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OPERATOR: Good day, ladies and gentlemen, thank you for standing by.
Welcome to the Sealy Corporation fiscal fourth quarter 2006 earnings
conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the
conference to Mr. Kenneth Walker, Senior Vice President, General
Counsel and Secretary. Please go ahead, sir.
KENNETH WALKER, SR VP, GENERAL COUNSEL, SECRETARY, SEALY, INC.: Good
afternoon, everyone. I want to thank you for joining us on Sealy's
financial fourth quarter 2006 investor conference call.
Before we begin, let me remind you that in accordance with the Safe
Harbor Provisions of the Private Securities Litigation Reform Act of
1995, the company knows that certain matters to be discussed by
members of management during this call may constitute forward-looking
statements. Such statements are subject to risks, uncertainties, and
other factors that may cause the actual performance of Sealy to be
materially different from the performance indicated or implied by
such statements. Such risks and factors are set forth in the
company's annual report on form 10-K for the year ending November 27,
2005. I'll now turn the call over to Dave Mcllquham, Chairman and
Chief Executive Officer of Sealy Corporation.
DAVID MCILQUHAM, CHAIRMAN, PRES, CEO, SEALY, INC.: Thank you, Ken.
Good afternoon. I want to also thank all of you for joining us to
talk about Sealy's fourth quarter and our full year 2006. Joining me
on this call is our Chief Financial Officer, Jeff Ackerman; Larry
Rogers, our new President of North America, and Mark Boehmer, our
Treasurer.
Our agenda for this call is as follows: I will give you a brief
business and industry overview and update on key operating
initiatives. Jeff will provide a financial recap on our fourth
quarter and full-year results. Then I will wrap it up, and we will
open the line up for questions.
Let me start by briefly discussing this past year. Being the largest
mattress manufacturer, we were able to not only overcome a challenge
industry and competitive environment, but also to sustain Sealy's
leadership in the market by effectively executing on our
comprehensive long-term growth strategy. Our focus on our three key
areas of growth, Domestic Innerspring, Specialty, and International,
put Sealy in a unique position due to our broad product offering
across all key price points and technologies, and provides diversity
across geographies. During fiscal 2006, we achieved a number of
significant milestones, positioning Sealy well going in to 2007.
These include a successful IPO, the transition of more than 70% of
our product line to the new federal flame retardant standards, making
Sealy FR compliant ahead of most of the industry. The successful
introduction of key promotional products to add volume incrementally
at price points where previously we weren't as dominant. The
introduction of numerous new specialty products, including a new
latex collection and expanded memory foam offerings, and tremendous
continued International growth and success.
In the fourth quarter, we completed our FR product transitions on
Posturepedic and continued to navigate through a challenging industry
and competitive environment. Sales for the fourth quarter increased
8.4% to $395.3 million. Units increased 4.9%, and average unit
selling price rose 3.3%. Domestically, our sales increased 2.8% and
our International business grew 26.1%. While momentum in our
International business has remained strong throughout the year, we
are also pleased, although still very cautious, with the positive
trends in our Domestic unit volume. We have gone from a 5.9% unit
decline in the second quarter to a 3.7% decline in the third quarter,
and only a 1.6% decline in the most recent quarter, and we anticipate
that upward trend line should continue. We remain confident there is
significant opportunity to improve future performance in the coming
years behind our ongoing new product initiatives and a return to more
normalized industry shipments.
To provide perspective on our performance, let me provide an update
on the bedding industry. The International Sleep Products
Association, or ISPA, reported that total dollar sales for September
through November, the period representing Sealy's fourth quarter,
increased by 3.6%, while unit volume was estimated to be down 5% as
reported by participating members. While not a perfect gauge, since
ISPA only represents about 60% of industry sales and does not include
all of the major innerspring manufacturers, it does provide an
indication of industry conditions. Trends in December were similar,
with ISPA reporting slight declines in revenue, units, and AUSP.
These conditions are in line with what we had been anticipating:
stabilization, but still somewhat soft unit trends that the domestic
market has been experiencing for the past several quarters. Our
competitors have remained aggressive to drive their volume, but given
the financial strength of Sealy, we are committed to doing what is
necessary on product introductions, pricing actions, and promotional
activity to remain competitive, even at the risk of short-term
margins.
We believe the key to our future performance lies in executing on
three key strategies: innovation and improving new product
development cycles and performance in both Innerspring and Specialty,
leveraging our presence and capabilities on a worldwide scale, and
driving operating improvements. Ongoing product innovation is central
to increasing market share and driving revenue growth in this
business. As such, Sealy maintains an ongoing stream of product
introduction. In fiscal 2006, we introduced nay mayor new
PosturePedic and Stearns & Foster lines that were FR-compliant,
strong promotional 125th anniversary products, and a number of
Specialty mattresses.
