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Executives

Barry Hytinen - Senior Vice President of Financial Planning & Analysis, Investor & Media Relations & Competitive Intelligence

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

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

Analysts

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

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

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Leah Villalobos - Longbow Research LLC

Peter J. Keith - Piper Jaffray Companies, Research Division

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

Eric Hollowaty - Stephens Inc., Research Division

Jon Andersen - William Blair & Company L.L.C., Research Division

Robert S. Drbul - Barclays Capital, Research Division

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

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Tempur Pedic International (TPX) Q4 2011 Earnings Call January 24, 2012 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Tempur-Pedic Fourth Quarter 2011 Earnings Conference. [Operator Instructions] And as a reminder, today's conference call is being recorded. Now I would like to turn the conference over to Mr. Barry Hytinen.

Barry Hytinen

Thanks, Matthew, and thank you to everyone for participating in today's call. Joining me in our Lexington headquarters are Mark Sarvary, President and CEO; and Dale Williams, Executive Vice President and CFO. After prepared remarks, we will open the call for Q&A.

Forward-looking statements that we make during this call are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements, including the company’s expectation regarding sales and earnings, involve uncertainties. Actual results may differ due to a variety of factors that could adversely affect the company's business. The factors that could cause actual results to differ materially from those identified include economic, competitive, operating and other factors discussed in the press release issued today. These factors are also discussed in the company's SEC filings, including the company's annual report on Form 10-K under the headings Special Note Regarding Forward-Looking Statements and Risk Factors. Any forward-looking statement speaks only as of the date on which it is made. And the company undertakes no obligations to update any forward-looking statements.

The press release, which contains a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures, is posted on the company's website at tempurpedic.com and filed with the SEC.

And now, I would like to welcome our group, our new Vice President of Investor Relations, who joined us earlier this month. Last year, I took on additional responsibilities as Senior Vice President of Global Business Development in addition to IR. And over the last year, our business development initiatives have ramped and Mark's hiring will allow me to be fully dedicated to this area. As many of you know, Mark has covered the company as a self [ph] analyst for many years, and was twice named Best on The Street by the Wall Street Journal for his coverage of home construction and furnishings. Mark reports directly to Dale Williams, and he's joining us on the call today.

And now with that introduction, it's my pleasure to turn the call over to Mark Sarvary.

Mark A. Sarvary

Thanks, Barry. Good evening, everyone, and thanks for joining us. We're pleased with the performance throughout 2011, and the fourth quarter was a good end to a very strong year. Fourth quarter sales were up 25% and earnings per share increased 27%. For the year, sales were up 28% and earnings per share increased 47%. In a few moments, Dale will provide details of the fourth quarter and full year financial results, as well as our 2012 guidance.

But first, I'd like to talk about the progress we made on our key strategic initiatives in 2011 and discuss the key drivers for the company in 2012. Just as a reminder, our 4 strategic initiatives are: number one, make sure that everyone knows that they would sleep better on TEMPUR by investing in brand marketing; number two, make sure that there is a TEMPUR mattress and pillow that appeals to everyone by expanding and strengthening our product line; number three, make sure that TEMPUR is available to everyone by gaining broad, high-quality distribution; and number four, make sure that we continue to deliver the best sleep by investing in R&D and consumer research. We have made progress on all these initiatives in 2011.

Sales growth were strong both in the U.S. and overseas, and we have gained share domestically and around the world. This growth was driven primarily by the success of our new products and our increased investments in advertising, as well as by continued expansion and distribution.

The new Cloud Collection continues to grow in the U.S. and has been very successful in its first year of launch internationally. The Contour Collection, which was launched in 2011 in the U.S., has also exceeded our expectations. We increased our brand advertising to record levels with our total investment in 2011, almost $150 million. The Ask Me campaign in the U.S. continues to be successful with communicating the benefits of TEMPUR and it's a flexible platform that allows us to focus communications as appropriate. The Weightless campaign, which we launched in Germany, France and the U.K., has also proved successful driving incremental volume in each of these countries.

We've also gained substantial distribution stores and slots both in the U.S. and overseas. As the Cloud line ramps internationally, we've increased the number of TEMPUR slots with our retailers in every market.

So now let's turn to our strategic focus areas for 2012. We're very excited about the next stage of our plan to become the world's favorite mattress and pillow brand and to continue on our path toward our $2 billion goal. We'll continue to implement the 4 initiatives of our strategy, and specifically in 2012, we'll broaden our product range, increase our consumer communication, raise advocacy with our retail customers and gain distribution.

