Good morning, everyone, and thank you for attending Tempur Sealy's 2015 Investor Day. I would also like to welcome those listening in via the webcast this morning. I'm Mark Group, Vice President of Investor Relations with the company. We're going to go through a formal presentation. Mark Showery is going to talk about our investment highlights and strategy.
Tim Yaghi is going to discuss North America. David Montgomery is going to review international. And Dale Williams is going to discuss the financial overview. We also have Barry Heitman here with us today in the back of the room. At the conclusion of the presentation, we will do Q and A here in person and also via the webcast.
For those listening via the webcast, please email your question to investor. Relationstempersealy.com. We have a lot of content to go through this morning. So I'm going to read the forward looking statement, and then we will get started. Forward looking statements that we make during today's event are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that forward looking statements discussed today will include a number of the company's expectations regarding its key strategic growth initiatives, growth priorities and future performance. Actual results may differ materially from company expectations due to a variety of risks, uncertainties and other factors that could adversely affect the company's business. The types of forward looking statements and certain of the risks, uncertainties and other factors are described in today's presentation, which was also filed with the SEC on Form 8 ks. Investors are urged to review this disclosure. These factors are also discussed in the company's other SEC filings, including those identified in the presentation today.
Any forward looking statement speaks only on the day in which it is made, and we the company undertakes no obligation to update any forward looking statement. With that introduction, it's my pleasure to turn the presentation over to Mark Sarvey.
Thanks, Mark.
Well, good morning, everybody. Excuse me, good morning. Welcome to the 2015 Tempur Sealy IR Day. What I'm going to cover today as an introduction is 4 topics. I'm going to talk about our investment highlights.
I'm going to talk a little bit about who we are, what we do, and why we believe Tempur Sealy is such an exciting investment. I'm going to talk about the industry landscape only briefly. I'm going to talk about it a little bit, but I'm going to do it to set the context for the strategy. And then I'm going to spend quite a bit of my time talking about what we're going to do to capitalize on the opportunity that we have. And finally, I'll wrap it up with a summary before handing it over to the next speaker, Tim Yeager.
So Tempur Sealy, following the merger with Sealy in 2013, is now the largest and only truly global bedding company. We have a comprehensive portfolio of iconic brands, and both those words are important. It's a portfolio of brands, meaning there are many of them, and they're iconic. They're strong. We have a complete and complementary product offering.
The whole range of products, all technologies, all price points. We have a strong management team, a strong and established management team, and who are executing a compelling strategy. We have significant sales, margin and earnings growth opportunity, and we'll talk about that throughout the day. And importantly, as ever, but it's always important to emphasize, we have very strong cash flow. We are genuinely global.
We compete in over 100 countries. We're particularly strong in Europe, in North and South America and Asia. And it's important also to notice that we compete or participate around the world largely through wholly owned subsidiaries, but also through third parties and also through licensees. So we compete and we'll talk more about that and David in particular will talk more about that, how we compete in different parts of the world. But we are well represented all over the world.
This is
the portfolio of brands I was talking about. Tempur Pedic, Stearns and Foster, Optimum and then the 3 sorry, Optimum, Posture Pedic and Sealy, the 3 Sealy brands. It's important that not only are they strong brands and good brands, understood and known by the consumers, but that they're different to each other, that they appeal to different consumers and that they are in a hierarchy, a hierarchy from value to luxury, even super luxury. And these brands are good. For example, Tempur Pedic is the brand in the U.
S. Most people are interested in buying. Stearns and Foster is the number one brand in the U. S. In luxury inner spring sales.
And Sealy is the number one brand in total awareness and the number one brand people are most likely to buy. So a strong set of brands that play different roles and serve the needs of different consumers. And we have a complete range of products. All types of product from inner spring to foam to viscoelastic to Tempur material and also other parts of the portfolio other than just mattresses and I would call particular attention to the adjustable basis. Adjustable basis are a crucial part of our business.
