Jan 22, 2009
Executives
Barry Hytinen – Vice President of Investor Relations and Financial Planning & Analysis Mark A. Sarvary – President and Chief Executive Officer Dale E.
Williams – Chief Financial Officer
Analysts
Mark Rupe – Longbow Research Budd Bugatch – Raymond James [Auri Colt] – Eaton Vance Brad Thomas – Key Banc Capital Markets Joel Havard – Hilliard Lyons Matt McClintock – Barclays Capital John Baugh – Stifel, Nicolaus & Co. Joseph Altobello – Oppenheimer & Co.
Anthony Gikas – Piper Jaffray
Operator
Good day. Welcome to Tempur-Pedic fourth quarter 2008 earnings conference call.
Today's conference is being recorded. At this time I would like to turn the conference over to Mr.
Barry Hytinen. Please go ahead, sir.
Barry Hytinen
Thank you for participating in today's call. Joining me in our Lexington headquarters are Mark Sarvary, President and CEO, and Dale Williams, CFO.
After prepared remarks, we will open the call for Q&A. Forward-looking statements that we make during this call are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that forward-looking statements, including the company’s expectations regarding sales and earnings, involve uncertainties. Actual results may differ due to a variety of factors that could adversely affect the company’s business.
The factors that could cause actual results to differ materially from those identified include economic, competitive, operating, and other factors discussed in the press release issued today. These factors are also discussed in the company’s SEC filings including the company’s annual report on Form 10-K under the headings special note regarding forward-looking statements and risk factors.
Any forward-looking statements speak only as of the date on which it is made and the company undertakes no obligations to update any forward-looking statements. The press release, which contains a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is posted on the company’s web site at tempurpedic.com and filed with the SEC.
With that introduction, it is my pleasure to turn the call over to Mark.
Mark A. Sarvary
Thanks, Barry. And to our listeners, thank you for joining us this evening.
During the fourth quarter, we executed well. Though consumer spending worsened, we responded quickly to improve earnings.
We took steps to improve productivity, lower expenses and substantially improve our financial flexibility. As the market continues to be tough, we will continue to tightly manage the business to ensure we maintain our financial flexibility.
On today’s call we will provide our view on our performance in the fourth quarter and will outline our key strategic initiatives. And later, Dale will provide a detailed review of our 2009 guidance.
In the fourth quarter, sales was slightly below our expectations particularly in our domestic market. As we saw the slowdown deepening, we took actions to improve profitability.
As a result we delivered EPS in line with our expectations despite the sales shortfall. Gross margins were down year-over-year, but thanks in part to cost savings initiatives, we managed to improve gross margin on a sequential basis.
As discussed in our last call, we significantly reduced debt in the quarter. Our repatriation initiative coupled with our focus on cash flow yielded nearly a $100 million dollars of debt reduction.
Our tight fiscal discipline and focus on cash continues in 2009. We are managing the business closely.
The sales visibility continues to be low. Our assumption is things will not get better in the near term and we are projecting a continuation of quarter four sales levels throughout 2009.
However, we reduced our debt and our expenses so that we will remain safely above our covenant levels even if sales levels fall significantly further. Dale will give you more detail in a moment.
At the same time, we're working on a series of initiatives that should further strengthen our competitive position when the economic environment improves. Now while all of these initiatives will have long-term value, they will all also contribute during 2009.
Firstly, we intend to improve our gross margins. In 2008, we lost 500 basis points of gross margin.
Now obviously that was a major setback and we do not expect to get it all back in one year. In 2009, our aim is to get back a couple hundred of those basis points.
Beyond 2009, we expect to drive gross margins back to 2007 levels if not better. Across our operations, we have initiatives underway to improve margins including projects to improve utilization rate, a redesign of our transportation network and a range of sourcing opportunities.
And in 2009, we expect to benefit from an easing outlook for commodity costs which will benefit our product costs and transportation expenses. Number two, we will improve our effectiveness with retail customers.
As I mentioned on our last call, historically we were a direct response company and today we predominantly sell through retail. There are several things we are doing to perform better in this area.
A simple but compelling example is the way we are helping our retail customers to advertise our brand and promote our product. We are arming our retailers with copy, messaging and commercial ready video footage to utilize in their print and TV advertising.
We tied our messaging and retailer advertising together for a consistent presentation to consumers. We've already seen retailers integrate this material into their advertising effectively multiplying the consumer impressions for the Tempur-Pedic brand.
Number three, we will continue to improve the quality and range of products that we offer. We have a compelling product set and as we grow, our products need to be even more differentiated and tailored to specific consumer needs.
As a result, we have kicked off an important consumer research study that will give us a unique and in-depth understanding of consumer needs and preferences in the sleep category. We will use this knowledge to help us design new products, improve existing ones and optimize our effectiveness at communicating the benefits of our entire product line to consumers.
And we will also share this information with our retail customers as a part of our effort to improve how we support them. For competitive reasons, I'm not going to go into detail in our R&D pipeline, but we have several new products in design and testing and I can say that we anticipate rolling out some very compelling new products during 2009.
Also during 2009, we will continue to invest in advertising to communicate the benefits of our products to consumers. Our advertising spending as a percentage of sales is planned to be consistent with 2008.