First, on new products. There are consumer segments that we do not currently address, and one of our 4 initiatives is to use R&D to ensure there is a TEMPUR mattress and pillow that appeals to everyone. So as we did with the Cloud Collection, we've identified another major opportunity to expand our appeal and meaningfully grow our business. The $1,000 to $2,000 price tag represents a very large market segment that we currently do not address in a meaningful way. In fact in the U.S., this segment has the same dollar value as all the segments above $2,000 added together. So I'm excited to announce that we will be introducing a 3-bed line, with varying fields, priced at $1,499 for a Queen set next week at the Las Vegas bedding show. The introduction of this line effectively doubles the size of our addressable market.

We spent the last 2 years developing this collection and it's the most researched product we have ever launched. It is both consumer preferred to the competitive set and vastly incremental to our existing product portfolio. Initial retailer feedback has been very positive and we expect to gain considerable incremental thought [ph]. Now while we know you will have -- likely have many questions, we're going to save the rest of the details for Las Vegas. Internationally, we will be continuing the successful rollout of the Cloud Collection. And in both the U.S. and overseas, we expect distribution gains both in the form of additional doors and additional slots.

Secondly, we will increase our brand advertising globally. We continue to see that investments in advertising are effective and have had a positive ROI around the world. Further, we find that increasing rates of advertising drives increased share and profitability. In 2011, we tested heavy-up marketing in 29 local markets in the U.S., and saw a very positive result. In 2012, we will significantly expand the test and monitor the results, and if it works as expected, we will ramp the program across the country. Additionally, in 2012, we're increasing our investment in brand advertising in Germany, France and the U.K. and introducing TV campaigns into additional markets including Japan, Italy and Australia. And our confidence is high that advertising there will have a very positive impact on awareness and sales in these new markets just as it had in Europe last year.

To maximize the success of our new products in our advertising, we're also very committed to ensuring that our retailers remain strong advocates of the TEMPUR line. We previously announced that we will be taking price increases on selected items within the range and in Vegas we'll be announcing a new promotion structure, both of which will increase dealer profitability from selling TEMPUR products. In addition, we have found that in those markets where retailers integrate their advertising with our national campaign, the results for both us and the retailers are dramatically improved. During 2012, we will work with retailers across the country to create and run impactful advertising that is integrated with Tempur national advertising.

Lastly, a couple of contextual comments, before I hand over the call to Dale. The environment we are operating in remains challenging. Fairly the macro environment, particularly in Europe, is uncertain. And our retailer feedback, both in the U.S. and around the world, indicates the traffic levels remain inconsistent. Our plans are based on a series of initiatives including a new product offering in the U.S., which is yet to be sold with single consumer. Therefore, we will remain flexible and we'll review our plans and be prepared to adjust accordingly throughout the year.

Having said that, we remain focused on driving meaningful growth for many years to come. We have a small but growing share today and we'll continue to build on that with our investments in marketing and new products introductions. In a few weeks, at our Investor Day, we'll discuss our new 5-year plan.

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

Dale E. Williams

Thanks, Mark. I'll focus my commentary on the financials and our 2012 guidance. Let's begin with an overview. In total, fourth quarter net sales were $367 million, an increase of 25% over the same period last year. On a constant currency basis, net sales increased 24%. North American sales were up 26%, and international segments, net sales increased 25%. On a constant currency basis, international net sales increased 21%.

Now by channel, in North American retail, net sales were $225 million, an increase of 25%. The North American direct channel increased by 44% to $21 million. International retail sales were $94 million, up 28%, and up 23% on a constant currency basis.

By product, mattresses were up 26%, driven by a 22% increase in units. North American mattress sales increased 24% on a 14% increase in units reflecting favorable price and mix. In the international segment, mattress sales increased 33%, driven by a 36% unit increase. On a constant currency basis, international mattress sales were up 29%. The modest decline in AUSP was related to our new futon product in Japan and associated floor models.

Total pillow net sales increased by 16% on 11% increase in units. North American pillow sales increased 15% on a unit growth of 10%. International pillow sales were up 17% on a 12% increase in units. On a constant currency basis, international pillow sales increased 13%.

Sales of our other products, which include items that are normally sold along with the mattress, were up 28% in total and up 36% in North America, and 10% internationally. Gross margin for the quarter was 52.1%, up 20 basis points year-on-year, and down 30 points sequentially. On a year-over-year basis, gross margin improved related to the following: Favorable mix, improved efficiencies in manufacturing related to our productivity program and fixed cost leverage related to higher production volumes. These benefits were largely offset by higher commodity costs and the costs associated with U.S. shipments to support our Danish manufacturing facility.

On a sequential basis, gross margin declined as we shipped slightly more product to Europe from our U.S. factories than initially anticipated, as our international sales continue to trend higher. However, as of the end of the year, we are no longer shipping products to Europe. Our European factory is now producing at record levels and capable of fulfilling our international growth plan.

