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Tempur Pedic International (NYSE:TPX)

Q1 2012 Earnings Call

April 19, 2012 5:00 pm ET

Executives

Mark Rupe -

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

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

Analysts

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

Jessica Schoen - Barclays Capital, Research Division

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

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

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

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

Joan L. Bogucki-Storms - Wedbush Securities Inc., Research Division

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

Joshua Borstein - Longbow Research LLC

Eric Hollowaty - Stephens Inc., Research Division

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the TEMPUR-Pedic First Quarter 2012 Earnings Conference Call. [Operator Instructions] And as a reminder, today's conference is being recorded. Now I would like to turn the program over to Mark Rupe.

Mark Rupe

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

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

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

Mark A. Sarvary

Thanks, Mark. Good evening, everyone, and thanks for joining us. We're pleased with our first quarter, we're off to a good start to the year. Sales were up 18% and earnings per share were up 26%. On a constant-currency basis, North American sales increased 18% and international sales increased 22%. In a few moments, Dale will provide details of the first quarter results, as well as discuss our outlook for 2012.

But first, I'd like to talk about the progress we've made on our key strategic initiatives during the quarter. The first of these initiatives is to make sure that everyone knows that they would sleep better on TEMPUR.

As we discussed at our Investor Day in February, our investment in brand advertising is a key driver of our future growth. We know that increasing recent advertising results in a higher TEMPUR brand awareness, which in turn drives increased sales, share and profitability. And we said we were going to significantly increase our investment in advertising in 2012, and during the first quarter, we did just that. Our advertising was a record $47 million with considerable year-over-year growth both in North America and in our key international markets.

In the U.S., we significantly expanded our heavy-up marketing program. Internationally, we increased our brand advertising investment in Germany, France and the United Kingdom and introduced TV campaigns into additional markets, including Italy and Australia. While it is still early, these marketing campaigns are showing positive results with brand awareness, purchase consideration and website traffic growing in line with plan. In particular, strong performance in our key international markets during the quarter proves that our advertising investment continues to be successful. However, while our confidence is high that these investments will continue to be effective, we will also continue to monitor the results closely and adjust as necessary.

The second of our initiatives is to make sure that there's a TEMPUR mattress and pillow that appeals to everyone by expanding and strengthening our product line. In the U.S., we introduced the TEMPUR-Simplicity Collection at the Las Vegas market in the late January, and just recently begun shipping the product to customers.

As we discussed in detail at the Investor Day, TEMPUR-Simplicity is the most researched product we have ever launched and addresses a very large market segment that we have not previously targeted in a meaningful way. At $1,499 for a Queen set, the 3 bed collection with soft, medium and firm comfort options, addresses the $1,000 to $2,000 price plan, a segment which has the same dollar value as all the segments above $2,000 added together. While it remains very early, we're pleased with the performance we've seen so far. Retailer feedback continues to be very positive and we've gained considerable incremental margin.

Internationally, we continued the successful rollout of the Cloud Collection, as well as just introduced the Sensation deluxe model in certain markets. These launches are part of our collection selling strategy, which drives both slot growth and broadens our addressable market.

Our third strategic initiative is to make sure that TEMPUR is available to everyone by gaining broad, high-quality distribution. During the first quarter, we continued to add distribution and slots both in North America and internationally, and expect additional gains throughout the balance of the year, Simplicity being a large contributor. The recent launch of our new Elite Retailer program is also expected to support and contribute to our distribution network.

Lastly, we want to make sure that we continue to deliver the best sleep by investing in R&D and consumer research. We did that too during the first quarter. We significantly increased our R&D spend, both on new product development as well as breakthrough new technologies.

So we've made solid progress on all these initiatives in the first quarter. And before I hand over to Dale, I just like to make a couple of contextual comments. As I said, I'm pleased with our results. We have continued to grow our top and bottom line substantially. However, as anticipated, there have been significant new competitive launches and aggressive price promotion in the industry as it has moved increasingly toward non-spring mattresses.

Our major initiatives this year, brand advertising, integrated retailer advertising, the new TEMPUR-Simplicity line and improved dealer margins will all strengthen our competitive position. The impact of these initiatives will largely be felt in the second quarter and beyond. We remain very confident in our long-term strategy for growth, based on our commitment to providing superior sleep. People who sleep on TEMPUR sleep better than those who don't. And our sustained significant investment in consumer advertising, making sure that everyone knows they would sleep better on TEMPUR.