Fourthly, we will improve the performance in our direct channel. Most consumers use the internet to research their mattress purchases before they buy and not surprisingly, the majority of Tempur-Pedic consumers interact with our website during the course of our research.
In 2009, we will be improving our website to be more informative and shopper-friendly and at the same time we will be investing in and strengthening our online marketing. Fifth and lastly, we see a substantial opportunity to improve our household penetration across our international markets.
Our international business has experienced excellent growth over the past several years, yet our household penetration is far lower than it is in the U.S. We will initially focus on growing penetration in our larger European market including the UK, Germany and France.
We will be strengthening our product innovation, working more closely with our retail partners and increasing our marketing investment. So, we enter 2009 in a strong financial position.
While we expect that the category will continue to be weak and we project that our sales will decline, we also project that we will generate significant cash flow and remain comfortably within our covenant. And at the same time, we have a strong brand and a strong business and we're working on a series of constant growth initiatives that will position us well when we come out of this period.
I'll now hand over to Dale.
Dale E. Williams
Thanks, Mark. I am going to focus my discussion on the financials, repatriation, and our 2009 guidance.
Fourth quarter adjusted EPS and net income were $0.17 and $12.7 million, which compares to GAAP EPS and net income of $0.52 and $39.9 million respectively in the fourth quarter of 2007. In total, Tempur-Pedic achieved net sales of $189 million, a decline of 35% over the same period last year.
Domestic sales were down 39%. During the quarter when we saw it start to weaken further, we implemented cost actions which I will discuss a moment.
International sales were down 27%. Foreign exchange rates were unfavorable during the quarter.
On a constant currency basis, our international sales declined 19%. Our international business weakened as expected and was generally in line with our expectations while currency was worse than expected.
By channel, our U.S. direct business was most impacted, down 47%.
The U.S. direct channel generally serves the lower consumer demographic than our retail channel, so direct can more affected by economic slow down.
Turning to the retail channel, we posted domestic net sales of $93.0 million, a decline of 39%. Internationally, retail sales were down 24% to $64 million.
On a product basis, mattresses were down 37% in total, driven by a 31% decline in units. Domestic mattress sales declined 41% on a 39% decline in units.
Declines in the direct business negatively impacted domestic blended average selling price while pricing was generally flat. In the international segment, mattress sales declined 27% on a 21% unit decline.
The sales decline reflects the negative impact of foreign exchange rates. On a constant currency basis, international average selling prices were up slightly.
In total, pillows were down 37%, driven by a 37% decline in units. Domestic pillow sales declined 47% on a 48% volume decline.
International pillow sales were down 27% on a 24% decline in unit volumes. Gross margin for the quarter was 43%.
Compared to the prior year, gross margin weakened primarily related to three factors. Despite oil prices continuing their downward trend, the cost for the raw materials we used were up substantially versus last year, on a percentage basis in the vicinity of mid-20, though by the end of the quarter, cost for these raw materials were trending lower.
Next, fixed cost de-leverage was a significant headwind, given the decline in sales and our efforts to lower inventory levels. And the sales decline in our high-margin direct business was also affected.
These factors were partially offset by improved manufacturing efficiencies in our operations. On a sequential basis though, gross margin was up 130 basis points.
This improvement was driven by factory productivity projects and helped to modestly lower transportation costs. As sales trends weakened during the quarter, we implemented contingency plans to lower spending.
We cut spending across the business and reduced head count. Our head count is now at 2005 levels, appropriate given the level of unit volumes we are seeing.
As a reminder, our factories are highly automated and require minimal labor, therefore, we can respond quickly when conditions approve. We lowered selling and marketing expenses $6 million sequentially.
These reductions were balanced between advertising and non-advertising expenses. In fact on a percentage of sales basis, we deliberately increased our advertising spend rate sequentially.
We also lowered G&A expenses by $1 million on a sequential basis. This represents our lowest level of quarterly G&A since 2006 despite incurring an excess of $2 million of bad debt expense.
Turning to the balance sheet, we continued to improve our financial flexibility. Accounts receivable were down $37 million sequentially and $64 million year-over-year consistent with sales decline.
Importantly, our accounts receivable continues to improve as DSOs are down four days compared to prior year, and a current portion of our receivables aging has improved on a year-over-year basis for the past three years. The key is to be mindful of terms and be diligent on collections.
We are doing both, but we cannot provide assurances that we won't get some unexpected bankruptcies in our retailer base. We lowered inventories by $9 million sequentially to $60 million.
This represents a $46 million reduction year-over-year. Turning to debt, during the quarter we implemented the first phase of our repatriation of foreign earnings.
We used the proceeds to reduce debt. Currently, we anticipate the entire initiative will be $150 million, up from the previously announced $140 million.
In the fourth quarter, we recorded a tax provision of $12 million related to the entire repatriation. The exact and final amount of tax will be determined in 2009.
However this is our current estimates for the tax charge. For purposes of estimating our cash flow, investors should note that we will pay this tax in the first quarter of 2009.
Also during the quarter, we resolved the escrow agreement related to the Tempur acquisition in 2002 when we were a private company. The company received $7 million from the release of the escrow account reflecting final settlement.