It's a growing part of our business. And as you'll see, not only is it driving growth on the top end, it's driving growth for retailers and AUSP, average selling prices throughout the industry. And we also have a series of other products like pillows and other accessories, complete products as well as a complete range of brands. And we have a strong and established management team. Most of us have been together now for 6 or 7 years.
We've had a couple of new additions recently. Tim Yeagy, who you're going to hear speak in just a few minutes, joined us a couple of years ago. And Jay Spenshin has just joined us as a CMO. But the team has been together for some time. We're a strong team.
We work together well. But we also have a lot of all of us have backgrounds in big companies who are consumer focused companies, consumer and innovation focused companies, very consistent with what we do here at Tempur. And importantly also, given the structure of our company, all of us have international experience. Now this team, this group is working against our strategy. And this strategy here, I've summarized it on one page.
Clearly and obviously, the strategy is based upon delivering value for stockholders. And if you look on the right hand side, that is driven by the fact that we have what we're calling our evergreen targets, an ongoing set of targets that we anticipate for the foreseeable future of a top line growth of 6% and an EPS growth of 15% and a strong cash flow both to reduce debt and to return value to stockholders. Now this is being achieved by these 5 pillars on the left hand side. Number 1, to leverage and strengthen our comprehensive portfolio of iconic brands and products. Number 2, to expand distribution and seek highest dealer advocacy.
It is important not only to be in distribution around the world and all over in all the different types of stores and retailers, but also to be advocated for by the people in those stores. Thirdly, to expand our margins and a focus on driving significant cost improvement, And we'll talk about that throughout the day. We're going to leverage our global scale for competitive advantage. And you'll see how having that scale is inherently useful in helping us be competitive everywhere where we compete. And where appropriate, we'll make accretive acquisitions of licensees and joint ventures.
So that's the strategy. Now this is the first time we've presented it in this format, but essentially it's the same as we've been talking about for some time. Indeed, we've been doing essentially this for the last 5 years. So let me just talk about what we've achieved over that last 5 year period from 2,009 to 2014. We grew Tempur Pedic U.
S. Net sales in 2,009 from $525,000,000 to $1,000,000,000 last year, a 14% CAGR. And that increased our market share from 8% to 13% over that period. Now there were many things that were done to achieve that growth, but the biggest single one was the introduction of the cloud mattress. And it's important to call it out because the cloud mattress broadened the appeal of the Tempur material.
It broadened it from a group of the number of people, the proportion of people who like sleeping on Tempur was significantly broadened by adding the cloud. And as a result, it broadened the target market and essentially drove the doubling of the size of the company. We grew at the same time international net sales from $306,000,000 to $472,000,000 Now that was done again in a variety of ways. We increased distribution, brand awareness, and we also expanded the product offering overseas. But we also positioned the company for growth going forward through the acquisition of 3rd party distributors, including China, Korea, Brazil and Mexico, setting a stage a base for growth going forward.
We responded aggressively when the competitive environment in 2012 changed in North America. Many of you know about this when there was a significant entrance of successful competitors against Tempur in 2012. And as we said at the time, we were going to take significant action and we did, completely revamping the Tempur North American mattress and adjustable base product offering. In fact, these products that you see here are like the final steps in that conversion of the entire product line that we initiated at the end of 2012. And we also strengthened U.
S. Retailer economics. And we did that to make sure that we got that advocacy that we needed to support us going forward. We said we were going to do it. We've done it.
And it's now driven our business. Also in 2013, we completed the strategic acquisition of the Sealy Corporation. Now that created significant stockholder value. Since the day we did that since the day before we announced that acquisition, the share price doubled 100% accretion. But importantly, as I've been saying, now that we have the 2 companies together, we have this complete and complementary brand and product portfolio, and of course, the unique global capabilities.