We will continue on our path toward our goal of $2 billion in sales by 2014 and to our recently introduced 5-year goal of $3 billion by 2016 through a continued focus on execution of our strategic initiatives.

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, first quarter net sales were $384 million, an increase of 18% over the same period last year. On a constant-currency basis, net sales increased 19%. North American net sales were up 17% and international net sales increased 19%. On a constant-currency basis, international net sales increased 22%.

Now by channel. In North American retail, net sales were $242 million, an increase of 16%. Our North American direct channel increased by 35% to $24 million. Internationally, retail sales were $96 million, up 26% and up 29% on a constant-currency basis.

By product, mattress sales were up 18%, driven by a 17% increase in units. North American mattress sales increased 15% on a 12% increase in units. In the international segment, mattress sales increased 26%, driven by a 26% unit increase. On a constant currency basis, international mattress sales were up 29%.

Total pillow sales increased by 20% on an 18% increase in units. North American pillow sales increased 22% on a unit growth of 19%. International pillow sales were up 17% on a 17% increase in units. On a constant-currency basis, international pillow sales increased 19%.

Sales of our other products, which include items that are normally sold along with the mattress, grew up 18% in total and up 23% North America and 4% internationally.

Gross margin for the quarter was 53.6%, up 130 basis points year-on-year and up 150 basis points sequentially. On a year-over-year basis, gross margin improved related to the following: improved efficiencies in manufacturing and distribution related to our productivity program; and fixed cost leverage related to higher production volumes. These benefits were partially offset by a higher new product cost.

On a sequential basis, gross margin increased 150 basis points as a result of the lack of cost associated with U.S. shipments to support our Danish manufacturing facility, improved efficiencies in manufacturing and distribution, related to our productivity programs, and fixed cost leverage related to higher production volumes. Our European factory produced at record levels during the first quarter and did not experience any subsequent system-related issues.

In line with our plan, gross margin improvement was more than offset by a significant investment in advertising during the first quarter. We increased advertising by 37% to a record $47 million or 12.3% of sales compared to $34 million or 10.6% of sales in the first quarter of 2011. We also invested heavily in R&D during the first quarter, which was up 47% year-over-year. These investments are the cornerstone of our key strategic initiatives, and thus will remain an investment focus of the company.

Our first quarter operating profit was $86.1 million or 22.4%. Interest expense was $4.1 million. The tax rate was 31.1%, down reflecting a net benefit of $2 million from the resolution of foreign tax matters. Earnings per share was $0.86 as compared to $0.68 per diluted share in the first quarter of 2011.

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 down 1 day from last year. Inventories were up $26 million year-on-year or 36%, partly due to the planned build for the planned rollout of Simplicity and the increased volumes. Payables were down 4 days due to timing.

During the quarter, we generated $45 million of operating cash flow and capital expenditures were $7 million. We lowered debt by $20 million to $565 million. Share repurchases during the period were 0.2 million shares for a total cost of $12 million. Our remaining authorization under our existing share repurchase program is $238 million. Our cash balance increased by $23 million to $134 million. Funded debt-to-EBITDA ratio was 1.4x, slightly below our targeted range of 1.5 to 2x.

Now I'd like to address our guidance. We are confirming our 2012 financial guidance. We expect net sales to range from $1.6 billion to $1.65 billion and we 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 less than this at the low end. Our gross margin projections assume continued productivity and volume leverage, partially offset by higher commodity cost.

Also as a reminder, our 2011 gross margin was negatively impacted by 50 basis points due to the system upgrade issues incurred in our Danish facility. However, in the second quarter, as compared to the first quarter, we're expecting gross margin [indiscernible] to be slightly down sequentially as we've accelerated the Simplicity core model rollout and faced slightly higher commodity cost than previously expected. We project our operating margins for the full year to be -- to expand nearly 100 basis points at the high-end of our guidance range despite our continued investment in strategic initiatives to drive long-term growth. However, in the second quarter, as compared to the first quarter, we are expecting operating margins to contract modestly as we further accelerate investments in advertising and R&D. We continue to 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 of our new office in Lexington.