In 2007, we have continued to upgrade and enhance our offerings as we
introduced 36 new models at the January market in Las Vegas, the most
noteworthy of which was an extremely innovative new Stearns &
Foster line. The new upper-end Stearns & Foster beds have an
exciting new pillow coil-on-coil construction that provides the
comfort of a traditional independent coil with the legendary support
profile of Stearns & Foster. In total, there are three innovative
new component introductions, which include the industry's first
foam-in-case boxspring. The new Stearns & Foster product line is
considerably different from the current assortment and offers five
meaningful steps in the line, which should drive AUSP improvements in
the brand. The result is a line of beds that has resonated very well
with our retailers.
We also introduced new Posturepedic Reserve Collections mattresses,
which broaden our offering in the mid-tier $599 to $899 segment.
Given the major FR conversion that is happening in this industry and
on most of our retailer's floors through the second quarter of this
year, we expect these new beds we introduce to begin shipping
mid-second quarter and in to the third quarter.
To remain fresh and appealing in order to increase market share and
drive revenue growth, we recognize that continuous innovation is
critical, which will mean that additional investment in research and
technology is a must. We will continue to strive to reduce our
development cycle and become more agile in order to serve customer
needs, employ the latest in technology, and maintain an ongoing
stream of product introductions. We are encouraged by our progress as
demonstrated by the recent introductions of the new Stearns &
Foster and Posturepedic Reserve lines at the Las Vegas market.
While innovation is the engine that propels our strategy of
delivering the right product offerings across key technology areas,
it is our strong brand advantage, manufacturing capabilities and our
marketing and distribution strength that drives slot expansion,
increased velocity and market share gains. All of these strengths
combined will allow us to make significant gains in the growth
categories of the industry and specifically in Specialty. Our
Specialty business is continuing to grow faster than the market as we
focus on driving velocity, expanding distribution, and improving our
product offerings. Our new proprietary continuous flow latex plant in
Pennsylvania began operations this month and should be ready to
support our anticipated capacity needs in the second half of 2007.
This further enhances our opportunity in latex, which is especially
exciting given the strong preference consumers have shown for this
product over other Specialty technologies. We also believe that our
continuous flow process gives us competitive advantages in cost,
service and product flexibility.
We are experiencing very positive sales momentum on our true foam,
memory foam products. As part of our marketing strategy designed to
increase demand and create scale by driving units, we introduced
targeted price actions in January. Research and market testing
determined there was a significant price elasticity in memory foam
mattresses and we lowered our prices to take advantage. The actions
were in line with what the majority of our retailers had been
anticipating offers them a greater breadth of pricing options in this
category. We are committed to offering consumers a variety of
Specialty platforms and not limiting ourselves to one technology.
Consumers want solutions to their sleep problems, not just different
components.
The third technology in our Specialty category is air, which we are
continuing to evaluate with our right touch test. This is a
comprehensive market test, which includes product performance,
marketing, training, distribution effectiveness and post-sales
servicing that is being conducted in the U.S., Canada, and in Europe.
Over the past several months, we have been putting all of the
necessary elements in place, and we began measuring results in the
middle of December. We expect to continue this learning and testing
throughout most of 2007.
Another aspect unique to Sealy that is a competitive advantage and
drives our strategy is our presence and capabilities on a worldwide
scale. In December we announced a realignment of management and
created a new North American division, which includes the United
States, Canada, Mexico and Puerto Rico. As North America becomes more
of an integrated market, this new structure should allow Sealy to
better leverage our domestic product development capabilities, sales
and distribution strengths and lean manufacturing initiatives across
all borders.
Our performance in international markets, including Canada, Mexico
and Puerto Rico, has been extremely strong this year, with sales up
almost 21%, further strengthening our position as the only major U.S.
bedding manufacture with a substantial company-owned international
presence. Since the markets around the world vary, having a
meaningful international business diversifies our revenue and our
earnings stream. As in Canada, where we have leveraged Sealy's
strength to build a No. 1 market share position with significant
scale and highly profitable operations, we continue to progress in
other international markets. For example, we grew sales in Europe
more than 20% in 2006, as we expanded our latex production and
distribution.
And in Mexico, we are the No. 1 luxury brand, a position that we
established several years ago, and continue to expand on. Not only
were sales up 24% in 2006, but we are also benefiting from
relationships and insights drawn from that business. One of our large
Mexican retailers is expanding in to the southwestern United States
and as part of that expansion, we are becoming a North American
supplier to them. Additionally, we are able to apply valuable
insights from Mexico to serve the growing Hispanic population in the
U.S. The scale and long-term track record of success internationally
gives us confidence that our goal of generating one third of our
growth from outside the U.S. is very achievable.