Our fourth quarter operating profit was $85.8 million or 23.4%. Operating expenses were up reflecting an increased investment and brand advertising to drive growth. SG&A expenses include a couple of items that I would like to address. As we previously disclosed, there's a variable component in our long-term incentive plan. In light of our strong 2011 results and continued positive outlook, we took a one-time charge to catch up our accrual of approximately $2 million. Partially offsetting this charge was a favorable adjustment of $1.8 million to the earn-out payment related to a prior acquisition. Interest expense was $3.5 million. The tax rate was 32.2%, modestly down reflecting the benefits of NOLs in certain foreign subsidiaries. EPS was $0.84 as compared to $0.66 per diluted share in the fourth quarter of 2010.

Now we'll summarize the income statement for the full year 2011. Sales were up 28% in total and 25% on a constant currency basis. North American sales were up 30%, and international sales were up 24%. On a constant currency basis, international sales increased 16%. Operating margins improved 180 basis points to 24%. Full year earnings per share were $3.18.

Next, I'll turn to the balance sheet and cash flow for a brief review. Our accounts receivable balance was up reflecting sales levels, however, our DSOs were flat from last year. Inventories were up $21 million year-on-year but flat from last quarter. During the quarter, we generated $70 million of operating cash flow, and capital expenditures were $11 million. We increased debt by $76 million to $585 million to partially fund share repurchases, which totaled 2.3 million shares for a total cost of $128.5 million in the quarter.

Our cash balance increased by $8 million to $111 million. Funded debt to adjusted EBITDA ratio was 1.5x at year end within our targeted range of 1.5x to 2x. Over the long term, we expect continued growth in sales, earnings and cash flow, which together with low capital needs will enable us to continue to return value to stockholders. We're pleased that our board has authorized a new $250 million share repurchase program for 2012.

Now I'd like to address our guidance for full year 2012. We currently expect net sales to range from $1.6 billion to $1.65 billion. And we currently expect earnings per share to range from $3.80 to $3.95 per diluted share. We project our gross margin for the full year to be up as much as 200 basis points at the high end of our guidance range and slightly little less than this at the low end. Our gross margin projections assume continued productivity and volume leverage, partially offset by higher commodity costs. Also as a reminder, our 2011 gross margin was negatively impacted by 50 basis points due to the system upgrade issue I referenced earlier. We project our operating margins for the full year to expand by nearly 100 basis points despite our continued investment and strategic initiatives to drive long-term growth. However, in the first quarter as compared to the fourth quarter, while we are expecting gross margins to increase slightly, operating margins will contract slightly as we start the heavy-up investment in marketing.

We anticipate interest expense for the full year to be approximately $19 million. We anticipate capital expenditures will be approximately $50 million, which includes the cost to build our new office in Lexington. We anticipate the full year tax rate to be approximately 33.3%, and we are using a share count of 66 million shares for the full year. The share count does not assume any benefit from a potential reduction in shares outstanding related to the company's new repurchase program.

In conclusion, our guidance reflects that it is a long year with many new strategic initiatives and products. Therefore, we believe it is prudent to plan the year as I have outlined.

Now before we open the call for Q&A, I would like to address our recent sales trends. In the fourth quarter, we experienced improving growth rate by month. In the first quarter, sales trends through the first 23 days have continued to be strong and we're very pleased with that. As noted in our press release, our guidance and these expectations are based on information available at the time of the release and are subject to changing conditions, many of which are outside the company's control.

One final comment, I'd like to thank Barry for his outstanding leadership of Investor Relations over the last 7 years, and we're excited about the contributions he is making in his new role.

With that, Operator, please open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from John Baugh with Stifel, Nicolaus.

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

Just quickly, clarify that 50 basis points get through the systems, was that a Q4 or 2011 total impact? And then secondly, how should we think about, as a percentage of revenue, I guess, the accent in 2012?

Dale E. Williams

John, this is Dale. Yes, the 50 basis points is looking at the full year. Of course, that impacted Q3 and Q4. So it is concentrated in those 2 quarters, mostly in Q4. On the advertising spend, in 2011, our advertising spend was in the 10.5 range. Right now, we're planning for 2012 advertising to be in the vicinity of 13%.

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

And how would that break out, Dale, between the U.S. and international?

Dale E. Williams

Just like the 10.5, it was actually pretty balanced, the 13 is also going to be fairly balanced between the 2 holes.

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

And is that going to be a heavy emphasis on the newly interest product or to general brand marketing?

Mark A. Sarvary

John, it's Mark here. It will be broadly focused across the range and will obviously be different by region and by geography depending on the situation there. In the U.S., we will -- the new product will be featured in the advertising but we'll go into details of that in Vegas. But it will -- the broad answer to the question is it will be across the range. And it's obviously a very important part of our strategy going forward.

Operator

Our next question in queue is from Brad Thomas with KeyBanc Capital.