We continue to anticipate the full-year tax rate to be approximately 33.3%. Given the slight reduction in our share count during the first quarter, we are now expecting 65.7 million shares for the full-year. This share count does not assume any benefit from a potential further reduction in shares outstanding related to the company's purchase program.

In conclusion, our guidance continues to reflect the business long year, with many strategic initiatives and products that are just underway. Therefore, we believe it is prudent to plan the remainder of the year as I have outlined. 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 of the company's control.

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

Question-and-Answer Session

Operator

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

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

I'd like to touch on the product launch drag on gross margins in the quarter. Is that due to factory issues in terms of making the new product? Or is there also selling of samples at a lower cost in there?

Dale E. Williams

Yes, primarily John, it's related to starting up in the factory. We -- as I mentioned in the inventory, we built a lot of inventory on Simplicity. So we had to through the startup process. We had to get the product out into our distribution system because we wanted to have a very quick launch here in April. We did have a few products go out a little bit early, but not a lot. And, but, so primarily as related to just getting started up and getting the warehouses ready and in place to hold the Simplicity inventory for a very quick launch here in the second quarter.

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

And so, just Dale the, as a follow-up here, does the margin, gross margin pressure related to Simplicity shift in Q2 to the sample sales? Or do we still have lingering impact from manufacturing? Or do we offset all of that with sales unit gains from the product because it will be fully placed in the selling?

Dale E. Williams

Yes, the manufacturing startup, that's just kind of a one-time first batch kind of issues that you run into with new formulas and brand-new products. But -- so we feel very good about the production of Simplicity. So essentially, as I mentioned in my remarks, we're accelerating this rollout. We said it would be 6 to 9 months. We now think it's going to be 6 months or less in terms of getting Simplicity out, and it's going to be, actually even more heavily weighted into the second quarter than what we had anticipated at the beginning of the year as customers want it.

Operator

Our next question in queue comes from Jessica Schoen with Barclays.

Jessica Schoen - Barclays Capital, Research Division

I had a question. You mentioned the current environment right now and the competitive changes that you've seen happening and you talked a little bit about some initiatives and starting to see the impact in 2Q. I was wondering if you could give a little bit more detail on what those initiatives are. And what the themes in the environment that you're seeing that has led to that.

Mark A. Sarvary

Well, what we're hearing from customers across the country, and we've been hearing this for some time now is that, there's an increasingly fast movement in premium mattresses away from spring mattresses towards what I call specialty mattresses, which obviously we're the leader in our channel. And as this has happened, there's obviously been -- our competitors have noticed and they

have started to participate. The initiatives that we're focused on though are, obviously the launch of the Simplicity, which is a very important product for us because it greatly broadens the range of consumers who we target. It targets this group people between -- who are willing to pay between $1,000 and $2,000. So that's one very big initiative. The second one is our integrated advertising, working with our retailers there to make sure theirs and our advertising is coordinated and effectively working together. And, of course, our brand advertising itself is a very important part of the initiatives that are driving growth. And finally, as we've made some changes to our promotional structures, so that it makes Tempur-Pedic more profitable for our retailers to sell. So those are the key initiatives that we're working on.

Jessica Schoen - Barclays Capital, Research Division

And then, when you look at the market and you see a lot of that outsize growth coming from the popularity of specialty mattresses, what kind of expectations do you have for the rest of the year? How the market will continue to trend?

Mark A. Sarvary

Well, projecting the market is always a tricky thing to do, which we try to avoid. But the -- what I think we, honestly I think the big thing, which is quite significant and I mean, I know this from our own experience here at TEMPUR, but from speaking to a lot of retailers, what is happening is that this move to specialty is something that is going to continue. And it's more than simply a move one for the other, because what it means is that consumers are trading up. Consumers are prepared to spend more on a good night's sleep, which is a pretty fundamental change. So we see this as being something that's going to continue to happen, it's going to continue to be good for consumers, for retailers and for us.

Operator

[Operator Instructions] The next question is from Keith Hughes with SunTrust.

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

I just wanted to ask on the growth in U.S. mattresses. We saw one of your competitors out the other night. Where do you think you stack? Are you just in the middle of a product cycle? Or where do you think this looks versus your long-term growth rate?