So it has created a much more powerful company going forward. Another theme is that we have returned value to stockholders. So throughout this period, we bought back 20,000,000 shares between 2,009 2012. And our EPS in 2,009 was $1.12 and in 2014 last year was $2.65 a 19% growth. So my point is we've been doing this strategy for some time and it has been delivering.
But now talking about the most recent year 2014, obviously we remain focused on execution. In 2014, our net sales increased. Now increased 21%, but that's not comparing a full year of Sealy. So on a consistent basis, net sales grew 8% if we'd have owned Sealy for all of 13%. Our adjusted EPS grew 11%.
Now in constant currency, that would have been an 18% growth. And you're going to hear throughout this presentation today, currency is an issue. It was an issue for us last year. It's going to be a bigger issue for us this year. So constant currency would have been an 18% growth.
Our operating cash flow last year was $225,000,000 versus $98,000,000 in 2013. And we reduced the debt by $234,000,000 consistent with the strategy that we said that we will be deleveraging after the Sealy acquisition. From an operational point of view, there were several things that we did, but the most important, the big one was we returned Tempur North America to a position of strength and growth in 'fourteen. Tempur is growing again, which was, as I said, in 2012 was the critical issue. The first and most important thing was to get Tempur back and growing.
And it's growing on the top line, and you'll see that as we exited the year, significant growth in margin as well. And Dale will talk more about that in a minute. The organizational integration with Sealy is essentially complete in North America. And this was a big task. 2 big companies put together over the last 18 months, and that has gone really quite well.
But that is it's not over completely, but it's essentially over. And now the 2 companies are operating as a single unit. We also acquired some strategic growth platforms and divested some non core assets. We acquired the Sealy rights in Europe and in Japan, which is going to be the basis for growth going a significant basis for growth going forward. And we divested some non core assets, the Sealy Spring manufacturing plants, which were non core and we used that to pay down the debt.
And in the end of 2014, we initiated some major cost reduction products related to Sealy specifically in later part of the year. We'll talk more about that, but that's been an important focus for the last part of this year and for this year and the coming year. But altogether, our focus on execution has positioned us for enhanced future growth and continued margin improvement. These are our base growth targets that we first announced at our earnings call 2 weeks ago. 6% top line growth, 50 basis point improvement in operating margin, deleveraging to 3 times and returning value to shareholders.
And Dale is going to talk more about that. That's slightly different than what we talked about before. Dale will explain more about that. But deleveraging to 3 times and returning value to shareholders and an adjusted EPS growth of 15%. As I said, these targets are these are evergreen targets.
These are targets that we anticipate doing every year when we're here, we'll talk about these targets because they're going to be consistent. As I said and we've said repeatedly, these are constant currency targets. Quite honestly, right at this moment, currency is a very significant headwind. At other times, it will be a benefit, but these are constant currency targets. However, having said that those are the targets, internally, we're targeting higher.
Internally, our target is 100 basis points of operational annual operating margin improvement. And I want to call out here 4 projects. This is not the complete list of projects that we're working on, but it's 4 projects. And collectively, they're worth $125,000,000 $125,000,000 give or take is 300 basis points of margin improvement. So if we assume that we do these over 3 to 4 years, these alone would contribute that growth in operating margin.
Now as I said, I want to stress, this is not the complete list. These are all, however, they all have the characteristic of being a single thing that happens once. They are not, for example, continuous improvement product projects or ongoing productivity improvement. These are major projects. The first one is the Sealy U.
S. Gross margin improvement. We'll share some numbers with you, but while there has been some good progress in getting sales of Sealy really accelerating last year, the margins were not where we want them to be. And it's from a variety of sources, but largely from the manufacturing and the distribution. And we'll talk about the process that we have in place.
We've set ourselves the target though to raise 20 fourteen's margins of 30% to 33% by 2018. That by itself would be worth $45,000,000 We're going to constrain our operating expense growth so that we move from a 29% combined operating expenses to 28%. That will provide an additional $30,000,000 We've talked about our cost synergies. When we first bought Sealy, we thought there would be about $40,000,000 We raised it to $70,000,000 We've achieved $45,000,000 and we have another $25,000,000 to go. So those $25,000,000 of synergies are part of this group.