Another key element of our strategy is expanding our lean
manufacturing efforts to drive operating improvements with resulting
margin expansion. Due to the commodity nature of many mattress inputs
and the inflationary environment in certain of the raw materials, we
are exceptionally focused on productivity improvements, value
engineering and cost reduction. In 2007, we will be expanding the
lean initiatives to our plants internationally and expect to produce
similar results to what we've accomplished domestically. We will also
be opening a new plant in Orlando, which provides greater capacity
and efficiency in serving the growing Florida market. By utilizing
value engineering and design for manufacturing initiatives, we
believe our lean initiative will provide additional benefits in the
coming years.
I will now turn the call over to Jeff Ackerman, who will update you
on our financial results.
JEFFREY ACKERMAN, EXEC VP AND CFO, SEALY, INC.: Thanks, Dave. I would
now like to walk you through the fourth quarter results in more
detail.
For the fourth quarter total sales were $395.3 million, an increase
of 8.4% from $364.6 million for the same period a year earlier. This
increase is the result of a 4.9% increase in units and a 3.3%
increase in average unit selling price or AUSP. Domestic sales
increased by 2.8% to $284.6 million, driven by a 4.4% increase in
AUSP and partially offset by a 1.6% decrease in unit volume. The
increase in AUSP is primarily due to the price increases announced at
the end of the fourth quarter in the prior year. While we are not
pleased with the continued decline in unit volume year-over-year, I
would like to point out that we comped 8% unit growth in the prior
year, and again, the trend is moving in the right direction.
Internationally, sales grew to $110.7 million, an increase of 26.1%
or 18.8% on a constant currency basis. This growth was the result of
strong growth in all our international businesses. The largest
contribution came from our Canadian business, which was up 25.2% or
18.9% in local currency and our European business, which accelerated
33% in the quarter or 28.2% on a local currency basis. Total gross
profit was $177.5 million, an increase of 11.3% or $18 million over
the same period a year earlier. As a percentage of sales, gross
profit expanded by 120 basis points to 44.9%. Driven by a reduction
in the reserve for workers' compensation claims and improved
manufacturing efficiencies, partially offset by the disproportionate
planned growth of our lower margin promotional lines.
The fourth quarter gross profit includes a change in estimates
underlying the reserves for workers' compensation claims. The effect
of this change was a $5.7 million benefit, of which $1.2 million is
related to 2006 claims. Over the past several years, Sealy has made
safety a top priority in our plants and our efforts are paying off in
fewer injuries and lower per incident workers' compensation claims.
SG&A increased to $6.1 million, or 5.1% from the same period a
year ago, to $125.7 million. As a percentage of sales, SG&A
decreased 100 basis points from the same period last year to 31.8%
through effective cost management efforts.
During the fourth quarter we incurred $5.8 million of higher floor
sample sales discounts and other product launch costs associated with
the completion of the new Posturepedic line roll out in the U.S. As
part of Sealy's strategy of constant innovation and enhancements to
the product pipeline, we anticipate ongoing investment in research
and technology, as well as spending to support new product
introductions across our broadening product offerings and expanding
distribution. While that amount will be less than the incremental
$26.7 million spent in 2006, we will continue to incur product
introduction costs going forward.
As we have discussed in the past, in order to maintain our
industry-leading position, we will continue investing in innovation
and new products, which we believe generates one of the best returns
on our invested capital. In 2007, we anticipate reinvesting $15 to
$20 million of the 26.7 million to support the rollout of the beds we
introduces at the Vegas show in January, along with additional
product introductions throughout the balance of the year. We expect
the majority of the sales and launch costs associated with the beds
introduced in January to be realized primarily in the second and
third quarters. The FR conversion for our promotional products must
be completed by June 30th and we expect the new Stearns & Foster
products to be rolled out by July at the latest.
Interest expense decreased $800,000 from the same period a year ago
to $19.4 million, which included $600,000 of non-cash interest
expense. The reduction was primarily driven by decreases in debt
partially, offset by higher LIBOR interest rates underlying our
variable-rate debt. Net income was $0.22 per diluted share, or $21.5
million, up 42% from $15.2 million in the same period in 2005.
Let me now touch on a few highlights for the full year. Sealy has
driven sales growth, positive unit volume, AUSP growth and gross
margin expansion. For the year ended November 26th, 2006, total net
sales were approximately $1.6 billion, a 7.7% increase from $1.5
million for the year earlier. This increase is a result of a 6.3%
increase in average unit selling price and 1.4% increase in units.
This performance breaks down domestically and internationally as
follows: Domestic sales increased by $48.9 million or 4.2% driven ,by
a 7.4% increase in AUSP partially offset by a 2.9% decrease in
volume.
Internationally, sales grew $64.3 million or 20.8% to $373.8 million,
a 17.9% increase on a constant currency basis. Gross profit increased
$56.3 million to $707.9 million from a year earlier. As a percent of
sales, gross profit expanded 40 basis points to 44.7%. Net income was
$74 million, an increase of 8% over the prior year. Our 2006 results
include $34.2 million of pre-tax expense associated with the IPO,
$26.7 million of additional pre-tax product rollout costs in the U.S.
associated with new product launches, a $4.5 million reduction in
charges related to workers' compensation claims for prior years, and
$4.5 million of pre-tax refinancing charges. We also had $4.1 million
of tax benefits associated with the settlements and resolutions of
certain tax liabilities.