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

Wanted to just follow up on the revenue guidance for next year. I was hoping you could provide a little more color on your expectations for the North American segment versus international and what you baked in for FX?

Dale E. Williams

Yes, Bradley, right now, we believe that from an overall standpoint, we're going to see actually fairly balanced growth this year. We think the U.S. will continue to perform but the international business growth rate has picked up. Right now, we're thinking it's going to be fairly balanced. From an FX standpoint, while FX was a help for most of 2011, it was -- the amount of benefit that we got from FX declined as the year went on. Our expectations for 2012 at this stage is that FX will be neutral. And if rates where to say, basically, where they are right now, that's where it would come out.

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

Great. And in terms of the guidance, also, Dale, could you give us some color on what you're factoring in, in terms of raw materials? And what the run rate looks like right now based on what you saw on the fourth quarter?

Dale E. Williams

Yes, as usual, we were planning the year. We tried to assume, at least on the commodity side, that we're going to see price increases because that's something that's completely out of our control. Right now, what we have built into our guidance would be that we would see a mid-to-high single digit impact on commodities. How that would play out versus 2011? You would -- currently, you would expect a little bit more impact in the first half than in the second half because we saw inflationary commodity prices as 2011 went on. So the first half was lower than the second half on commodity costs so we would expect a little bit more impact of that in the first half as compared to the second half.

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

That's great. And I'm going to just ask Mark one last question here. I know you want to save a discussion on the new line until next week, but when I think about when you guys rolled out the Cloud the first time, the biggest question was, was cannibalization. And I was hoping maybe you could talk a little bit about what you've done to try and make sure this new line does not cannibalize existing sales?

Mark A. Sarvary

Right. You're right the first time. I don't want to talk about this until we get to Vegas. Please, we'll see you in Vegas and we'll take you through it. It's obviously something that we thought about a lot. And I think when you see the product, you'd see how it's positioned and marketed, you'll understand what we've done. But it's not something I want to go into on the call today.

Operator

[Operator Instructions] Our next question comes from Budd Bugatch with Raymond James.

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

Just on the gross margin, if we could get a little more quantification of the items that may be affecting you sequentially from third quarter to fourth quarter, what they did? Because you had, I think, Dale expected gross margins to be up sequentially in the fourth quarter.

Dale E. Williams

Yes, we did, Budd. We thought at the time that we did the third quarter call that we would see a slight improvement in gross margin sequentially. If you recall, at the time we said that we thought that the cost impact of supporting the international business from the U.S. factories would cost us $3 million or $4 million. Basically in our planning, we had $3 million baked into that. It ended up because as you can see, the international business performed really well in the fourth quarter, ended up being a little over $4 million. But again, I would emphasize that by the end of the year, the shipping had stopped. The productivity of the Danish plant is at record levels, and we're very comfortable that the Danish plant now will support all the growth plans for the international business for years to come.

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

Normally, in your filings, I think you provide segment gross margin and operating margins, and I suspect the K has been done or all the audit is done. Could you possibly give it to us before the filing? Maybe what the percentages were for international versus domestic? Or do we need to wait for the filing?

Dale E. Williams

Yes, I think it'd be easier to wait for the filing. I don't have that sitting in front of me. But we'll be filing our K in the next several days.

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

Okay. And finally, I just make sure I got the numbers right, if you do 13% advertising to sales ratio, it looks like advertising on pure dollars will be up about $60 million year-over-year, something like $210 million, is that the plan?

Dale E. Williams

That's in the neighborhood.

Mark A. Sarvary

That is right. It's a very important number. It's a very important part of our strategy. And the only thing that I do want you and everybody else to understand is and like we do everything else, we test, test, test. So this is the result. So this is our plan as we stand here today. We've tested everything in both the U.S. and the markets that I referred to and overseas. And as we roll this out, we will continue the tests. But this is our best plan or our best expectation. But it's going to be something that we'll discuss at the investor conference in February. So hopefully, we'll see you there and we'll take you through it in more detail. It's a very important part of what's driving the strategy going forward, both in terms of growth and in terms of continuing to build upon what is already a very strong brand.

Operator

Our next question comes from Leah Villalobos with Longbow Research.

Leah Villalobos - Longbow Research LLC

I was just hoping you could talk a little bit more about the recent trends. You mentioned some recent strengthening here towards the end of the fourth quarter and beginning of the year. If there's anything specific that you're seeing that's driving that?

Dale E. Williams

Yes. It's hard to dig underneath it. Certainly, there was a promotion in the fourth quarter that seemed to do well, but we did see both domestically and internationally. So on the domestic side, we saw improving trends in the business as the quarter went on. Internationally, we saw very good trends throughout the quarter as -- through the third quarter, we're seeing international business pickup. That continued through the fourth quarter in terms of the first -- the start of this year, we're 23 days in. We're very pleased with how the business is performing, again, on both sides. Both the international business and the North American business are performing well but it's early in the quarter, and this can be a fluctuating industry. So we don't take 23 days lightly but we also don't project it out forever.

