systematically and methodically, and we're going to. And yes, we are going to increase our advertising spend. I think that's approximately correct, the amount that you said.

Dale E. Williams

Yes, I would say I wouldn't necessarily think about it as 50 basis points. It's actually more. But you've got 200 basis points of gross margin improvement, 150 basis points of EBIT improvement, so you could say, "Okay, advertising is going up 50." But we're also going to see benefit in G&A. We'll see benefit in other selling. So there's more that would be funding some increase in advertising as well as continued increase in product development.

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

It's Keith Hughes from SunTrust. Just building on the advertising question, in the 2016 view, do you change how Tempur or Sealy uses its ad dollars now, Tempur more national, Sealy more local promotion? Or is it roughly the same as we see it today with the 2 brands?

Mark A. Sarvary

Forgive me, just say that again. Do...

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

So in your 2016 view and you talk some about ads and that, is the mix between the national ads that's primarily used at Tempur-Pedic versus the local ads or local ad support that's used at Sealy, does that change at all in that viewpoint or is it roughly the same?

Mark A. Sarvary

It's roughly the same. There's no change in strategy. It's roughly the same. So the basic principle that Tempur is building national advertising is roughly the same. And Sealy is more local. But having said that, we intend to continue to evolve. One of the things that we want to do is to make -- sorry, let me answer this in 2 sentences. The first thing is, as I said, Tempur has a different go-to-market strategy than Sealy. We spend a greater proportion of our total gross margin on advertising on Sealy ads -- Tempur ads and Sealy ads, and it will continue to do so. Over time, we're going to continue to optimize how we spend. One of the things that has been talked about forever is the relative importance of advertising on TV versus advertising on the web. And I've been doing this for a very long time and -- since the beginning of that time, people have said the television commercial is nearly over. And it still isn't. Then I still don't think it will be, and it still won't be in 2016. But web advertising is getting more important. So how we use that is going to, I imagine, evolve over this next 3-year period for both of us. And the other thing that's going to evolve is -- I talked about the degree to which we're going to try and cooperate with -- not cooperate but, well, cooperate but coordinate with retailers and Sealy and Tempur to optimize the building of new consumers coming into the store to maximize the kind of -- the amount of total -- the size of the total pie. And so you may see some evolution there. So what I'm saying is that the fundamental premise, which is that disproportionate amount of Tempur's advertising, greater than Sealy's, is going to be spent in advertising to the consumer, that will continue. Exactly how we shape and use it, I see that evolving over the time.

Peter J. Keith - Piper Jaffray Companies, Research Division

It's Peter Keith from Piper Jaffray. I just want to talk about the premium specialty. There's a school of thought out there that the specialty product area has about 30-some percent, call it 32% of share. School of thought would say that that's already sort of peaked out and that it can't grow anymore. Clearly, if your top line guidance is calling for double-digit growth a couple of years out, you don't believe that specialty share has peaked, and probably your share within specialty hasn't peaked. Can you talk about why the school of thought that suggests it has peaked is wrong and what you see kind of evolving over the next couple of years?

Mark A. Sarvary

Well, first, just I'm sure you know that but to be clear, doesn't refute your point, but to clarify it, we're talking about, I know, not Tempur. We're talking about the portfolio of the company. And we're talking international as well as North America. So -- but your question is an -- is a fair question. I think premium specialty -- and I'm subdivided, I'm thinking a subset of the question here -- premium specialty still has great potential to grow. I think specialty does as well, but I think premium specialty, which I think of as different than just specialty in general, has the potential to grow and I think for the very prosaic reason that people who -- the data is still the data. People really love these beds. I mean, they are very satisfied. The satisfaction levels are very high, people really like it, and they swear by it. The people love Tempur-Pedic. That's why they ask me advertising is so effective. And the more -- and only a very tiny proportion of people actually have these beds, still is much less, just about 4%. So there's still an enormous potential demand for it. The second thing is that I think that the definition specialty versus spring is sort of getting less and less clear-cut. Obviously, as the hybrid grows, what you call -- we've -- ISPA has decided hybrids are spring, even though that by definition, they're half visco and half not. And so it's sort of a kind of interesting clear-cut decision. So I think that first of all, what if specialty will evolve? And I think that you're seeing it from us, with the Breeze beds, for example, with the adjustable -- the firmness bed. These are specialty beds, but they're evolutions. They are appealing to a set of -- to a broad -- to more consumers other than we were -- before have been to. So I think yes, there is the potential, and I think that the most fundamental reason is because consumers are increasingly willing to pay more to sleep well. And these types of beds have extremely good records in terms of people sleeping well. People report very well when they were asleep. So I do believe so. Now on top of that, I think in the rest of the non-premium, I think there's potential for growth beyond. You're seeing it right now. I think the question -- one question is going to be what's the floor space going to be dedicated to these different things because floor space ultimately has to be proportional to income and profitability, which is part of what we're talking about when we say category management. We will have a mindset of things about profit maximization for the retailer floor. But all that long answer, I would still say yes, I do believe there's growth for the premium potential -- for premium specialty.