Now, on the balance sheet, which is one of the strongest in the
industry, Sealy's cash and cash equivalent balance as of November
26th, 2006, was $45.6 million, compared to $36.6 million at the same
time last year. The company continues to deleverage the balance sheet
and reduce debt net of cash by $149.3 million during the year to
$786.9 million. Our net debt to adjusted EBITDA ratio was 3.15, as
compared to 4.02 last year. The reduction in debt was attributable to
strong operating cash flow and proceeds from our IPO, partially
offset by $31 million in net capital expenditures and the addition of
$26.5 million in financing obligations related to leases.
During fiscal 2006, we added the new latex plant in Pennsylvania and
our plant under construction in Orlando to our balance sheet. In the
future, we intend to employ operating leases to fulfill our facility
requirements. Additionally during fiscal 2006 we capitalized the
long-term licensing agreement with Pirelli, a brand that we license
in Europe, which we will amortize over the life of the agreement at a
rate of approximately EUR2 million per year. We are able to maintain
relatively low levels of working capital and have initiatives to make
improvements on each component.
Looking at our accounts receivable during the fourth quarter of 2006,
our Domestic days sales outstanding was 34 days which was one day
higher than the same period a year ago. International days sales
outstanding improved by two days over the prior year. Our Domestic
days inventory on hand increased by 3 days to 28 days from the prior
year. This increase was driven by a buildup in our foreign-sourced
inventories to support the Specialty Bedding category. We expect
days-on-hand to improve at the startup of the domestic latex plant
which will reduce our reliance on imports. Internationally,
days-on-hand was flat. Our Domestic days' payable was 64 days, a
decrease of four days as compared to the same period a year ago.
International days payable was up nearly one day.
Next I would like to remind you that this is a steady business that
delivers substantial cash flow, with low-maintenance CapEx and
minimal working capital requirements. On an ongoing net basis, we
evaluate our capital needs and determine the best use of cash. As we
approach our target leverage ratio of 2.5 to 3 times total net debt
to adjusted EBITDA, we have been discussing with our Board of
Directors the preferable use of cash going forward in order to
provide the best return to our shareholders. The company's priorities
for the use of cash flow include investing in our strategic
initiatives and product innovation and the payment of dividends.
Additionally, we are pleased to announce Sealy's Board of Directors
has approved a share repurchase program, authorizing the company to
repurchase up to $100 million of its common stock. We believe that
this repurchase program reflects our commitment to return a portion
of excess cash to our shareholders while maintaining our targeted net
debt levels and preserving flexibility to fund our continued growth
plans. In fiscal 2006, our cash capital expenditures were $31
million, and in 2007, we expect capital expenditures to be
approximately 2% of our revenues, which is in line with our
historical average.
Finally, I'd like to briefly discuss our outlook and a few things to
keep in mind when modeling Sealy's fiscal 2007. We remain focused on
execution of our product line initiatives, ongoing innovation,
improves to our product refresh cycle and cost management. Given our
current outlook, we expect our performance will be impacted by the
aggressive competitive environment, ongoing strength in our
promotional and Specialty lines, a transition period leading up to
shipping our new Stearns & Foster line and Posturepedic Reserve
beds, which will only truly start impacting our results in a positive
manner the last few weeks of the second quarter and beyond, and
finally, the ramping up of our domestic latex plant during the first
half of the year. We are encouraged by the current trend in Domestic
unit volume, and continue to be pleased by the strength in our
international markets.
As a reminder, our business can be somewhat volatile on a
quarter-to-quarter basis, but our long-term targets remain intact.
Over the long term, we anticipate achieving our targets of sales
growth in the mid-to-high single digits, an average of 20 to 50 basis
points of gross margin expansion, 10% EBITDA growth and EPS growth in
the mid-teens. For 2007, we anticipate being able to realize
additional benefits totaling $4 to $6 million over our normalized
effective tax rate of 38%. And lastly, I want to make you aware that
fiscal 2007 is a 53-week year for us.
I will now turn the call back over to Dave to provide some concluding
comments.
DAVID MCILQUHAM: Thanks, Jeff.
Before we take questions, I want to remind you of a few things. Sealy
is the largest mattress manufacturer with a unique competitive
position due to our scale, breadth of product offerings and diversity
of geographies.
With the implementation of our recent management realignment and with
FR compliance largely behind us, we are optimistic going in to 2007,
focused on our execution, and ensuring that we have the right
products in the stores at all times. We are particularly excited
about the opportunity in the second half of the year, as our new
latex plant in Pennsylvania becomes fully operational and the
innovative new Stearns & Foster and Posturepedic Reserve products
are established on our customer's floors.