Leah Villalobos - Longbow Research LLC

Sure. Okay. And then just in terms of door count, could you give us an update of where you ended the quarter and what your assumptions are for 2012?

Dale E. Williams

Sure. On the domestic side, furniture and bedding doors, we ended right about 7,500 so we're up almost 250 doors in the fourth quarter. And internationally, we ended at almost 5,300 doors. So internationally, again, up almost 100 doors in the fourth quarter. For 2012, we don't give a specific door guidance anymore, but we would expect both internationally and domestically to continue to see some expansion of doors. The overall door growth internationally last year was actually fairly limited. That was a combination of the difficult environments in Europe. There was quite a bit of calling so there was a bit of a netting going on. So we didn't -- overall, we didn't have a ton of doors over there, frankly because of the environment and the uncertainty. In that kind of environment, you want to make sure that your existing retailers are performing very well and are very healthy, and we're very comfortable with that at this stage. But over time, we do expect a lot more door opportunity internationally than what we did in 2011.

Leah Villalobos - Longbow Research LLC

Okay. And when you say over time, you think that begins in 2012 or are we looking beyond 2012?

Dale E. Williams

Well, the biggest uncertainty is what's going on over there. Our business is performing very well but the overall macro environment in Europe continues to be a question. So we'll see how it plays out. But we do expect, over the next several years, to add quite a few doors internationally, both in Europe and in Asia.

Operator

[Operator Instructions] Our next question is from Joshua Pollard with Goldman Sachs.

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Let me just clarify one thing. Does your new guidance incorporate the impact from your new product launch? I just wasn't sure if that was the case.

Dale E. Williams

Yes, it does, Joshua.

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Okay, great. And then your pricing expectations for 2012, is there any chance you could give us a more clarity on where you expect pricing to go for your base product? I'm not sure if you guys want to look at it on a same-store sales basis just given that you're introducing a lower price point product?

Mark A. Sarvary

We're making a variety of pricing adjustments across the range of different products. It doesn't apply to every product and it doesn't apply to some of the key price points like the $1,999 and $2,999 and so on. So it's a spread across the whole range. And those price increases, together with the new product and everything else, are all incorporated in both the top line and the gross margin assumptions for the full year.

Joshua Pollard - Goldman Sachs Group Inc., Research Division

And then when you guys think about 2012 and the store level advertising, can you just dig a little bit deeper about what you guys are planning to do on that end? And if that's a change in strategy versus what you guys -- what your approach was in 2011?

Mark A. Sarvary

Probably a change in strategy. What we're finding, as I said, is where retailers and we are advertising in, in an integrated manner, it works very well. So we tested that throughout the country and it works very well, from one site to the other. And it's something that we're going to continue to focus on. And it's something, as I said, that we're going to expand this year, but we're going to continue to test as we expand. But it's also something that we'll talk about in the context of the overall advertising in the Investor Day. So again, it's something that I'd like to talk more about in the context as a whole picture when we're all together in New York in a couple of weeks.

Operator

Our next question is from Joe Altobello with Oppenheimer.

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Just a couple of quick ones. First, in terms of the new mattress line, obviously, you don't want to go into too much technical detail ahead of Vegas, but could you just give us a sense of the timing of when we'll see those in stores in the U.S. and overseas?

Mark A. Sarvary

Yes. The new product will be in stores in the U.S. in the second quarter. And at the moment, it's not planned to roll out overseas this year.

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Okay, great. And in terms of the market opportunity, you mentioned that this increases your adjustable market by about 50%. How does that compare to what you guys thought with Cloud going in?

Mark A. Sarvary

Well, actually it's 100%. The way to think about this is if you imagine that the size of the market, I mean, this is not precise math, I'm not going to -- but if you think about it like this, approximately half of the population prefers a soft mattress and half of those a firm mattress. And when we introduced Cloud, we essentially went for the other half of those people who were in the price range of Tempur-Pedic but who, until then, did not have a product that appealed to them because they didn't have a soft one, there was only a firm. So we consider that to be a doubling. But if you consider now what we're talking about, we're doubling that doubling. So we're essentially -- if you compare it to the size of the market that we were addressing prior to the introduction of the Cloud, we are in broad terms, addressing a market that is 4x as big as the market we were addressing.

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Got it. That's helpful. And just one last one, in terms of the competition, we obviously seen a ton of new beds in the Visco arena. It doesn't seem like they've had much of an impact on you guys, thus far, in terms of market share. Have you seen any evidence that they're helping the overall pie to grow in terms of Visco at this point.