Of course, this item had no P&L impact. On the balance sheet it was recorded as a reduction to goodwill.
In total for the quarter, we reduced debt by $100 million to $419 million. For the full year, we reduced debt by $183 million.
As a result of our cash performance, our funded debt-to-EBITDA ratio was 2.44 times, unchanged from last quarter and well below our debt covenant of 3 times. We have taken and will continue to take steps necessary to ensure we will be in compliance with our debt covenants in any realistic scenario for 2009.
Let me pause here and speak briefly about some cash and debt assumptions. We anticipate working capital should be at worst in modest use in 2009.
We expect to continue to aggressively pay down debt this year as well. A fair estimate of debt reduction would be at least $80 million.
This coupled with our expectation for earnings before interest, taxes and depreciation leads us to believe that by yearend, our debt ratio will be lower than where it stood at the end of 2008. In fact, based on the way we're modeling the business, we would anticipate this ratio would be approximately 2.2 times by this time next year.
However, should economic conditions deteriorate further as we look at the business, we estimate that we would be in covenant compliance even if sales in 2009 were to decline to approximately $700 million with only moderate spending cuts. Now I would like to address our guidance for full year 2009.
For sales, the company currently expects full year net sales to range from $770 million to $790 million. For earnings, the company currently expects diluted earnings per share for 2009 to range from $0.70 to $0.90.
I'd like to note that the economic environment makes sales difficult to predict. Visibility is low.
Our sales guidance assumes unit volumes to remain consistent with the fourth quarter coupled with a modest benefit from seasonality and price increase. We recently announced price increases on some of our higher-end models around the world.
Our EPS guidance assumes gross margins are up in 2009. In 2009, we anticipate gross margins will improve by as much as 200 basis points.
Our confidence in this is based on three areas of opportunity. First, cost saving projects underway across our operations are yielding significant improvements in utilization rates and other key factory metrics.
Second, the redesign of our transportation network should be completed by yearend and we will see escalating benefits from this project across the year. And lastly, we have a range of sourcing opportunities which are enhancing margins.
In addition, we will benefit from the reduction in commodity cost in terms of both product cost and transportation. In our guidance we assume these factors will be partially offset by reduced volumes and negative channel mix.
Our plan is to continue to invest in advertising at rates consistent to or slightly higher than our full year average for the full year 2008. We know our advertising dollars will go further in times like these and this demonstrates our commitment to our retail customers.
Regarding interest expense, I'd like to remind investors that $300 million of our debt is currently swapped to affix interest rates. Therefore, we would recommend investors anticipate interest expense to approximate $22 million for the full year.
We are using a share count of 75 million shares and a full-year tax rate of 34.5%. As noted in our press release, our guidance and these expectations are based on information available at the time of the release and are subject to changing conditions, many of which are outside the company's control.
This concludes our prepared remarks and at this point, Operator, we'd like to open the call to questions.
Operator
Thank you. The Question-and-Answer session will be conducted electronically.
(Operator Instructions) And the first question comes from Mark Rupe of Longbow Research.
Mark Rupe – Longbow Research
Hey guys, a couple of questions here. As you look at 2009, I know you'd mentioned that you want to increase household penetration in some of the European countries, but on the R&D pipeline without getting into specifics, do you anticipate that you'll be able to expand your addressable (ph) market opportunity?
Mark A. Sarvary
Are you talking in Europe or are you talking worldwide?
Mark Rupe – Longbow Research
Worldwide.
Mark A. Sarvary
I mean I think we do, but I mean I clearly think we do because that's a critical component of the focus for the international business and I do in the U.S. too, but I don't want that to be interpreted as to say that that means that we need to go to another price point or—
Mark Rupe – Longbow Research
Okay.
Mark A. Sarvary
—another level of price point.
Mark Rupe – Longbow Research
Sure.
Mark A. Sarvary
We have we believe significant opportunity in the ranges that we currently compete.
Mark Rupe – Longbow Research
Okay. And as far as— I mean do you ultimately think that could be at some point in time down the road maybe expanded on a price point or do you want to stay in that premium category for the foreseeable future?
Mark A. Sarvary
I mean you can never say never.
Mark Rupe – Longbow Research
Right.
Mark A. Sarvary
But no plans at all to move out of the premium category. This is where we are and there is an enormous amount of opportunity still here.
We still have a small proportion of the premium category and we believe we have a lot of opportunity within it.
Mark Rupe – Longbow Research
Okay. And as far as the UK, Germany and France, I know there's different implications for each of those countries, is it just spending more ads there, is there distribution play as far as getting the penetration up there?
Mark A. Sarvary
It is both. It is distribution, but it is also getting a share of mind (ph) of the retailers in those different countries and as you know, they are all different and the structures are different, but it is a function of more investment and marketing.
It is a function of new products that we will be introducing later this year, but it's also a function of working with our retailers to increase our importance to them.
Mark Rupe – Longbow Research
Okay. And as it relates to February 2nd (ph) price increases, is there a general kind of rule of thumb, net-net overall, what pricing will be in '09?
Mark A. Sarvary
It applies primarily to more expensive items, so it's not a general one. It isn't a single, simple price and it applies only to the more expensive of our items and they range between 3 and 5%.