The opportunity for continued sales growth, margin expansion, and
earnings momentum is clear, and as we pursue the opportunities in
front of us, we expect to not only maintain our market share
leadership position in the bedding industry, but extend it as we seek
to increase shareholder value over time. With that, we will open up
the lines and take questions.
OPERATOR: Thank you. [OPERATOR INSTRUCTIONS] We'll take our first
question from Stephen Kim with Citigroup.
STEPHEN KIM, ANALYST, CITIGROUP: Thanks, guys. Good job.
DAVID MCILQUHAM: Hey Stephen.
STEPHEN KIM: Hi. Had one basic question and a few sort of
housekeeping items. Let me save the housekeeping for last. You gave
some Domestic AUSP data, and you also talked about Domestic units,
Domestic unit trends. First of all, I guess I was wondering if you
could articulate whether your AUSP across all of your major product
categories, let's say-- the different technologies, if you will, like
the innerspring, and the air, and-- not really air, but the-- the
viscoelastic and the latex, did they all experience AUSP growth? Was
it roughly comparable? Or did some grow and some decline?
JEFFREY ACKERMAN: Yes, Stephen, this is Jeff. For competitive reasons
we're not giving, really, any information about pricing on a
product-line basis.
STEPHEN KIM: Okay. Let me try another one then. You talked about a
Domestic unit growth in the quarter, and you said it was down 1.6%.
Can you give us a sense for how things have trended sort of at the
end of the quarter, as you head in to earlier this year. Have you
gotten to the point where you were sort of flat year-on-year?
JEFFREY ACKERMAN: As I mentioned, Stephen we were comp an 8% growth
from the prior year, so we were -- being down in the quarter 1.6% on
a two-year basis that still puts us up 6% on units for the domestic
market.
STEPHEN KIM: Yes. I guess what I'm saying, though, is if you extended
that and looked at the period month-by-month or looked at in January
and February, whether those trends improved from the numbers you saw
in the fourth quarter as a whole?
JEFFREY ACKERMAN: You know, I really don't have that the monthly data
here with me.
OPERATOR: Okay. We'll go to our next question from Al Kabili with
Goldman Sachs.
ALBERT KABILI, ANALYST, GOLDMAN SACHS: Good afternoon, guys.
DAVID MCILQUHAM: Hey, Al.
ALBERT KABILI: A question on the International trends, clearly very
strong, but it becomes more difficult comps this year. Could you talk
a little bit about how much of the International is driven by
expanded distribution last year and what should we be looking for
this year in terms of growth out of International?
DAVID MCILQUHAM: Al, it's Dave. I think we have consist importantly
said, that a. we don't expect to continue the trends in perpetuity
like we have seen in the last year to two years internationally.
That's for sure. But we continue to believe that we can drive a third
of our overall growth from outside the U.S., and generally, it varies
market-by-market. We just continue to outperform the market in Canada
and Mexico, and in South America. In Europe, we did have some
increased distribution that was in line with the expansion of our
production facilities in Italy last year, and all-in-all, we believe
we can continue to drive that one third of our growth from outside
the U.S.
ALBERT KABILI: Okay. But no definitive-- how much does this sort of
decelerate going forward? Is this still double-digit growth or -- any
sort of guidance on that?
JEFFREY ACKERMAN: Well, Al, it's Jeff. As we've said, we remain
committed to a third of our growth being from International. So that
will continue to be the case, and given that it's a smaller piece of
the business, it's-- in order to drive that one third of the growth,
obviously it will be growing faster than the domestic market, and
that's consistent with how it's performed for the last five years.
OPERATOR: Thank you. We'll take our next question from Keith Hughes
with Robinson Humphrey.
KEITH HUGHES, ANALYST, SUNTRUST ROBINSON HUMPHREY: Thank you. Just on
the quarter, you talked about some workers' compensation expense of
$5.7 million and $1.2 million. Can you just go in to a little more
detail on what that specifically encompasses?
DAVID MCILQUHAM: Sure, Keith. What we really have is two pieces. One
is we have now as a company, working with our actuaries, have
developed enough of our own history, loss history, and we're able to
use that, as opposed to some actuarial standards and the focus that
we've had on safety has really paid off. We've seen a continuing
decline in not only the frequency, but the severity of accidents that
we've had. So that's a change in estimate. So, $4.5 million of the
$5.7 million relates to really prior year's performance, and prior
year's claims, and $1.2 million relates to our performance in 2006
around addressing safety and driving down workers' comp claims.
KEITH HUGHES: The income statement is going to come up to the $5.7
million benefit for the fourth quarter, is that right?
DAVID MCILQUHAM: That's right.
KEITH HUGHES: And your interest expense, I believe you said was $19
million in the quarter. Does that include some non-cash expenses, as
well?
DAVID MCILQUHAM: Yes, $600,000.
KEITH HUGHES: $600,000. Okay. And a little bit longer-term question,
you've recently done some pricing actions on your viscoelastic
product. Has that already been rolled out to the retailers? And if
so, have you had any kind of reaction on that?