And finally, pricing. We raised some prices last year and we're raising some more prices are being raised in March of this year. And they collectively will contribute $25,000,000 in operating margin. One note on that. If you remember in 2012, one of the most important things was to get Tempur back in a position of brand strength.
A real measure of that is the ability to raise prices. These are the first time we've been able to raise prices on existing products for some time. So this is a good sign and this is this collectively is worth $125,000,000 And as I'm saying, these alone provide a 300 basis point operating margin improvement. Now this is consistent with what we're forecasting for 'fifteen. This is our 2015 guidance.
And if you look at those 3 metrics, our sales growth, our operating margin and the adjusted EPS, Corrected for the significant headwinds of FX that we will experience this year, sales growth at the midpoint of our guidance would be 7%. Our adjusted operating margin growth would be approximately 115 basis points and our EPS growth 20%. So the plan that we're laying out is consistent with what we're in fact, 2015 is slightly ahead of this plan that we're laying out. So that's an overview. Let me just step back a minute now and talk about just for a minute about the industry.
I just want to set a bit of context on the industry to set the strategy in context. The industry is large and it is growing, dollars 22,000,000,000 and growing about 5%. It's big and it's growing, but it's evolving. It's evolving and it's evolving particularly in the U. S.
There are a variety of ways that you can look at this evolution. But here are 4 of the things that I think is important to consider as you think about this industry. The first obviously is that there is consolidation of the manufacturers. Tempur and Sealy, the recent merger, but obviously Serta and Simmons too are a single entity today. Now from a Tempur Sealy perspective, obviously we've led that consolidation.
But moreover, our portfolio of strong brands and the complete range of products puts us in a very strong position. Secondly, the U. S. Bedding specialty stores are consolidating, and particularly obviously Mattress Firm, which is growing significantly. From a Tempur Sealy perspective, we have a very strong strategic relationship with Mattress Firm, and we also have a very strong market share of their business with Mattress Firm.
So as they grow, we grow. New channels are emerging. There are always new channels emerging in this industry, but the new but they continue to be. And in this at this moment, I would say 2 that are worthy of focus on are the electronics retailers, the electronics and appliance retailers like P. C.
Richard. Also Wayfair and other which I'm using as an example of the growth of the online retail of furniture, which is something just starting off. As many of you know Wayfair is an important competitor in that. Again, from a Tempur Sealy perspective, we have a single sales force with a complete range of products and a complete range of brands. This means that when we're calling on a P.
C. Richard or whoever, we have that the sales team has the ability to offer a product range that is of all kinds and all types and optimize it for a given retailer. From an online perspective, Tempo was born of an online company. We started off as a direct selling model. This is in our DNA.
So this direct selling is something that we know well. And finally, from a technological innovation perspective, one can argue that there haven't been very many technological innovations in this industry. And there are more, but I would say there are more coming. And I would say it's good for the industry because this is what will encourage consumers to buy beds more frequently. As you'll see, and I'll talk about it in a minute, beds are not people are not accelerating the rate at which they buy beds.
We need in order for that to accelerate to provide a reason for somebody to swap out what they have. Two examples here are the adjustable base, which is something that was almost unknown a decade ago and now is a very important part of our business. And the removable washable cover, which you'll see on some of our new mattresses over here. Now Tempur has always been an industry leader at investment in product development. So Tempur Sealy is well positioned to capitalize on this evolving industry.