Joshua Borstein - Longbow Research LLC

Josh Borstein, Longbow Research. The revenue projections that you have, they don't include any of the $500 million synergies. So from that perspective, it seemed to be somewhat conservative. On top of that, you're reinvesting $30 million to $60 million of the $70 million to $100 million of the cost side into growth initiatives. Considering that, do you expect or do you see the market growth rate projections you have for Sealy at 5%, for Tempur at 6% to be somewhat overly conservative?

Mark A. Sarvary

I would say that the important thing -- there's a couple of things to recognize about this. The first is we're not growing right now. So we have to change the trajectory of growth. So that's number one. And number two is the environment is extremely competitive, more competitive than it's been in our history. So we believe that we can outgrow the category, not counting the $500 million of synergies. And we are committed to doing that. But this is a competitive environment. We're going to have to -- in order to win, we're going to run faster than we were running before. And we're investing in those things that we have said for some time are the key areas for investing: advertising, innovation and making ourselves easier to do business with. And that is going to take some investment. So for us to say we're going to invest and beat the category, it seems to me and it seems that that's an appropriate balance of expectations and actions.

Unknown Analyst

Just trying to get a sense -- you guys have on your update on your current trends that they've been in line with your expectations. But you've been encouraged by your Labor Day holiday period sales. Just kind of given what Mattress Room [ph] has said in your last earnings call that Labor Day has been pretty much in line with Q2, just trying to get a sense of, do you guys see the same thing? What are your sense in terms of how the Ask Me campaign has really kind of impacted your Labor Day sales? Just kind of -- and getting a sense for whether your expectations are really just a continuation of what your guidance was in your last quarterly call.

Mark A. Sarvary

Yes. The -- we gave the guidance. I think it's 45 days ago -- some relatively short period of time ago. We had a set of expectations. In this limited period of time, we have seen nothing that changes our expectations, and we were encouraged about Labor Day. I really can't say much more than that.

Unknown Analyst

Two questions for you, one kind of stepping back a little bit and looking at the broader industry. When you look at the unit sales over the last few decades, you're noticing kind of it's kind of stagnated. And I'm curious if you believe that, that might have anything to do with the fact that you're selling a product that's opposed to last 20 to 25 years as opposed to the historical 7-year norm? And then secondly, just with regards to innovation, it seems that both Sealy and Tempur-Pedic were losing market share over the last couple of years. And I think part of that is due to a slowness in innovation, especially with regards to cooling technology for Tempur-Pedic. And I'm curious what's kind of driving your innovation efforts today. Is there a particular customer concern that you're focusing on? Or is there something else?

Mark A. Sarvary

What was the first question again?

Dale E. Williams

The units.

Mark A. Sarvary

Brown units.

Dale E. Williams

That unit information was the industry, not Tempur. And the industry units were growing. During the recession, they took major reduction. They've grown again, but they're not at the level that they were prior to the recession. They're not at the level that most people would consider what a normal unit should be. The fact that Tempur has a product that lasts a lot longer than normal, we're still, from a unit standpoint, a pretty small piece of the industry. So Tempur's product quality that says it's going to last much longer than a traditional mattress really and big enough to influence the whole industry unit sale? I'm sorry?

Unknown Analyst

Your competitor questions your [indiscernible]

Dale E. Williams

Yes. But all of specialty is together, which really as a fairly recent phenomenon is not large enough yet to have influenced the historical unit trends.