Mark Rupe – Longbow Research
Okay.
Mark A. Sarvary
So it is of the order of 4 on average. We're also raising the price on and at the same time improving the quality and design of our foundations, so that is the other thing, but the primary price increases are on subset of the items (ph), the more expensive ones.
Mark Rupe – Longbow Research
Okay. And then Dale, on the guidance, I know you said that it assumes that the fourth quarter kind of run rate on units.
Dale E. Williams
Yes.
Mark Rupe – Longbow Research
Obviously the comps in '08 versus '07 were a lot more challenging. Is it fair to assume I mean if you stay at this kind of run rate it's actually you are assuming kind of it gets worse because the comps get a lot easier?
Is that a right way to look at it?
Dale E. Williams
Well, actually the way to look at it is the (inaudible) would be worse early in the year than later in the year.
Mark Rupe – Longbow Research
Okay.
Dale E. Williams
Because if you have a consistent, kind of flat units with some improvement in revenue related to the price increases—
Mark Rupe – Longbow Research
Right.
Dale E. Williams
—and some seasonality, there will be some increase in revenue as the year goes on.
Mark Rupe – Longbow Research
Sure.
Dale E. Williams
The comps get easier as the year goes on also.
Mark Rupe – Longbow Research
Okay. Perfect.
Congrats on the execution. Thanks.
Mark A. Sarvary
Thanks. Bye.
Operator
Next is Budd Bugatch with Raymond James.
Budd Bugatch – Raymond James
Hi! Good afternoon.
Let me thank you for taking my question. Dale, can you give us any quantification on the amount of de-leverage in the gross margin that you faced or any of the other elements in the gross margin degradation in the quarter?
Dale E. Williams
In the quarter?
Budd Bugatch – Raymond James
In the quarter or the year, either, however you'd like to give it.
Dale E. Williams
Yes, the easiest way to think about it is if you look at the volumes that we had for the year, sales were down for the year as well as, let me give you a full year number, volumes were down for the year approximately 18% on mattresses, obviously much worse in the fourth quarter. We talked a lot a year ago about Albuquerque being a $10 million addition to fixed cost.
Obviously there is fixed cost in the other factories, but that's the sales volume reduction, but then also we reduced our inventory quite a bit so the production volumes were down more than the 18% which causes all that fixed cost to be underabsorbed.
Budd Bugatch – Raymond James
Understood.
Dale E. Williams
So essentially it was a sizeable nut (ph) that we had to deal with in 2008 and we'll continue to deal with in 2009. I will say that we feel like our inventories are in a good position.
We may see as the year progresses because of our network redesign as I talked about, we'll now only have cost benefits from that, but we also will get some additional inventory benefit from that, but not huge inventory benefits 'cause we squeezed so much inventory out of the business last year. So we will have a more direct comparison of overhead pressure in 2009 to the actual volume decrease in 2009.
Budd Bugatch – Raymond James
Okay. And you said in your guidance you had assumed as much as 200 basis points improvement in gross margin.
I think that that is at the high end of—
Dale E. Williams
Yes.
Budd Bugatch – Raymond James
—guidance, what would be at the low end? What would be your gross margin assumption at the low end?
Dale E. Williams
At the low end, we would assume that gross margins would be flat to just slightly up.
Budd Bugatch – Raymond James
Okay. And can you give us a quantification of the amount of repatriation in the quarter?
Dale E. Williams
Yes, from a debt reduction standpoint we reduced our debt $75 million related to the repatriation. We actually moved a little bit more cash than that, but it was a rebalancing of debt.
We had an unused facility in Europe, so we moved more money than that, but increased the debt level in Europe from nothing to not fully utilizing the facility. It was about a $15 million additional that was moved in terms of rebalancing the facility, so the balance though of the repatriation net of the taxes, so we will see by them end of 2009 the full benefit of the repatriation less the taxes, so 150 less 12, so $138 million of debt reduction associated with repatriation.
We saw 75 (ph) in the fourth quarter.
Budd Bugatch – Raymond James
75 plus 15, so 48 left or 63 left?
Dale E. Williams
In terms of net benefit of debt, 63 left.
Budd Bugatch – Raymond James
Okay.
Dale E. Williams
Because all we did was rebalance.
Budd Bugatch – Raymond James
Right. Okay.
Alright. And you have a CapEx number for 2009 and I'll get off?
Dale E. Williams
Our expectation for CapEx is it will be essentially flat to 2008.
Budd Bugatch – Raymond James
Thank you very much. Congratulations.
Operator
Next is John Baugh with Stifel, Nicolaus.
John Baugh – Stifel, Nicolaus & Co.
Thank you. I want to talk about the gross margin sequentially, it was awfully good in light of revenues dropping from what, 250 to 189, and you commented that you saw some raw material alleviation, although I think you’re on FIFO, so I would expect we’d see a lot more.
Could you comment on sequentially what you did in the fourth quarter to achieve that gross margin level? Because if you just look at fixed costs and variable costs, it should have been much lower than that.
Dale E. Williams
Yeah, we did obviously see even worse impact in the quarter of the fixed cost deleverage. We had a—you know, as we talked all year last year, and we talk every year, we have a number of programs and initiatives constantly underway to improve the cost effectiveness of our manufacturing.