So just with that little sidestep onto the landscape of the industry, let me talk now about our strategy. As I said, this is our strategy and it has these 5 pillars, leveraging and strengthening the iconic brands and products, expanding our distribution and seeking highest dealer advocacy, expanding our margins with focus on driving significant cost improvement, I talked about that, leveraging our global scale for competitive advantage, and accretive acquisitions of licensees and joint ventures when it makes sense to drive 6% top, 15% bottom line growth and strong cash flow and value for our stockholders. Now before I talk about those specific elements and particularly about brands and products, I think it's important to step back and look at how this industry grows. I showed in a previous chart it grows and when later on we'll show you the U. S.
And it grows there too. This is the U. S. Data. It is remarkable for this industry that for the last 15 years the number of mattresses sold is essentially flat despite a significant increase in the population.
Now you can argue and I think there is a degree of truth that there is some pent up demand in there, but it is flat. All of the growth has come from price, all of it. And if you think about what drives price, there are 2 things that are consistently going to be able to get consumers to pay more. 1 is innovation of product and the other one is brand strength. Brand strength and innovation drive the ability to drive price, which is the only way to drive growth in this industry given this extraordinary flat line on mattresses.
Now not surprisingly, in the box up there, Tempur Pedic accounted for 22% of the mattress industry growth from 1999 to 2014 because Tempur Pedic has always been focused on AUSP, average unit selling price. In fact, if you look just over the last year, this chart could be extended back a long way, but if you look over the last few years, Tempur has always been committed to raising AUSPs. Now clearly that's good for us, but it's good for the retailers too. So it's very symbiotic here. The middle line shows that the Tempur Pedic U.
S. Mattress AUSP has had a 6% CAGR since 2011. Sjerns and Foster starting from a lower base has had a 7% CAGR. But in many ways, the most interesting line is the top one. That's the U.
S. The Tempur Pedic U. S. Average transaction value, and that has grown at a 9% CAGR. And the transaction is essentially much higher because it includes a foundation, but it includes increasingly an adjustable foundation, which roughly speaking doubles the price of the bet.
This is really where the retailers have to be focused and where they increasingly are And we're driving that top line is where it's beneficial to us and beneficial to the retailers. And that is why we have this symbiotic relationship with them. So to have that growth driven by brands and innovation, we have and will continue to invest significantly in branding. We've invested over $500,000,000 in global marketing in 2014. And you can see that it covers all types from television to digital, all types.
But we have achieved that brand strength by investment over the years. It's an independent research that asks consumers which brand are you most likely to buy. The combination of Tempur and Sealy, 35% of people say that's the one they're most likely to buy, more than twice as much as our nearest competitor. People say that they will buy Tempur and Sealy. So if you're going to carry products in a store, it makes sense to carry those brands that are the most well known.
And those brands being so branded and well known command a price premium. But then the second thing is the innovation. And over the years, we have invested significantly in innovation, effectively 2 times our nearest competitors. We've invested in innovation to drive products that make consumers be prepared to pay a premium for a product that's better than what else is on the floor. So in 2014, we had a record number of product introductions.
It was in fact the biggest number of product introductions we've ever had. But the important much more important than the number was that they delivered compelling consumer benefits, and as a result drove market share increases. Tim will talk more about this, but the new Tempur Cloud and Contour were very well received but quite different to what they replaced. The Stearns and Foster, which is at the back of the room, there was a beautiful, beautiful addition to our portfolio. But we broadened and strengthened and raised consumers predilection, that's probably the wrong word, but willingness to pay more because of these superior products.
And this year, we're going to do it again. The Tempur Flex product, which is in the back there, we'll talk more about that. But that product is remarkable. It's very, very well received. And like the cloud, it appeals to a very different group of consumers.
The Posturepedic, the new products there, the complete line of new Posturepedics from what we've spoken with retailers already, that's going to get expanded placement. Again, we are continuing to do this and we have a robust future pipeline. So we have strong brands and strong products and so we have strong distribution. Tempur has approximately more than 15,000 points of distribution around the world. Sealy has nearly 17,000 points of distribution around the world.