Mark A. Sarvary

Well, I'm not quite sure what you mean by long-term growth rate -- what we're -- as we look at the market, we're up 18% this quarter on top of very significant growth last year and consistent with our growth projections for the full-year. So we feel pretty good about it. And as we look at the industry as a whole, we think that the industry is certainly back from the doldrums that it's been in. But as we look forward for our full year, we're pretty confident that we're going to continue to gain share as we have been for the past years.

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

And in the first quarter, did you gain share in specialty?

Mark A. Sarvary

In specialty, probably not. But remember, that's a challenge when you think that in it -- for a long time, we were a very dominant player. As new people come in, the dominant player is always going to be impacted disproportionately. We look at it as a share of total category. And in that, we believe we will continue to grow.

Dale E. Williams

Keith, it's Dale. Let me add a couple of points on your first question, in terms that you were asking what the long term growth rate. In February at our Investor Day, we talked about, reiterated and talked about the $2 billion growth plan, obviously to hit $2 billion in 2014, we have to compound growth at 12%. We talked about a $3 billion growth plan for 20 -- to be $3 billion in 2016. That requires a 16% compound growth rate. So we have certainly a lot of plans around products and a lot of plans around how we go to market to drive the growth of this business. And this is a global growth goal, it's not just a North America goal. So we feel very good about where we're at and our position on that. As to your second question on share within specialty, we've said, for as long as I've been with this business, the long-term goal here, the long-term gain is not to necessarily maintain our share specialty. We want specialty to become -- gain share in the market, and we expect to lose some share of specialty along that way. But if specialty is 20% of the market, and we're 70% of specialty, that's nice, but we would much rather be 50% or 45% of specialty and specialty be 50% of the market. That's a much better equation for us.

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

Okay, I get what you're saying. And just one, one quick one on internationally -- outstanding numbers there. Is that the influence of the Cloud?

Dale E. Williams

Yes, the Cloud and the advertising, really working over there, building the brand awareness.

Operator

Our next question comes from Joe Altobello with Oppenheimer.

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

Just a couple of quick ones. I guess, first just going back to your comments earlier on competition. You've had competition in the space for a while, I think you've had some branded competition in the space for almost a year now. Is there something that's changed in the landscape in the last 3 months or so? Is the competition getting more price competitive? Have there been new entrants in the last 3 months? Or has something changed recently that that's caused you to sort of tone down your comments today?

Mark A. Sarvary

The -- obviously, there's been competition forever, and the competition, we've always said, is very strong. I think that what's happened not over the last 3 months, but over the last 12, 18 months, is that as the recognition has come, that specialty as Dale said, is trending towards being probably 50% of the market in dollars. Everybody is going to participate in that. And so that is, that's going to, that has happened and will continue to happen. As we, and this is a, this is in fact in some ways a something that's been driven to a large extent as the new people come in by being very promotional and very focused on price, we intend to maintain our focus on making sure that we're focused on the consumer, making sure that our products are right for the consumer and that our communication is, or our investment in marketing is largely on direct consumer communication. But this is what we have long anticipated as the market shift. And I think, it's, as I said, it's a 12 to 18 months phenomenon, not a 3 month phenomenon.

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

Okay, fair enough. And then secondly, in terms of accelerating rolling out of Simplicity, just to be clear, it sounds like the rationale or driving reason for that is simply the fact that retailers want it faster. Is there anything else that's causing that?

Mark A. Sarvary

That and the fact that the buildup was quicker than we -- we always put a certain amount of conservatism as we plan building of a new product, just to get it on sale the same. It's a new manufacturing process getting everything right, and so on. So we put a little bit of conservatism in it. Our Supply Chain guys were ahead of schedule, and the demand was very high, and so we were able to move it -- we've essentially moved the rollout schedule earlier, largely driven by demand, but also by our ability to meet that demand.

Operator

Our next question comes from Brad Thomas of KeyBanc.

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

Just a follow-up on the sales in the domestic segment. Mark, I was hoping you could just talk a little bit about performance by different price points. Was there anything that you saw differently among your lower-priced models, or by any channels that you sell in, or anything that maybe points more to the competitive or promotional landscape in terms of how your sales played out?

Mark A. Sarvary

We don't -- as you know, we don't split our sales by price point, but as we've said before, and I can reiterate it again this quarter, not really. I mean, there's no systematic differences in the distribution of sales by price point this quarter versus prior quarter.