We have sourcing initiatives. With the dollar strengthening, that helped us.
FX turned negative for us on revenue, but it helped us, at least on the US side, in terms of some of our international source product, it became cheaper for us. We had obviously transportation costs were improved as diesel prices dropped in the quarter.
Our core chemical cost on average for the quarter, were still significantly up year-over-year, and were pretty much—they were up a little bit compared to the third quarter. That will turn in 2009, but in the fourth quarter we still had additional chemical pressure.
If you recall, I think in the summer we talked about—when oil prices were going crazy, and approaching $147 at the time that we did the call in July—we mentioned that we were conducting a study of what happens to the business if oil goes to $200, and that prompted a lot of outside the box thinking, you know, getting together our best engineers, our best designers, our best thinking in the company, our best chemists, and put together a long list of projects that we would do to try to offset the impact of $200 barrel of oil. Well those projects were started, obviously that’s a long list, it will take many years to accomplish, but we got some immediate benefits from that out of the box thinking that started to impact us in the fourth quarter.
John Baugh – Stifel, Nicolaus & Co.
Good. And then maybe a question for Mark, and if you want to give us your thoughts, high and low end of the range on where you think your chemicals are going to be that’s great, but if you don’t, I’m still curious as to what your pricing strategy, it sounds like you’re taking some prices up, keeping prices flat.
Assuming we’re looking at a significant drops in raw materials year-over-year, is there a temptation to lower price at any point? Or do we hold the line on pricing and capture that margin?
Mark A. Sarvary
Well remember that we obviously didn’t raise price at all last year when the costs were going up significantly, and much of the rest of the industry did. We deliberately held off through the year, and we decided late in the year last year, we decided and announced it in around November that we were going to increase prices.
There’s obviously been some easing in prices, but overall, the fact is that our margins—gross margins, have worsened very significantly and we need to improve the productivity front that Dale was just talking about, but also we do need to take a little bit of pricing. We’re doing it quite carefully, we’ve done it very thoughtfully, picking on those products where we have we believe room for small amounts of pricing.
We have experience in the past, which shows the elasticity on our products is very small, and our initial reaction, from what we’re hearing from retailers, is people understand why we’re doing it, obviously, it’s always a challenge to pay price, but we believe on balance, this is the right thing to do. So, obviously, we’ve given it a lot of thought, but no, I think it is the right thing to do.
John Baugh – Stifel, Nicolaus & Co.
Okay, and have you cleared out all the inventory of the dropped SKU’s?
Mark A. Sarvary
Yes.
John Baugh – Stifel, Nicolaus & Co.
Great. Thank you.
Mark A. Sarvary
Thank you.
Operator
(Operator Instructions). The next question comes from Joe Altobello of Oppenheimer.
Joseph Altobello – Oppenheimer & Co.
Thanks, good afternoon guys. The first question, in terms of your retailer base, can you talk about how many accounts you lost throughout 2008 due to bankruptcy, and how many you view as at risk at this point?
Dale E. Williams
I don’t have an account number, I have a door number.
Joseph Altobello – Oppenheimer & Co.
That’s fine.
Dale E. Williams
We lost about 500 doors in 2008 because of bankruptcies. Now, in terms of our total door count, that didn’t show up because we added doors throughout that year.
Joseph Altobello – Oppenheimer & Co.
That’s just U.S. though right?
Dale E. Williams
That’s correct.
Joseph Altobello – Oppenheimer & Co.
Okay, got it.
Dale E. Williams
For the year, our doors are up year-over-year, while we lost about 500 doors due to bankruptcy, our expectation, built into our guidance is that our bad debt expense in 2009, although a lower revenue level, will be similar to what we experienced in 2008.
Joseph Altobello – Oppenheimer & Co.
Okay, and what was the bad debt expense in 2008? I missed it.
Dale E. Williams
I don’t think I gave it, I think it was roughly around $6 to $7 million—somebody will give me an exact number here.
Joseph Altobello – Oppenheimer & Co.
That’s fine.
Dale E. Williams
Eight million dollars bad debt expense in 2008.
Joseph Altobello – Oppenheimer & Co.
Okay. And the allowance for (inaudible) accounts at the end of the year?
Dale E. Williams
At the beginning of the year?
Joseph Altobello – Oppenheimer & Co.
No, no, at the end of the year, what was the account balance there?
Dale E. Williams
Just a second; $6.70.
Joseph Altobello – Oppenheimer & Co.
$6.70, okay. And then, in terms of the ad spend—this is just more of a modeling question, but you mentioned that you expect the same level of ad spend.
Was that a percentage of revenue or was that in dollars?
Dale E. Williams
Percentage of revenue.
Joseph Altobello – Oppenheimer & Co.
Okay, and what was ad spend in 2008?
Dale E. Williams
9.2%
Barry Hytinen
That’s right Dale, 9.2.
Joseph Altobello – Oppenheimer & Co.
Got it. Okay.
Great, thanks guys.
Operator
Next question comes from Bob Drbul with Barclays Capital.