JEFFREY ACKERMAN: Yes, we rolled out the pricing actions to the
retailers on or about January the 8th, and we have seen some reaction
to that as Dave mentioned in his opening statements. We believe that
there was price elasticity in the visco's category, and we're
experiencing that elasticity.
OPERATOR: Thank you we're go next to John Baugh with Stifel Nicolaus.
JOHN BAUGH, ANALYST, STIFEL NICOLAUS & COMPANY, INC.: Good afternoon.
Congratulations. My question is surrounding gross margins that
exclude the workman's comp. I guess it was fairly comparable to the
year, maybe slightly below, or fairly comparable. Was it very strong
internationally and weaker domestically? I know you're not going to
give us numbers, but some kind of flavor for what drove the gross
margin exclusive of workers' comp.
DAVID MCILQUHAM: We were actually the gross margins were-- just a
second-- were-- internationally we were up slightly, and in the U.S.,
we were also up.
JOHN BAUGH: Okay. And then help me, again, just the pricing a year
ago, the magnitude and the timing of all of that, and when did we
exactly anniversary that?
DAVID MCILQUHAM: The pricing took effect about mid-November so it was
the last couple weeks of the fourth quarter.
JOHN BAUGH: Thank you.
OPERATOR: I'll go next to Kevin [Zietz] with Goldman Sachs.
KEVIN ZIETZ, ANALYST, GOLDMAN SACHS: Hi. Thanks for taking the call.
On the stock repurchase program. I was wondering if you could clarify
whether that is -- is the $100 million the sort of final thought
process on what to do with our cash and how to think about the
long-term capital structure? Or is this an interim step and should we
expect more?
JEFFREY ACKERMAN: We will continue to assess our best use of free
cash flow, and this is what-- what we're prepared to do now based on
our discussions with the board.
KEVIN ZIETZ: Okay. And just as a follow-up, could you clarify the
size of the RP basket? I guess as of the end of the quarter and what
size the carve-out is for stock dividends?
JEFFREY ACKERMAN: The RP basket is $125 million and the carve-out for
the dividends is $30 million.
OPERATOR: Thank you. We'll take our next question from Karru
Martinson with CIBC World Markets.
KARRU MARTINSON, ANALYST, CIBC WORLD MARKETS: Good morning-- good
afternoon sorry. On promotional pricing, it sounds like you've taken
more than you were expecting on the lower end of the market. I was
wondering if you could give an update how you see that market
progressing and also your market share there. I was seeing some 99
promotional pricing out there on the market.
DAVID MCILQUHAM: Karru, I'll take this one. It's Dave. We have
consistently said and looked at the promotional segment, and that's
really the $500 retail price category and below, as an opportunity
for us. We have historically been under-represented in that, but
we're being very selective in terms of distribution, because clearly
we want any gains at that end to be incremental, and we introduced
the new 125th anniversary products. They have gone incredibly well.
And I think fair to say, to use your words, probably exceeded our
expectations a little bit in 2006, but we're very mindful of making
sure that any activity that we have there truly is as incremental as
possible, and we do that by really targeting specific opportunities
on an account-by-account basis. We think we'll continue to do that,
but clearly, that's part of the component as to where we get a third
of our innerspring growth from in the domestic market.
KARRU MARTINSON: And just on the -- perhaps you said it. Maybe I
missed it. The amortization of intangibles was up significantly on a
year-over-year basis. Can you provide a little color on that?
JEFFREY ACKERMAN: The amortization on the intangibles is being driven
by this licensing agreement, and that's the biggest item. That's the
Pirelli agreement we talked about.
OPERATOR: We'll go next to Reza Vahabzadeh with Lehman Brothers.
REZA VAHABZADEH, ANALYST, LEHMAN BROTHERS: As far as the -- your
pricing and promotional posture, I'm wondering with all of the
actions that you have taken that you feel like this is the right
place to be at this point in time? Or do you think there's more
pricing actions to be taken one way or another in the coming period?
JEFFREY ACKERMAN: I'm going to have Larry take that one.
LAWRENCE ROGERS, PRES OF NORTH AMERICA, SEALY, INC.: This is Larry,
as Jeff said. As David alluded to, we have taken a targeted approach
to this, where we have selected customers that are already doing
business with us that participate in this promotional sector. We
don't go out and indiscriminately blow our promotional products to
the marketplace. So it's a very targeted approach, and we continue to
remain on that path.
REZA VAHABZADEH: Okay. And then on the growth margin front, was the
improvement year-over-year just due to the increase in the European
business or was it due to mix, or was there also any realization of
lower raw material costs?
JEFFREY ACKERMAN: Yes, there were not a lot of changes relative to
raw material costs. Actually it's the opposite. If you look at what
happened to material costs versus the prior year, there's a
significant increase on foam, and that is one of our -- by far our
largest raw material. So the manufacturing team, through their focus
on continuous improvement and execution on lean principals, they were
able to drive a lot of offsets to that and as I mentioned, before the
International business was up -- the margins were up just slightly.