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

And then in terms of Simplicity at this stage, I know it's started shipping, we've seen in retailers. You've talked in the past about the ability to gain, hopefully, 2 or more incremental slots. Is that still something that you could see? How are you feeling about the order process at this point?

Mark A. Sarvary

I mean, it's extremely early. So everything I said about Simplicity has to be caveated by that. But the initial plans, the initial rollout plans, what retailers have agreed to does seem to be consistent with that plan to get 2 or so incremental slots. So what -- we'll see it when we see it. And -- but that is what people are going to, that's what we're rolling out to, that's what we're seeing.

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

Okay, I think I just -- maybe squeeze one more in here. In terms of the investment in advertising, I mean, if we were to really nitpick here, this is one of the lower sales quarters that we've seen in a while, on a lower contribution margins in a while, admittedly you have a, exciting new product coming out. But are you seeing the returns that you want to see still on that incremental advertising dollar investment?

Mark A. Sarvary

We are, but we -- and as I said in my prepared comments, we are, and -- but we monitor it very, very closely. One of the things though, you have to realize is, that advertising doesn't pay for itself on the day you do it. It has to be over a period of time. And this obviously is the lowest -- the proportion of promotional times which is when advertising is most effective, and when our heavy ups are coordinated, there's a limited amount in the first quarter. So it is consistent with it, but we monitor it very carefully. I mean, one of the things that we, that is kind of a leading indicator is web hits. And so it's true in America, and it's true in the rest of the world. Web hits are a good indicator of whether advertising is breaking through. And I think I saw data that we're well above 50% higher on web hits this quarter than we were last quarter, and we believe that's very driven by advertising. I mean, sorry, by this quarter than we were first quarter last year.

Operator

[Operator Instructions] The next question is from Jon Andersen with William Blair.

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

I just had a question on the guidance. By my math, the top line guidance of $1.6 billion to $1.65 billion kind of implies growth through the balance of the year, somewhat below what you experienced in the first quarter. And, I guess with, and at the launch of Simplicity, the benefit of the incremental advertising spending, it's not immediately intuitive to me why that might be the case. Is there just that -- this is more to do with conservatism, because we're early in the year? Or is there something else we're seeing there?

Dale E. Williams

Well, yes, I would say in regards to Simplicity, we have a plan for Simplicity, while we're accelerating the rollout of Simplicity, we haven't changed the plan that we had for the year in terms of what Simplicity would to at this stage. It's only been in the market for a couple weeks. It's really only been in floors for a week and half or so. It's way too early to have a gauge of what Simplicity's going to do. It's way too early to know what the real benefit of the heavy ups' going to be. We're just embarking here as Mark said, a lot of the programs are just kicking in here in the second quarter and yes, we have, had ideas in our planning for the year of what the benefit of those programs like the integrated advertising et cetera, would do for us. But they're just starting. So there's no basis to change whatever our original plans were. One other thing that I would comment on from a total year standpoint, at the start of the year we thought FX would be fairly neutral this year. It proved to be a headwind in the first quarter, based on how the euro specifically is trading, it doesn't look -- and the continued uncertainty around the -- particularly the European markets, we're performing very well there. But you read the headlines in the news as much as we do, and there's still a significant uncertainty as to what the economy is really, economies over there are really doing. So we're trying to be a little bit cautious. We've built in -- FX now going to be headwinds for the year. We'll see pressure from FX as the year goes on. We'll also continue to be concerned about the overall macro environment in Europe. So I think it's a function of not enough has changed to change our plans for the year. We don't have the evidence and proof points yet because most of the major initiatives for the program, for the year are just starting.

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

One follow-up. I don't want to beat it to death, but on competition, I know we've kind of talked in the past about the competitors have had specialty offerings in the marketplace with varying degrees of success. It kind of sounds like, and looks like, based on the some of the industry growth rates that might be getting more traction. If -- you think, is there a different approach that's a being taken by some of your competitors, better in-store presence, better marketing? Or I'm just trying to kind of get a better handle on why there may be more traction in the premium area?