Matt McClintock – Barclays Capital
Good afternoon, this is actually Matt McClintock filling in for Bob. I just have two quick questions, the first one is Dale, it seemed like you were talking about the weakness in the quarter—and maybe I had the wrong impression, but it seems like it got worse during the quarter, could you give us I guess a view of the sales cadence, like the trends per month during the quarter?
Dale E. Williams
Well, I won’t exactly go month-by-month, but when we did the third quarter call, it was mid October, we had already seen a dramatic turn down in the business. We talked about it on the call, we changed our guidance based on that.
We did see the business deteriorate further from October to November. If you look at the ISPA data that’s available, ISPA says for total industry, October was down 23%, November was down 30% because of the pressure on the premium end of the business being more significant then on the low end of the business.
The premium numbers would have been a little bit worse than that then what ISPA’s showing from a total industry standpoint. So we saw a dramatic turn down at the beginning of October, it got a little bit worse in November and then kind of held.
Matt McClintock – Barclays Capital
Okay, and then I guess similar to—in the third quarter you talked about how the overall sales weakness was broad based across price points. Was that the same theme in this quarter?
Or did you see similar to, I guess the ISPA data weakness? More weakness at the higher end of your price point range and maybe stronger sales on the lower end?
Dale E. Williams
No, we continued to see the decline in the business be pretty much across the full price spectrum.
Mark A. Sarvary
Pretty evenly too.
Matt McClintock – Barclays Capital
Okay, and would you say that the trends have held into January as well?
Dale E. Williams
Yes.
Matt McClintock – Barclays Capital
Okay, that’s it. Thanks guys.
Operator
(Operator Instructions). The next question comes from Auri Colt (ph) with Eaton Vance.
[Auri Colt] – Eaton Vance
Good afternoon, and I wish you the best of luck going forward. As I’m sure you’ve observed out in the economy, auto sales down 35% year-over-year in recent months; Tiffany sales down 35% in terms of same store sales.
Clearly, the products you sell are great, but at the same time, they’re considered premium or luxury goods by many consumers. What I’m trying to understand from a marketing perspective, is what are you thinking of doing to try and change the mindset of consumers, going forward, so that when they think about their priorities of how they want to spend money, they’re going to take a Tempur-Pedic mattress from being a luxury, expensive item that they can’t necessarily spend on today with a more restricted wallet, to one that is more important, in the hierarchy, so they actually—more of them make the decision to make the purchase as opposed to deferring or trading down to a more conventional spring mattress?
Mark A. Sarvary
First, I think that as you said, and as you implied, we have seen a certain amount—we have seen a significant amount I should say, of people deferring, people deciding that they’d like to have a Tempur-Pedic, but given the environment they’re going to wait a little while. I think the key to one of the reasons that we have such high expectations for the brand and for the company is because the value that we provide is associated with health and sleeping well, and it is something that is very important to a lot of people.
It’s something which is not really a luxury in the traditional sense. It is only a luxury in the sense of it’s looking after oneself in a way that keeps you healthy and keeps you well, and is in fact the responsible thing to do.
As the baby boomers age, the opportunity is only getting bigger. So we see the underlying trends to be very good, and I think one of the things that’s interesting is that if you think about the cost of one of these Tempur-Pedic beds, it’s literally measured in—of the order of a dollar a day.
It’s a very small investment, and more and more people are seeing it. One of the indicators that we’ve found interesting that sort of tells me that the underlying demand for the product is still there, is that in this last year, despite the fact of all that’s gone on, the number of slots that we have in each retailer is in fact growing.
So retailers and by extension, consumers continue to see that this is something that is not a bauble or an unnecessary luxury, but actually something that is a very sensible investment in their health and their life. An important part, both of the way we’re designing our products and the way that we communicate them and the way that we will continue to evolve how we communicate them.
[Auri Colt] – Eaton Vance
Thank you, and just a follow up, do you have an estimate for what percentage of your buyers finance the purchase either through a credit card or some other sort of zero cost loan program? What I’m just trying to understand is that in the past three or four months, to what degree has that access to purchase been limited and an explanation for why your sales have fallen?
Dale E. Williams
Yeah, this is Dale, we don’t know across the entire population of our sales, the only part of our sales that we know with certainty, is in our direct business, because we do have through a third party relationship some financing available to consumers in the direct business. Historically, the percentage of our direct business that has been financed, not bought with a credit card, because we require all purchases in our direct business, to be paid with a credit card.
But in terms of real financing, 12 months, 24 month type financing, that has been run historically in the 45% range of our direct business. Generally from our retailers, we get the sense that it has on average been about that same; higher at some retailers, lower at others.
Some retailers really emphasize financing as a business model. Some retailers don’t do any financing.
So on average, we’ve always kind of ball parked it at about 45% of our product is financed. You do raise a great point.
The fourth quarter, part of the second leg of turn down that we experienced and many other companies experienced, was a severe tightening of consumer credit financing available. The decline rates that we saw in our own direct business were up significantly of people who wanted to buy the product, but then because of increasing FICA score requirements or their own FICA scores declining, a combination of the both, consumer credit just wasn’t readily available in the fourth quarter, and we kept hearing that repeatedly from retailers as well, that people come in, want to buy the bed, but then they can’t get financing.