And it's in every channel, furniture and bedding, department stores, warehouse clubs, company owned stores, and we'll talk more about that, but we have 100 company owned stores, electronics and appliance manufacturers retailers, mass merchants and obviously direct and hospitality and contract. But as I said in my opening comments, it's not enough to just be in distribution. We need advocacy when we're in distribution. And advocacy has two sides to it. You need the advocacy of the owner of the retail establishment who's going to put your products on the floor and encourage his or her people to sell them.
And you need the advocacy of the person in the store. You need when somebody walks into a store, the person they meet advocates for Tempur City Brands. And in order to drive for that, we have a series of very important tasks. Clearly, the first and biggest is to have the best brands and the integrated product portfolio that allow us to provide them a complete range of what they need. In store marketing and training is critical to help the people in the stores be most effective at selling the product.
But remember, if you have a complete range of product from top to bottom and they are all logically linked so that the person in the store can explain to a consumer why each one is different to the other and why this one is superior to that is superior to that. And it is a single message that a single salesperson is explaining to the RSA with a single portfolio. It makes it very logical and very easy. It makes it easier to sell. It also allows us to do category management.
In many industries, profit optimizing by slot or by SKU is something that is more sophisticated than in this. But now having this portfolio and the ability to look at each slot and it's what it's delivering, we can work with retailers to optimize profitability. But overall, collectively, it is crucial not just to be in distribution, but to provide the best dealer support. Now I said a little earlier that we are the industry's only truly global company. And I also said that we compete in various ways around the world, whether it be in most cases directly or the most of our volume is done directly.
But we compete in various ways with licensees and with joint ventures, for example. But our big areas are North America, Europe and Asia. If you look at the parts of the world, a very simple coding here. Blue means we're the leader. Green means we're in the top we're a major player.
We're in the top 5. So we're a major player. As I think most of you know, around the world brands are different in every area of the world and around the world it tends to be quite fragmented. So we're a major player wherever it's green and we are a leader where it's blue. What you can see is while we are globally the leader, in any given environment, we're relatively we have room to grow.
We're not the leader and we have room to grow. So the way we we believe there's a lot of opportunity. We have a lot of it. We're established in many places. We have room to grow.
However, the way we're going to grow in each place is not the same. So forgive me this eye chart for a minute, but I think I just want to lay out how to think about this. If you look at the different areas of the world and I hear of simplistically US, Canada, Europe, Asia Pacific and Latin America and you look at the ways consistent with our strategy that we can drive growth, Product innovation, marketing, leveraging distribution synergies, and just to explain, a distribution synergy means in an area where Tempur has much distribution, but Sealy doesn't, it gives us the ability to get more Sealy distribution. In an area where Sealy has distribution, but Tempur doesn't, gives us the opportunity to get more Tempur distribution. Opening our own stores and leveraging joint ventures.
In the U. S, while there will be some distribution synergies of Sealy and Tempur where there are areas where one or the other is stronger and can help the other ones, Product innovation and marketing is going to be the key to driving our growth in the U. S. In Canada, that's true as well, but in Canada, Sealy has better distribution than Tempur. And so that gives Tempur the opportunity to leverage on that synergy.
In Europe, clearly product innovation and marketing are important, but the big driver of growth right now is that we have very good distribution of Tempur in Europe. We have very little distribution of Sealy. So that is going to be a big driver of growth in Europe. And in Asia Pacific, we have again the similar set of things, but the big driver is opening our own stores. It's a little different by country, but in general opening our own stores is going to be a big driver of growth.
You can see I put a box around opening own stores in Tampa, North America. We have some stores, but they're marketing stores. They're not really a point of distribution. They're more of a marketing communication. They're successful and we'll open more, but they're not a big part of the distribution.
But having said that it's different in different parts of the world, we will capitalize on the fact that this global scale gives us capabilities that provide a distinct advantage working together. 1st and logic and most obviously is product development. The product development that we have clearly benefits all around the world and that can be procurement obviously, but also R and D and engineering and design. Distribution, and what I mean by that is, we can develop a product in one country, prove that it's successful and then roll it out to other countries. The best examples of that are the Cloud and Breeze beds, which were developed in the U.