Mark A. Sarvary

Well, obviously, we've had competitors of different types, Visco, latex and so on, over the years, and we will continue to. And this is a tough market with some very good competitors in it and they will continue to introduce products. So this is what we anticipate. But as you said, from our point of view, we've grown quite nicely this year, we've grown -- this year and this quarter. And we've seen share gains throughout the period. What I think is the fundamental thing that we're seeing is that consumers are increasingly prepared to pay a premium for a product that will enable them to sleep better. And so what's happening is that -- what we're seeing and we think it is a pretty fundamental shift is that the consumer is coming to this premium priced product, and that is what's driving our growth. And I think, obviously, it's the strength in other people as well, but it's driving our growth. And I think what we -- the way we look at -- how to capitalize on that opportunity is by continuing to innovate with products that have greater differentiation and preference with consumers. And as you know, we always, for all new products that we introduce, are tested against not only our existing products but also against the competitors' set. And so what we look to do is to capitalize on this fundamental trend by continuing to have products that are both genuinely differentiated and preferred by consumers. And so we're quite excited about the situation as it stands right now.

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

I'm sorry, just one last one. In terms of the gross margin on the new line, how does that compare to your fleet average?

Mark A. Sarvary

First, we're not going to talk about the new line at all until Vegas. And secondly, we don't break out margins by line.

Operator

The next question in queue comes from Bob Drbul with Barclays Capital.

Robert S. Drbul - Barclays Capital, Research Division

The question I have is, when you look at the Cloud in the first year in Europe, how is it performing there versus the first year domestically?

Dale E. Williams

Well, the Cloud has performed extremely well in Europe. I think that the way that we rolled the Cloud out was different in Europe than how we rolled it out in the U.S. The market size is different. There is a slight difference in preference around firm versus soft in the U.S. versus Europe. Europe skews a little bit firmer. It's not a night and day difference, but it does skew a little bit firmer. But every market that we put the Cloud in, the Cloud did very well. The Cloud on the international side of the business has done pretty much what we saw in the U.S. It has significantly expanded our market reach. It really helped grow the business. And then in combination, as Mark said in his comments, the markets where we had a combination of the Cloud and the advertising, we saw a really dynamic growth. Because as we build the consumer interest, they were more likely to have a product in the store that they like because we have 3 different feels. So it really -- the advertising and the Cloud together really built on each other well.

Mark A. Sarvary

And I think, I mean, I think it's one of the things that is in some ways even more important in international than it is in the U.S. It's the fact that people perceive -- the average consumer perceive that there was only one TEMPUR. And this was a very much another TEMPUR. And what has been exciting is about how fast it has rolled out, but also as a result, how much of a benefit it has gained in France [ph]. Because what people -- what the retailers in international, in Europe in particular, focused on is what we call the collections, which is the original TEMPUR, the Cloud and the Sensation. And this has been a very important key change in sort of strategic perspective on what Tempur is.

Robert S. Drbul - Barclays Capital, Research Division

Great. And my second question is, I guess, 5 or 6 years ago, you guys did the Original that was at $1,200. And how much of a percentage of sales did that generate at that point in time? And how would that really differ versus what you're doing today at the $1,500 price point?

Mark A. Sarvary

The Original was the product that frankly was candidly just -- an existing product that then was de-spec-ed in order to sell it for a lower price. It was never very successful. I would encourage you to come to Vegas and see what we've done here. This is a completely different thing. And the degree of product development, research and development, new product or new technology invention and the consumer research is unparalleled. So I would really encourage you to come to Vegas and see it and I think it will answer that question.

Operator

Next question in queue is from Keith Hughes of SunTrust.

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

You referred in the prepared comments to a different dealer incentive structure, I believe is what you phrased it. Can you give any more details what that means?

Mark A. Sarvary

I'm not going to go into great detail on this again and I sounded a little bit like a broken record. I'll talk about it in Vegas. But here's the bottom line, as we have over time increased our gross margin, which we had systematically year-after-year, we have a -- it sort of a win-win game for us in the retail. And making sure that as we grow a share of the market, not only did the retailers' share in that growth from a top line but also from a bottom-line perspective. And so we are looking at ways. And we have done this before, but we are once again, the modification for the way the promotion are going to be structured is going to enable us to give retailers a greater profitability from selling TEMPUR, which is exciting and it's part of what we believe is part of our long-term win-win process as we grow over time. But I'm not going to go into more detail with that but I'll be happy to do it in Vegas.

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

Okay. And that's for 2012 in the program, is that correct?

Mark A. Sarvary

Yes, that's right.

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

And, Dale, for 2012, you've broken up as you were giving the details regarding it, did you say something on gross margin for 2012?

Dale E. Williams

Yes. We expect gross margin to be up about 200 points.

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

200 basis points, okay.

Dale E. Williams

And [indiscernible] margin to be up about 100 points.