So that is something that contributed to the additional pressure of the fourth quarter. Our expectation, obviously, based on using fourth quarter as the foundation for 2009 guidance, is that that will continue.
We’re not going to try to project when consumer credit is going to start to loosen up again, but that is something that was a factor.
[Auri Colt] – Eaton Vance
Got it. Well thank you.
Operator
The next question comes from Brad Thomas, with Key Banc Capital Markets.
Brad Thomas – Key Banc Capital Markets
Thanks, good afternoon. I just wanted to follow up on the door count question from earlier.
As you think out for 2009, what sort of an impact are you banking in from store closures and how are you thinking about total door count growth?
Dale E. Williams
From a door count standpoint, we can’t really forecast bankruptcies, but from a cost standpoint, we’re expecting to incur roughly about the same dollar magnitude of bad debt. So obviously, that would imply some negative pressure on door count.
We also will have some growth endorsed in certain accounts. So on balance, 2009 may be a flat year on total door count, or maybe slightly down.
But we don’t think it’s going to be a big driver positively or negative other then the expense of the write offs.
Brad Thomas – Key Banc Capital Markets
Okay, great. And then Mark, you commented earlier about still gaining a share of slots in 2008.
Are you still thinking that that can be an opportunity in 2009? It seems like the higher end is losing share in this difficult consumer environment, and that customers are trading down in many product categories.
Do you think there’s a risk that perhaps you don’t see the slot growth or could lose some slots in 2009?
Mark A. Sarvary
As I said, we saw slot growth in 2008, in this sort of very difficult situation, and we continue to believe that there’s opportunity for growth in 2009. One of the things that we saw was in the third and fourth quarters, we introduced some new products in the third quarter of last year which have been well received and where they have been distributed have been successful.
We know that there’s potential for those in significantly broader distribution then they are. A lot of retailers were sort of tightening their belts at the end of the year, and were deferring their decision to roll them out to all their stores.
We believe there is an opportunity going forward. So we think we should start the year with a set of products that have potential to increase their distribution and thus increase our overall average slot per store in 2009.
Brad Thomas – Key Banc Capital Markets
Okay, great, well let me add my congratulations as well on some nice execution, and best of luck in 2009.
Operator
Moving on to Joel Havard with Hilliard Lyons.
Joel Havard – Hilliard Lyons
Thank you, good evening everybody. Mark or Dale, I seem to recall that you quit talking about it too specifically, but advertising expense, as percent of sales, had gone from what had been a traditional, call it 10% or 11% to something maybe closer to 9%?
Maybe Dale, you’ll give us a little insight, maybe lower then that Q3, Q4; and then Mark, how does that rate jive with what sounds like maybe a little bit more enhanced advertising effort in 2009? I realize that you’re really maybe talking more marketing, as it pertains to supporting the retailer, but can you combine those possible disparities?
Barry Hytinen
Let me give you kind of the housekeeping side of it, and then let Mark talk more from the strategic standpoint. Third quarter advertising was about 7.3% of sales.
The fourth quarter advertising was about 8.2% of sales. So we did spend less than the 9% in the back half, we talked about the year, we told everybody basically back in April, we would spend less than the average for the balance of the year, because we would try to get the year back in line with what we felt was a reasonable advertising rate.
If you recall, we had a lot of fixed advertising already in place, non-cancelable in the first quarter, and then when the business started to turn south in the first quarter, we couldn’t get out of that spin, so it was very high in the first quarter. Again, the second quarter was higher than our norm expected rate, just because again, some of it was already preplanned, and you couldn’t get out of it.
So the back half was planned to be curtailed to try to get the year back in balance. We did pick up from a percent of sales from 3Q to 4Q, and we think that the 9% level is about the right level in this environment.
I’ll let Mark talk more about the strategic side of it.
Joel Havard – Hilliard Lyons
Okay, thanks.
Mark A. Sarvary
One thing is that we think—I mean it’s hard to tell what the exactly right number is. First of all, we’re very committed to maintaining an appreciable marketing communication, and we think 9% is an appropriate number.
Also, to time it as closely as we can to be timed in sync with the sales. So we expect very close to 9% each quarter.
It will vary up or down 1% or so, but it’s going to be of that order. I think there’s kind of a couple of strategic things.
One is that interestingly enough, we’re seeing, as I’m sure you will have heard, advertising rates are quite low, especially for our type of advertising, cable advertising, and we’re getting quite good rates and we’re also getting quite good returns and even in the first part of this year. So we’re quite pleased with the advertising that we’re running right now.
The other thing is that we’re putting an increasing focus on is our internet advertising. It’s got a lot of advantages.
One is that it’s quite efficient, but also we can pulse it very well, and we can pulse it both in timing and amount and also specifically on different types of office and products, and we’re getting more sophisticated at using that. The third thing is that we’re continuing to evolve—I mentioned that we’re doing some research—we’re continuing to evolve the message that we communicate to consumers.
I don’t want to go into the details of it, but we see some quite good opportunities for improving the precision of our communication and the effectiveness of our communication, which we think will have leverage going forward. Finally, I also said in the prepared comments that we’re working hard with the retailers to provide them with advertising copy that is useful and immediately applicable for them, but which reinforces our message.