Mark A. Sarvary

And I think the -- as I said, there's simple -- the really kind of astonishing change in the world is that specialty is being accepted, as being the bulk of what business above $1,000 is going to be. And as you look at it like that, and what it means is it's the retailers themselves who say "Well, in that case." I'll -- that opens their ears to that. It also provides us an opportunity. But I think the fundamental change is in that. I think that there is a recognition and a trend that has a started to accelerate, which is causing, obviously the competitors who participate, but for the retailers to be more, to have had the justification for the space on their floors. I mean, it's something that we've talked about for a long time, and it's happening something like we expected.

Operator

The next question in queue comes from Joan Storms with Wedbush.

Joan L. Bogucki-Storms - Wedbush Securities Inc., Research Division

Mark, you had mentioned earlier, and I want to make sure I got the comment right about obviously because of the product rollout in particular in the U.S. that business is likely to accelerate. Obviously you have some of these headwinds on the raw material cost and the FX, but just due to the rollout is it Simplicity in the extra slots that the we should see some acceleration of business in the Q2 through the Q4?

Mark A. Sarvary

What I said was that we have a lot of initiatives, which are essentially kicking in Q2 to, through Q4. And as Dale said, I mean, we made our guidance for the year 3 months ago, and we're not modifying it even though we're slightly ahead of -- in terms of topline growth and where we thought we'd be. But the fact is that we don't -- all of these, not all, but these initiatives are still extremely early in their rollout. It's too early for us to change our expectations of these things. So as we stand here today, we think it's the best way to look forward is to stick to what we had originally thought, and that's what we're doing. So we're excited to see them, we're watching them with great anticipation, but at the moment, that we, it seems appropriate and our projections say that the best projection we can make is our guidance.

Joan L. Bogucki-Storms - Wedbush Securities Inc., Research Division

I mean, most of the early channel checks we've done on a roll out of Simplicity as then a lot -- most of the stores you're taking in the entire 3 beds so far. So are those part of, like the elite dealer program companies that you're servicing first during the rollout?

Mark A. Sarvary

Forgive me, I didn't quite hear what you said. Say that again?

Dale E. Williams

Saying 3 beds.

Joan L. Bogucki-Storms - Wedbush Securities Inc., Research Division

On the -- most of our early channel checks that you've done on the rollout of Simplicity, a lot of the stores are the taking all 3 slots for that line, and I didn't know if you can -- are those customers or retailers part of the elite program that get the product first? Or how does that work?

Mark A. Sarvary

Well, as I said, in order for us to gain an average of 2 in total, the majority of people have to take 3, so it's going to have to be, it's not a big surprise. We -- people are, the majority of the people are saying that they want to take 2 or more. That you're just -- I'm sorry, we just heard a buzzing sound, I don't know what that was. It comes as a surprise to me that you're seeing 3 in the stores you're visiting.

Operator

Our next question in queue is from Budd Bugatch with Raymond James.

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

Just, Dale, one specific question. I think in the last quarter guidance you said that gross margin would be up modestly and it was up pretty nicely. I know you talked about the efficiencies and yet some new product drag. So maybe you could can give us a little bit of additional color on that?

Dale E. Williams

Well, we had obviously on a sequential basis, it felt like we were through, and we said that we were through the Danish facility issue. But you never know absolutely until you go a few months, make sure that everything is going as it's appears to be. But as I mentioned in my comments, we did not have any lingering Danish support needs from the U.S. So that's a positive. We had very good productivity build and response, and while we had a little bit of startup cost around Simplicity, actually the start up cost were a little bit less than what we thought they would be. So basically from a gross margin standpoint, where we saw very good performance in terms of what our plans are and what our outlook was. We are projecting and seeing some chemical pressure in the balance of the year from what we expected at the start of the year. Budd, you've mentioned a couple of times that you've heard of more price increases and stuff, and yes, we've built in some more chemical pressure into our outlook. We think that, that will give us a little bit of headwind in the second quarter. But because of the performance that we're getting on our cost improvement programs, we think that we can offset that in the second half, and actually get back whole for the year, which is why even with higher chemical costs we're not changing our outlook for gross margins for the year.