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

And then final question, on the increased advertising you mentioned earlier, is there going to be a new campaign besides the Ask Me campaign or just an ad -- further development of that?

Mark A. Sarvary

Well, first of all, remember that the Ask Me campaign is the American campaign. There's one in the rest -- there's a variation of that in most of the rest of the world. And that's because there's a different status of knowledge about the product than most of the rest of the world. But the Ask Me campaign still has a very good legs. We'll continue to evolve it. As I said in the prepared comments, not only is it a good tool, not only does it work well, it is customizable and we can change it and incorporate new messages. And we found out that it was quite powerful when we used Cloud, for example, or the Ergo base. So we will continue to use it. At some stage, we'll move and we'll change it, but it would take a lot of thought and as you can imagine, a lot of research before we're going to do that because this has been a real winner.

Operator

And in that case, we will go to Peter Keith with Piper Jaffray.

Peter J. Keith - Piper Jaffray Companies, Research Division

Dale, just -- somebody just asked about gross margin with the 200 basis points. I just want to clarify something you said in the initial comments, so it sounds like the drivers to that will be the manufacturing efficiencies offset by some higher input costs? Were there any other components I may have missed?

Dale E. Williams

Yes. For gross margin in 2012, the drivers are as you said, basically our productivity initiatives continuing to drive impact in the business. We will also see some improvement from volume leverage. We're talking about reasonable growth here and that more volumes to the factories gives us volume leverage. As Mark mentioned, there's a price increase that will be -- it's not as big an impact as we've seen in the last couple of years but will be a small positive benefit of price. On the flip side, the primary negative that we're dealing with right now is commodity -- our expectations around commodities. And that's just -- we try to take a negative view on commodities every year as we start the year and that's served us well over time.

Peter J. Keith - Piper Jaffray Companies, Research Division

Okay. So it looks like, I guess within that or you've been anticipating that mix will be somewhat accretive overall to your gross margin for the year?

Dale E. Williams

Mix is a component of gross margin and right now we think that the mix is overall kind of fairly neutral.

Peter J. Keith - Piper Jaffray Companies, Research Division

For 2012?

Dale E. Williams

Yes.

Peter J. Keith - Piper Jaffray Companies, Research Division

Okay. And then what about -- just to stay in the same theme for Q4, it sounds like it's one of the key margin drivers. What was the main component of that mix benefit?

Dale E. Williams

On the mix benefit, essentially, on a year-over-year basis, you had -- last year, we were rolling out the Cloud Luxe. Now the Cloud Luxe is well-established. It's a product that performs very well in the U.S. market. So Cloud Luxe is certainly a positive mix driver in the business. On the international side, we saw actually a little bit of negative mix because units were growing faster than dollars but that was related to a new futon product that was rolling out in Japan.

Peter J. Keith - Piper Jaffray Companies, Research Division

Okay. And is the Contour line playing the mix at all, cause that replaced the...

Dale E. Williams

Yes, absolutely, Contour -- I shouldn't have forgotten Contour. That absolutely is a positive mix driver. The Contour is performing very well. As Mark said, it's exceeded our expectations. But the Contour itself as a line is a little bit higher priced than what it replaced. So that is a positive mix driver that we've seen in the 3Q and 4Q also.

Operator

Our next question is from Jon Andersen with William Blair.

Jon Andersen - William Blair & Company L.L.C., Research Division

I just have a -- I guess a little bit bigger picture question on your dealers. How are your dealers thinking about allocation of space to premium and maybe more specific specialty? And I'm just thinking of that in the context of kind of the Cloud, which was highly incremental in terms of slots per store for you. And with the rollout of the new products in 2012, presumably we're looking for that to be incremental as well. But just trying to understand if the mix shift occurs within the business, how receptive the retailers are to kind of moving in this direction and opening up more slots, and not just for Tempur, but for others who are looking to play more broadly in the space?

Mark A. Sarvary

Well, as I said a little earlier, I think that the thing that is happening is that people are -- consumers are increasingly prepared to invest in superior premium mattresses, where they are confident that they can sleep and it will improve the quality of their sleep. And I think that trend is going to continue. And as you know, we're talking about these new products of $1,499. As you know, premium -- the traditional breakpoint of premium is $1,000. So obviously, clearly into the premium mattress arena. But I also know that I think there is a large proportion of the consumers who -- and this the purpose of this price point, will want to compete -- or will want to consider a bed that are superior but can't reach all the way to the highest levels of premium. And so I think that retailers will give space to those things that will appeal to their consumer base. And I think that there's a lot of room -- I think there's a lot of room there. In fact, that historical -- recently, over the last period, 12 to 24 months, the growth in the industry has come from the premium. And the lowest end of it, the lowest price points, this is an area where retailers and consumers are looking for opportunity to drive more growth. And consumers will come if there's something that is fairly superior and meets their needs and it's designed for them. So I think slots will follow volume.