S. And then rolled out to the rest of the world. But right now, we're rolling out Stearns and Foster and the Sealy Hybrid around the world. And finally and importantly, brands. The brands are well known.
They're more well known in the U. S, but the brands are known around the world, and we intend to develop them. And importantly, we intend to develop them with the same brand positioning all around the world. So we're uniquely positioned to capitalize on this integrated product and brand portfolio on a global basis. As I said, while most of our business overseas is done through wholly owned subsidiaries, we do have a significant component of our business done through either licensees or third parties.
In 2014, I mentioned on the right hand side that we bought the Sealy or we acquired the Sealy brand rights in Japan and in Europe as well as Southern Brazil. We also acquired the Tempur rights in Mexico. But you can see that there's more than a dozen existing licensees and third party distributors for Sealy and some 65 Tempur third party distributors in small countries around the world. We have 2 important joint ventures. The Asia joint venture is a partnership with the Sealy of Australia, our Sealy licensee in Australia.
And we have a 50% ownership of this, and we have the rights to buy the remaining 50% in 2020. Today, in 2014, it has approximately $100,000,000 of sales, and it's had a 25% CAGR since 2009, and it has an accretive operating margin. So this is something that is growing and will continue to grow and is an important driver of growth for Sealy in Asia and will be wholly owned, we expect, in 2020. And that's in the markets that you can read on that list, but China, Hong Kong and so on. Obviously, it does not include Japan.
The other joint venture that I wanted to mention is, it's Comfort Revolution. This is a 45% owned joint venture where we're teamed up with a industry pioneer, the man who founded Sleep Innovations. And these are value priced mattresses and pillows that appeal to a different target user group, but that too we have the right to buy the remaining 55% of in 2017. So in summary, we have a great opportunity. We have a clip and we have a very clear plan, which we're executing against.
It's quite simple and we're executing against it. Leveraging and strengthening this portfolio of brands and products, expanding distribution and driving advocacy, expanding our margins with a focus on driving significant cost improvement, and that's an important component of what we're doing, Leveraging our global scale and as appropriate accretive acquisitions. To drive for these what we're calling the base growth targets of 6% and 15% and strong cash flow to reduce debt and return value to stockholders. As we said, as well as the 6% and the 50 basis point base target and deleveraging to 3 times and returning value to shareholders, we are targeting an internal target of 100 basis points of annual operating margin improvement every year. And as I said, targets are based on constant currency.
It's an exciting and very clear
path to
see how to achieve this, and we're working on it right now. And I think it's important that I use the word we are working on it because one of the things that is very important is that Tempur Sealy has a unique culture and group of people working within it. We have a great group of people, very dedicated. We use the phrase committed, capable people with strong shared values, but it is really one of the great strengths of our company. So we're excited.
We have a great plan and we have a great team of people working against it. So with that, thank you very much. And let me hand it over to my colleague, Tim Goede. Tim? Thanks, Mark.
Good morning, everybody. Appreciate the opportunity to be here. I'm the Chief Operating Officer. I have been with the company about 2 years now and I actually joined just prior to the integration of Sealy. Bulk of my career the bulk of my career was actually with Whirlpool Corporation.
I had a number of different positions up through my last position at Whirlpool, which was the EVP of North America Operations. And one of the things I got to experience at Whirlpool was the integration of Maytag. It was a huge challenging and very rewarding opportunity to go through that. And I think the benefits, the lessons that I learned were very relevant here as I come into this great assortment of brands and products and have to do similar things to bring the 2 companies together and make them effective. So that was really attractive to me and I'm looking forward to continuing to drive that progress.
This morning, I'm going to talk to you specifically about North America and really the U. S. And Canada. And that's collectively about a $2,400,000,000 business for us. As Mark said, we have a tremendous collection of brands, iconic brands, well known brands, desirable brands for consumers that cover key price points, key technologies and that fit together really nicely.