Mark A. Sarvary

Yes, that's right. And secondly, I would say the -- on the innovation front, on the cooling front, those of you who may have heard me say this before, many of the beds that were introduced that ostensibly were cooler beds were not cooler. They didn't do -- they didn't cool. I would say that one of the things that is kind of exciting about the innovation at Tempur has been the Breeze beds that we have recently introduced, which do cool and which are actually selling very well. So I would say, from an innovation point of view, Tempur clearly does lead the field in -- on that front. But innovation is right, and we -- we have over time been growing share very substantially. But we did pull back in the last year. There's no question about it. It was a year where we didn't have that rate of growth. It doesn't negate the basic idea, though, that when you look at what is going to drive growth going forward, clearly, marketing is a big part of it, but innovation is another. And we have not just 1 or 2, but as I showed on the chart, many sequential significant innovations, and we will continue to do so. It is very important. You're right to say that our market share fell this year, no doubt about it. But it doesn't negate the basic plan, which is the things that will drive it: marketing, innovation and having an effective supply chain.

Jessica Schoen - Barclays Capital, Research Division

It's Jessica Schoen from Barclays. I had a question on your international forecast, and I was wondering if you could give us some color as to the mattress purchasing environment specific to each region as far as appetite for premium and luxury products as well as non-innerspring?

Mark A. Sarvary

That will take a time because Benelux, I mentioned, is intriguing because in Benelux, beds are expensive. People buy expensive beds there. I mean, they really do. And so Tempur is relatively cheap in the Benelux. In the U.K., it's much more like the -- it's quite similar to the U.S. In China, obviously, beds are a heck of a lot cheaper. In Germany, most beds are foam, not visco, just regular foam. But in France, right next door, they are mostly spring. In Austria, it's very similar to Germany. Switzerland's like Austria but more expensive. Australia is very -- Australia is very like America. It's very -- so it's very different. It is -- and what's more, the -- not only -- each country is different, remarkably different, and both in terms of the types of beds and the technology that they pay and -- sorry, the types of beds and the technology that they prefer and the competitive set. One thing, however, is this. It's that in general, there is a proportion of the market that is paying -- in the U.S., we talk about super premium being $2,000 for a queen. In Europe, they talk about $1,000 for a single -- EUR 1,000, which is about -- it's not 1 million miles apart. There is a significant portion of premium business almost everywhere in the world, remarkably. And you can argue it's perhaps a little less than the U.S. but not much. And it's kind of -- the one thing that's kind of interesting to me is that almost regardless of where you go, there's always a segment, roughly the same size as we have in the U.S., of people who are investing in what we will call super premium here.

Unknown Analyst

When you go back to last year and reexamine the Simplicity launch, what have you learned from that experience? Where were your assumptions incorrect on the success it could potentially have? And how are you going to avoid potential execution missteps going forward with capital projects like that one?

Mark A. Sarvary

Well, one of the -- I mean, it's an interesting question because on -- the Simplicity wasn't a success. It didn't sell nearly as well as we hoped. It's intriguing, though, today, right now, it's outselling most of our products in terms of unit turns. And if you compare Simplicity to other products, it still sells quite well. There's quite a lot of people who will pay a significantly lower price for a Tempur-Pedic-branded product. So it hasn't been a success like we wanted, but it's not like it's so -- it has no place at all. So it's kind of intriguing. And last year, it contributed quite significantly to our overall business. But I don't disagree with the basic premise that it wasn't a success. I would say that part of what was true -- what was the learning about it was this. It's that it was a bit like in a response to Budd's question. We try -- in order to make sure that the products can be in the mind of consumer, super premium and $3,000 is an average price point, we had to make a bed that was quite different if we were going to charge it significantly an amount less for both economically to make it for that price but also from the positioning of the consumer. And it was, I think, to some extent trying to stretch a brand too far. And I think that we -- in our desire not to stretch the brand, to make the product look clearly different, we suboptimized the Simplicity product. Now having said all of that, I would then say that when we launched Simplicity, we -- the basic premise was to target the big and growing $1,000 to $2,000 market. We had not anticipated the very, very significant number of competitive products that will launch literally at the same Vegas. So we were comparing ourselves to the existing set at the time. We were not -- we did not compare it to what was going to come. To some extent, that's the thing where we have to learn. We have to be kind of recognizing we need to be one step ahead of what we're comparing with, not comparing with the current state of play. And that's going to become increasingly important as you talk about innovation going forward. I said this rate of innovation is going to increase. It's going to need us to continue to do that.

Mark Rupe

All right, everyone, that concludes the formal presentation remarks. And on behalf of the management team, I want to thank you for attending. Across the way, we have a product showroom. Feel free to try out some of our several new products. We also have a boxed lunch to grab and go and a product giveaway. And if you guys need to reach me, my contact information's in the folder. Thank you again.

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