OPERATOR: We'll take our next question from Alexis Gold with UBS.
ALEXIS GOLD, ANALYST, UBS: Hi, good afternoon.
JEFFREY ACKERMAN: Hey, Alexis.
ALEXIS GOLD: Just a couple of questions, just as we look at the
changes in the retail environment, I know Mattress Firm was recently
purchased, and they were one of your big retailers, can you give us a
sense for whether or not you think that has any impact or benefit to
the business?
JEFFREY ACKERMAN: We don't comment on what our customers are doing
and what changes might be occurring in their business and how it
might affect their strategy.
ALEXIS GOLD: I guess-- you have talked a lot about International, can
you talk maybe a little bit about where you see -- just category-wise
-- potential floor space opportunities for new products.
JEFFREY ACKERMAN: Alexis, would you just repeat that question,
please?
ALEXIS GOLD: Sure. I was just trying to understand. Are there any
specific categories, whether in the sleep stores or the furniture
retailers? Right now I feel like we have seen ramp-up in furniture
actually where you see opportunities to gain floor space.
JEFFREY ACKERMAN: Was that referring to International or Domestic?
ALEXIS GOLD: No, Domestic.
JEFFREY ACKERMAN: Okay. I don't think that there's anything specific
that is happening from a channel perspective that is dramatically
different from the trends over the last year or two. There's no
question that sleep shop chains like Mattress Firm and Sleep Ease,
Sleep Train on the West Coast for example, are three -- I guess
Mattress Giant is another one -- are growing faster than the market,
but overall as a percent of channel sales -- in some cases-- and I
think an example last week of Mattress Firm acquiring another sleep
shop chain isn't driving the kind of growth in the sleep shop channel
that we saw back in the '90s. So overall the channels are pretty
stable, and we don't see that changing much.
ALEXIS GOLD: Okay. And just as we look at pricing for '07-- I know
you talked about it a little bit, but just as we look at the new
stable of products that you are offering, should we expect that,
across the board, at least as we look at higher pricing categories,
that we would expect pricing in aggregate to be up in '07?
JEFFREY ACKERMAN: We're focused in '07 in making sure we have got
absolutely the best product values out there, and we're looking at
driving slot velocity, and we don't see any material inflation
aberrations in 2007 that we experienced in the last couple of years
with foam and steel. So we expect pricing to be fairly stable in '07,
unlike it has been in past years, particularly given the introduction
of FR products. And we think that most of the gains that might happen
in AUSP in 2007 will likely be AUSP-driven as opposed to price-- I
mean, that will be mixed-driven as opposed to price.
OPERATOR: Thank you. We'll take our next question from George
Chalhoub with Deutsche Bank.
GEORGE CHALHOUB, ANALYST, DEUTSCHE BANK: David, just so I understand,
if we're looking at the fiscal year, how are you kind of expecting it
to evolve? It seems to me the comments of being more back-end loaded
in terms of EBITDA performance is purely based on the roll-out costs
you're going to be incurring at the early part of the year, but it
seems to me that the top line, given your strategic changes that you
have made, mostly on the Specialty side, the top line growth -- we
should see that happening as early as early part of fiscal '07. Is
that the right way to look at things?
DAVID MCILQUHAM: George, we don't comment and give quarterly
guidance, but -- you've kind of read I think how 2007 is going to
roll out when you say it's going to be more back-end loaded. There's
no question that the industry has not emerged yet from the unit
softness that we have seen in the last few quarters, and the December
numbers just came out from ISPA, and it actually showed units, as
well as revenue, as well as AUSP down. And I think it's going to be
the second half of the year before the industry really starts to
return to normal kind of trends and performance. Clearly, as Jeff
mentioned, we were anniversarying some big unit gains a year ago, and
it's going to take until the second half, 'til we get the latex plant
up and running, until we get the new Stearns & Foster line rolled
out, and we're going to go through a pretty major transition in the
second quarter as we convert to the new Stearns line, the new Reserve
Posturepedics and we change out all of the promotional beds to get
ready for FR.
GEORGE CHALHOUB: Okay. Besides the two very obvious uses of cash for
fiscal '07, which clearly is stock buybacks as announced this
afternoon, and potential debt reduction -- and I'm sure you're going
to balance that depending on what you feel is most economically
sensible to you -- are there any small pockets of strategic
opportunities that you may be looking at in some areas where you feel
you may be better off just buying some small capacity versus just
rolling out. I.E. you like some area like the Specialty side of the
business -- is there a chance to buy something -- and I'm not
necessarily saying a [inaudible] good business in size -- but to kind
of fill in pockets where you feel you may have a faster way to have a
big foothold and less drop in growth?