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

And you, could you give us little bit more color, you talked about the revenue guidance, I was struck and I think John got a little bit to this. The revenue guidance is unchanged, I recognize it still is early in the year. You are accelerating Simplicity, which would have said you should have gotten a little bit more revenue as that gets placed earlier and has longer to get a season going on retailer's floors. You did talk about a little bit of FX headwinds. So maybe if you could quantify the FX headwind and is that what is offset by the accelerated revenues from Simplicity? Is that the right way to look at it? Or it -- those are the 2 major moving parts?

Dale E. Williams

Yes, I mean, those are the 2 major moving parts. And again, even though we're accelerating the floor model rollout of Simplicity, we're not changing the sell-through assumptions of Simplicity per se, just because we haven't sold much yet. We don't have a broad response or input back in terms of how it's performing in the market, we've heard some good anecdotal things. But until we get some time with it, we're not going to change our plans around Simplicity. We are anticipating ongoing FX pressure. In the first quarter, it cost us, I guess, globally about 1 point, I think, for the full-year, we're expecting it to cost us a couple of points.

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

2 points or more?

Dale E. Williams

Yes, probably 2. On the international side, outstanding first quarter, 22%. Constant currency growth in the first quarter, so very pleased with the performance overseas. But still concerned about the economies, particularly in Europe, and the comps go get tougher as the year goes on as we're comping the Cloud. We started rolling out the Cloud internationally, just late in the first quarter last year, and then it built and built throughout the year. So that the comps do get tougher as the year goes on. So we're not necessarily expecting an acceleration of growth, and we said at the beginning of the year, we saw it for the year, the growth rate between U.S. and international would be more balanced. So those are of all of the factors that we're looking at.

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

Now you did -- I'll sneak one final one in there. You did, I think, last quarter say that the Simplicity inclusion in 2012 guidance was modest. Could you give us maybe a little bit more color of what's included in the 160 to 165 the -- for Simplicity this year?

Dale E. Williams

We're not going to get into the exact specifics of how much Simplicity we expect to sell. But it is still a relatively modest expectation. It's not going to become our expectation for this year's, it's not going to become the whole driver of the business.

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

About there in terms of growth rate, is there any way to characterize it in terms of the delta of the growth rate?

Dale E. Williams

No, we don't want to get into that.

Operator

Our next question is from Leah Villalobos with Longbow Research.

Joshua Borstein - Longbow Research LLC

This is Josh Borstein in for Leah. You implemented some pricing in early April, and did you see any pull forward in demand ahead of that increase?

Dale E. Williams

Really, no. One of the key things about this price increase, you always see a little bit. But this one was very different than how we have typically done price increases. This price increase was relatively small. It was, actually fairly heavily weighted to non-high volume sizes, twins, kings, where queen is by far the highest volume. So the price increases were on in areas where the retailers are less likely to try to take advantage of it. Also, the flip side of that is some of the new programs that we introduced that start off in the second quarter, that are geared around volume, actually kind of counterbalance any potential impact of trying to get a benefit from the price increase. Last year, we had a sizable price increase in March on the Cloud Supreme, and, which is our highest volume unit. So on a year-over-year basis, the price increase impact was significantly different.

Joshua Borstein - Longbow Research LLC

Okay, so how should we think about ASP going forward for the year in the U.S.? You have a little bit of pricing, you said, from the April price increase that presumably is going to be offset by some lower price points from the Simplicity. Just I'm thinking about, "Hey, it's ASP for the year." How should we think about that?

Dale E. Williams

Yes, for the year, I believe we said that we thought is, on the North America side of the business, we thought that ASPs would be flat. Because of the impact of Simplicity.

Joshua Borstein - Longbow Research LLC

Okay. And then if I could just sneak one in, a housecleaning question. The -- could you update us on the door count for the U.S. and internationally?

Dale E. Williams

Yes, let's see. Domestic door count, 7,700 I've got, international looks like 5,300.

Joshua Borstein - Longbow Research LLC

Okay, and that 7,700, was that -- does that include Canada?

Dale E. Williams

No, that's just U.S. Canada, there's -- the door count doesn't change much. It's about 400 doors in Canada.

Operator

The next question is from Eric Hollowaty with Stephens Inc.

Eric Hollowaty - Stephens Inc., Research Division

Dale, could you just reiterate what your guidance was on gross margin for the second quarter? You guys cut out, I think, when you were giving that out.