It’s really a win-win. It helps their advertising be more effective, and at the same time, it doubles or increases the amount of advertising that we get.
So there’s a variety of different things, it is an important part of what differentiates us, and clearly, it has and will continue to serve as well.
Joel Havard – Hilliard Lyons
Mark thanks for that overview, guys, best of luck!
Barry Hytinen
Joel, one thing, just as a note, since you asked about the historical—this is Barry—on a full year basis, we were 9.2% of sales for advertising. In the full year 2007, was 9.4%.
So really, for the full year, it was effectively flat as a percentage of sales. And operator we’ll take our next caller.
Operator
(Operator Instructions). And the next question comes from Tony Gikas with Piper Jaffray.
Anthony Gikas – Piper Jaffray
Thanks, and my congratulations as well guys, nice execution. A few questions, you talked a little bit about execution of the ads spend.
Any change to the ad campaign or the message? I recognize it seems very fresh, but just curious on that front.
And then the second question, in terms of the next quarter and going forward, it sounds like there’ll be some charges related to the repatriation of some cash. Will you still—should we be using the 34.5% tax rate?
And you’ll give us a non-gap number? I’m assuming that’s how you’re going to do that going forward, and then I have a couple follow ups.
Dale E. Williams
Let me address the financial questions first, and we’ll come back again to the question on advertising. On the repatriation, we believe that we have accrued the appropriate taxes in the fourth quarter.
It may tweak very slightly, and basically what causes it to tweak a little bit is foreign exchange rates. However, we have accrued, in the fourth quarter, what we believe is the total charge for the repatriation.
We’re actually going to pay it in the first quarter. For the additional repatriation that we’re doing in terms of moving cash, that comes at no additional tax, because it was all put into one tax analysis.
So the repatriation, the additional monies that we will be moving from our international operations to the US, come at no additional tax charge. Does that help?
Anthony Gikas – Piper Jaffray
Yep, that’s perfect, thanks.
Mark A. Sarvary
On the ad message, as you said, the advertising is new and it’s fresh and we think that one of our key goals with that was to increase awareness of our product, of our brand I mean, with a target audience, and it really did. We got a measureable increase—I didn’t mention that before—we have had a significant increase in consumer awareness of our product, so it’s worked.
As the environment evolves, and referring to the previous question, there’s a degree to which we want to evolve it from being a message of luxury, to one of health and a sensible investment. It’s not actually a fundamental change, but that is going to be part of the tonality change.
The other thing is, that we’re finding that one of the things that plays incredibly well with consumers is when they hear from other people recommending the product, and we’re going to be leveraging that sort of word of mouth communication quite extensively going forward. And finally, although it’s still not seen, I believe there will be some quite good learning’s coming out of the research we’re doing.
So I do see it evolving, I don’t see us doing a (inaudible) in the short term.
Anthony Gikas – Piper Jaffray
Okay, great. A couple quick follow ups, it seemed like the international business outperformed the domestic business a little bit in the quarter.
Is there a lag in the international business? Is there further weakness to come there relative to the US business?
And then Dale, one final question, what’s in your guidance in terms of FX headwinds for the coming year?
Barry Hytinen
In terms of the international business, we did see a lag in 2008 as we talked as the year progressed, early in the year, the international business was positive. The first quarter the US business was down and the international business still was growing.
We saw that turn in the second quarter, get a little bit worse in the third quarter, get a little bit worse in the fourth quarter. We did see a lag.
We saw different countries get hit at different points in the year. The key thing that we have—and then ultimately in the fourth quarter, we even saw the economic malaise hit Asia.
The US got a double whammy. It dropped significantly early in the year last year, and then took another significant decline in basically late September, early October, this year after the financial markets melted down in the US.
It was partly complicated by the significant tightening of consumer credit. Internationally, we haven’t seen a second leg.
That doesn’t mean there won’t be one, but we think that particularly from a credit standpoint, the tightening of consumer credit that happened in the US happened globally, so that impact is already out there, and so we look at it market-by-market, what’s happening there, and what’s happening in the local environment, and we feel like the international business, on a constant currency business will perform. It performed better in 2008.
It will perform better in 2009. A piece of that is because there are a lot of countries where we have a smaller business base, and even in this environment we’re still getting growth in those businesses, so that mutes some declines in some of the more established markets.
The next part of your question was FX impact in 2009. We do believe that we will have negative FX impact in 2009.
Essentially what we have in our plans is the average FX rate in the fourth quarter will apply to 2009. So to the extent that the dollar strengthens from where it’s at today, actually, today’s rates are slightly less then, or slightly beneficial to what we saw in the fourth quarter.
As the dollar strengthens further, we’ve got a little bit of room there before it hurts us more negatively; if the dollar weakens any, then that will provide some additional benefit.
Anthony Gikas – Piper Jaffray
Perfect, thanks guys, good luck.
Operator
That does conclude the Question and Answer session; I would now like to turn the conference back over to you for any additional or closing remarks.
Mark A. Sarvary
Well thank you everybody and we look forward to talking to you again in April, when we will review the first quarter. Thanks for joining us tonight.
Operator
And that does conclude today’s conference. We do thank you for your participation.