Jon Andersen - William Blair & Company L.L.C., Research Division

Okay. And then one quick question, just on the multiyear cost-saving program, I think it just completed year 3 of that program. And I'm just wondering kind of where you are from kind of the 700 basis points of targeted cost savings? And should we think about that kind of terminating at the end of 2012 or it's just kind of one step in the process that extends beyond that?

Dale E. Williams

Yes, good question. And we are not focused anymore on that 700 basis points improvement. We're approaching it, and in 2012, we'll basically hit that. But the program has changed over time. It is now a continuous program. There's not a specific goal. The goal is, every year, were going to find ways to improve the cost and drive cost out of the business and help improve margins, funding the growth initiatives that the business is undertaking. So the team is doing a great job, they've got great plans well into the future in terms of the directions they're going to go and how they're going to get there. Some of these things take time because even if you have a great idea and you go do it and it appears to work, you have to then put test products through life cycle testing to make sure you're not impacting the properties or the feel or the durability of the product. So everything that we do from a cost standpoint is fully embedded. There's a long runway of opportunity ahead of us on this program.

Operator

The next question comes from Joshua Pollard with Goldman Sachs.

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Can you provide an update on the Cloud expansion internationally, sort of where you are? And if there are any marketers or doors where you guys are still not quite there so that should be a tailwind for your international growth? And also talk about whether or not there's an international product launch component for Vegas?

Mark A. Sarvary

Well, first of all, on the Cloud for international. The Cloud is still on its first year. Remember, first of all, the Cloud is still in its first year of launch anywhere and internationally. And it takes 12 to 18 months just to get seated. And then as you can see in the U.S., we're continuing to grow Cloud. Everywhere where it is, it's relatively new. And there's still a lot of opportunity in countries throughout where it's already been launched. But for example, in the U.K., it was only launched in the fourth quarter of last year. So it's still, in the U.K., it's a very new phenomenon. And there are other countries where that's true as well. So I would consider Cloud essentially halfway through its rollout. That's how I think about it. And in terms of new product introduction, in general, we will -- we don't do international new product announcement at Vegas because we don't have international customers from Vegas in general, they're very few. We'll attempt to do that in forums, more convenient for retailers in the countries that we're selling in, in Europe and in Asia. But right -- there is no major product announcement like what we're going to show in Vegas next week for international currently scheduled. Although, I believe that there are many things in the pipeline.

Joshua Pollard - Goldman Sachs Group Inc., Research Division

My other question was, it's been a little while since you guys have acquired one of your third-party distributors. Is that still part of the strategy?

Dale E. Williams

Yes. So we acquired Korea in July, so 6 months is not a long time. But absolutely, that is a part of the ongoing international growth strategy, continuing to expand markets. The third-party distributor network is a good way to see the market, get in, get started. As we see that there's an opportunity where we think that the market is a growth potential is not doing what we think we could do with it then there are -- periodically, we'll take one over. But that is something that we will continue to do into the future at the appropriate time. It's not something that we per se schedule out and it's certainly not something we'll talk about in advance of getting deals done.

Operator

I show a follow-up question from Eric Hollowaty of Stephens Inc.

Eric Hollowaty - Stephens Inc., Research Division

Yes, Dale, earlier in response to your question, I believe you said that the new $1,499 Queen product would be hitting stores starting in the second quarter this year. Is it reasonable to assume that the rollout for this, domestically, might look much as it did for something like the Cloud, where it was kind of an 18 months type of time frame? Or might it be closer to something like the Contour, which was more of a fast track or might it be somewhere in between? Any color you can provide on that.

Dale E. Williams

Yes, I would think it would be more in between. The Cloud is more of an extended rollout and is one product at that time. Here, we're rolling out a collection, but it's new. The Contour was very concentrated because it was a new collection but it was replacing existing products on the floor. So it was both in ours and the retailers' interest to make that transition very quick and swift, and it went very well. So the new product line will be somewhere in between. Not quite as fast as the Contour but it would not -- should not take, hopefully, as long as the Cloud.

Operator

And I show a follow-up from Keith Hughes of SunTrust.

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

Just to confirm the $1,499 you're referring to, is that for a Queen set on one of the new models?

Dale E. Williams

Correct.

Operator

And ladies and gentlemen, unfortunately, I'm sure we are out of time for questions on today's call. I would like to turn the program back to our presenters for any concluding remarks.

Mark A. Sarvary

We look forward to talking everybody again in February, when we host the Investor Day, which we hope many of you will be able to join us in New York, but thank you for joining us this evening. Have a nice evening everybody.

Operator

Ladies and gentlemen, thank you for participating on today's conference. This does conclude the program and you may now disconnect.

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