JEFFREY ACKERMAN: George, this is Jeff. Look, we feel like what we
have in latex -- we have proprietary process for manufacturing latex,
and we believe that's the low-cost way to do it. And so we're
committed to that path. Beyond that, we're always assessing our
supply chain.
OPERATOR: We'll go next to Stephen Kim with Citigroup.
STEPHEN KIM: Thanks. Just had a couple of follow-up questions. The
$5.7 million associated with the workers' comp, how much of that was
net? I mean, what was the tax impact on that?
JEFFREY ACKERMAN: I think on a net basis, you could use a 38% tax
rate. And like I said about $4.5 million of that related to the prior
year.
STEPHEN KIM: Right. But 38% tax rate would be fine. And then you
mentioned 53 weeks in the year. Is there going to be a quarter which
has 13 weeks and one that has 14 or how is that going to work?
JEFFREY ACKERMAN: Actually the first three quarters will have 13 and
the fourth quarter will have 14.
OPERATOR: We'll go next to Keith Hughes with Robinson Humphrey.
KEITH HUGHES: Just one follow-up. Jeff, will you be posting a
quarterly income statement on a website or emailing out or anything
like that?
JEFFREY ACKERMAN: No, we'll be filing the K --
KEITH HUGHES: That usually doesn't have a quarterly break out. Maybe
a few numbers.
JEFFREY ACKERMAN: Other than what we have in the K now, we weren't
anticipating doing that.
KEITH HUGHES: Can you tell me what the average diluted share count
was in the fourth quarter?
JEFFREY ACKERMAN: If you give me just a minute, I'll come back with
that.
KEITH HUGHES: Okay.
JEFFREY ACKERMAN: Anything else, Keith?
KEITH HUGHES: No, that's all. Thank you.
JEFFREY ACKERMAN: Okay. I'll get you that in just a minute.
KEITH HUGHES: Okay. Thank you.
OPERATOR: We'll go next to Al Kabili with Goldman Sachs.
ALBERT KABILI: Hi, guys, also a couple of quick follow-up questions.
On the workers' comp, so the $1.2 million, that-- you should see that
savings also flow through in '07? Is that how we should think about
it? Because you have sort of reversed, sort of, your expense there,
but presumably, going forward, you are going to be booking things at
a lower rate.
JEFFREY ACKERMAN: That's correct. So going forward, we're going to be
able to use our own loss development factors and then also just the
improving performance that we have got allows us to take $1.2 million
out of the current year. We've demonstrated for quite sometime now
the improvements in safety over time, so we don't see any reason why
that should change.
ALBERT KABILI: Okay. Great. Thanks. And then on the Pirelli, is that
what's driving the spike in D&A, sequentially, in the fourth
quarter, as well as the royalty income?
JEFFREY ACKERMAN: That's a piece of it. The Pirelli piece is an
amortization of intangibles.
ALBERT KABILI: Okay. So what should we be looking for for the new
sort of D&A rate in '07? If you could provide some outlook there
for us.
JEFFREY ACKERMAN: As I said before, our CapEx for the year is going
to be in the 2% range of sales. At this moment that's all I can
really provide you.
OPERATOR: Thank you. We'll go next to Reza Vahabzadeh with Lehman
Brothers.
REZA VAHABZADEH: You touched on this before, but just to flesh it out
and confirm it. Do you anticipate total raw material costs to be
relatively flat in 2007? Any potential for benefits?
JEFFREY ACKERMAN: I don't know, Reza, there's clearly some
volatility, but at this point we're seeing fairly stable pricing on
raw materials, but things change all the time.
REZA VAHABZADEH: Do you usually hedge or otherwise forward-contract
any of your input cost?
JEFFREY ACKERMAN: No, we have supply agreements with key suppliers
and we lock in prices usually on a quarterly basis, but we do not
utilize forwards, and okay? I did want to get back to Keith's
question on the diluted share count for the quarter was at 96.7
million.
OPERATOR: Thank you. And at this time it appears there are no further
questions. I would like to turn the program back over to Dave
Mcllquham for any additional or closing remarks.
DAVID MCILQUHAM: Great. Listen, we really do want to thank you for
your participation here this afternoon. I thought we had a great
discussion of the business, good questions, and we are focused on
executing against our key initiatives in terms of International
growth, Specialty growth, and driving innerspring velocity in the
domestic market. We're focused on our product development pipeline
and getting these new products to market.
I'm encouraged and excited by the agility we've demonstrated in the
last few months, as we brought these 36 new products to market at the
Las Vegas market. And we're committed to the lean journey and the
fact that with the new organization structure, we've got a terrific
new leadership team in place in North America with Larry and Mike
Hoffman, and we feel very good about our ability to meet our
long-term commitment of growing our business in innerspring,
Specialty and internationally in delivering increased shareholder
values. So, thanks for your support and your participation, and we'll
see you on our first quarter call.
OPERATOR: That does conclude today's conference. You may disconnect
your line at anytime.
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