Dale E. Williams

Okay. Yes, I said for the second quarter, I expect sequentially from 1Q to 2Q, gross margins to be down a little bit, because of the impact of the heavy floor model rollout of Simplicity and chemical prices are up.

Eric Hollowaty - Stephens Inc., Research Division

Right, okay. And the international, excuse me, the advertising expense increase in the quarter, could you give us perspective on whether that was fairly evenly weighted U.S. versus international in percentage terms, or how did that sort of play out?

Dale E. Williams

Yes, in terms of percentage of revenue, the international spend is, was higher in the first quarter as a percentage of our revenue there. And that's been the case for a while in terms of growth rate of advertising. It was a slightly higher growth rate in the U.S., but not dramatically different in terms of growth rates in advertising between the 2 sides. Because the U.S. is catching up a little bit. Last year, the U.S. was spending 10%-ish and picked it up this year to 11% and change, and international, which was spending at a higher, over 12% last year, is now over 13%.

Operator

Our next question is from Joshua Pollard with Goldman Sachs.

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Can you talk about what percentage of your existing clients actually took on the Simplicity? And then what the speedup of the rollout in the U.S. Can you talk about when you guys are looking to put that out for your international segment?

Mark A. Sarvary

The vast majority, I'm not going to give you an exact percentage of our customers who will be taking the Simplicity. And as Dale said, the rollout's going to be over, essentially 6 months. So starting from now, 6 months. There'll still be stragglers, obviously, but that's roughly what we expect, and we're trying to get quite a bit of that into the second quarter. In terms of when we'll launch it in international, we will launch it, we haven't announced to date when we'll do that, but we do anticipate doing so. It's just not appropriate to announce when.

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Is it fair to ask whether or not that would be this year or next?

Mark A. Sarvary

It won't be this year. But I don't want to talk -- I won't be more specific than that.

Eric Hollowaty - Stephens Inc., Research Division

Okay, that's fair. The other question I had was around your R&D spend. You didn't give the numbers, but you did say that it was up almost 50%. I'm trying to compare that with some comments you guys made in the second half of last year, where you said that the Simplicity end up a -- being your biggest product from an addressable market standpoint, but that you had a number of products that were ready to go. I'm trying to understand when I think about the increases in spending that are sort of needed in the more competitive environment, the new products that you have coming out, potentially a next year roll out with the Simplicity worldwide, I'm trying to understand why such a big increase in R&D for you guys at this particular point?

Mark A. Sarvary

First of all, as I, first of all, R&D is crucial to us. This is a very big, important component of our overall business strategy. We're committed to making sure that we have beds that people sleep better on. And we do that from research product development. So, first of all, it's the backbone of our business. Secondly, if you look at it as that amount of spend, it's still in kind of big terms, it's a relatively small amount, it's less than 1% of our total sales. So it's an important thing, it's a large number, but it's in the big scheme of things, not a thing that greatly moves our P&L. But having said all that, I think that the concept of making -- as I said, and I have said and it is true, that we have several things ready to roll, and -- but that doesn't mean we're not working on more things. And there are 2 parts of R&D. There is the product development side of it, which is using existing technologies to create products, to create new product. And there is the development of new technology, which enables new products. And we do, genuinely do both. And so I can -- we cannot -- we're never going to say we got enough R&D. We're always going to think we're going to need more. That's going to a continuing plan for us going forward.

Dale E. Williams

And Josh, from a specific number standpoint, first quarter of '11 we spent 2.3 in R&D and first quarter of '12 we spent 3.4.

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Okay. If I could just sneak one more in. Are there any stores where you guys are net or only are -- better, that you're actually losing a slot to put the Simplicity in? I know it's not something that's really been talked about much, but I'm wondering if there's a portion of your customers who are taking on 3 or so -- 2 or 3 Simplicitys but taking one other off of the floor?

Mark A. Sarvary

There's inevitably going to be some of those. But the fact is, that we're looking for, as I've said, in a net gain of 2. So there's going to be averages, some will take 3, I mean, it'll average out, but by the laws of specifics, there's going to be some people like that.

Operator

And I do show that we are out of time for questions. I would like to turn the call back to Mark for any concluding remarks.

Mark A. Sarvary

Thanks very much. Thanks, everybody, and we look forward to talking to you again in July when we'll host our second quarter earnings conference call. Thanks for joining us this evening.

Operator

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

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