What's great about our portfolio is if you walk into a consumer if a consumer walks into an outlet, no matter what price point, what technology preference that consumer wants, we have the right product. We have the right brand. We have the right technology. We have the right feel. So we have the ability to serve the needs of virtually any consumer and that's a huge advantage in the way that our portfolio both fits together and covers the industry collectively.
The brands fit together well. There is some price point overlap. For example, Stearns and Foster does go up above $2,000 where Tempur plays, but that's okay because the brands are positioned very differently. They have different aesthetics. They have different brand promises.
So the Tempur brand, for example, is all about the best sleep of your life. Tempur brand has the innovative and unique Tempur Foam. Tempur Foam delivers nothing there's nothing else like it in terms of the support, the ability to adapt to your weight and shape to give you the best sleep of your life. That's what Tempur is about. If you're a Stearns consumer, you appreciate the finest materials, the best craftsmanship, the way it's constructed.
And it's aesthetically very different. It's much more traditional. It's a beautiful bed. And as you can see from the back compared to the Tempur products on the side, very, very different, one a traditional appeal and one a much more modern appeal. So very different positioning to appeal to different consumer groups.
Posturepedic has historically been about back support. And we're really recommitting to that positioning. It's a compelling positioning. It worked for many, many years decades for Posturepedic and we believe there's a great opportunity to recommit to back support as we build equity in that Posturepedic brand. And then the Sealy brand really covers the value segment.
It's a good value for the money. It's a trusted brand with a good value. So it's really important that we have distinct positioning against compelling consumer targets and that we deliver those positionings with our product development and with our messaging. We have a complete range of technologies from Tempur material that's in the cloud and Kontoor to hybrids. Hybrids is defined by us as half spring and half foam.
It's been well received by consumers. They view it as innovative. This half and half, the best of both worlds. It was actually an innovation of the Sealy marketing group and it's done extremely well. So that's an important part of our portfolio as well.
And of course, we have our innerspring. A large portion of our volume is the classic traditional innerspring beds. And then we have other more niche opportunities. We have the gel memory foam beds in the Optimum brand, Sealy Optimum, and that's the brand that fits below Tempur and covers the price points below $2,000 We also have a niche product with adjustable comfort with Tempur Choice. And for those who prefer the feel of latex, we actually have latex as well.
So again, whatever product technology, whatever price point you're looking for, whatever brand most appeals to you from an aesthetics or a messaging standpoint, we have it for you. We have a great assortment of adjustable bases and adjustable bases have done extremely well for us this past year And I'll talk a little bit more about that as well. And then to finish out the range, we also have an assortment of pillows and toppers. Those are primarily the drivers of our non bedding assortment, okay? So that's a little bit about who we are and what we offer.
I'll talk a little bit about the U. S. Industry specifically. In 2014, the industry hit about $6,000,000,000 and you can see that since the recession, the growth has been fairly healthy. We've seen nice year over year improvements and $6,000,000,000 in wholesale would be an all time record for the category.
Interestingly though, if you look at the unit performance, which is the red line, even in 2014, the units in the industry were still not at the levels that were achieved in 2,007 and any year prior going back to 1999. So it's possible that there's some pent up demand out there. So again, what's driven the growth in dollars to get to $6,000,000,000 is average pricing. Average pricing has gone up to nearly $300 at wholesale. And certainly, Tempur Pedic brand, in particular, has continued to achieve price appreciation and has been a big part of that appreciation and growth in the category from a dollar standpoint.
The other key driver for us is adjustable base shipments. In 2011, we believe the category was around $200,000,000 And in 2014, it was actually $500,000,000 And certainly, Tempur Pedic has been a key driver of that improvement. In fact, right now more than half of the beds, slightly more than half of the beds, Tempur mattresses that are sold and adjustable bed goes with it. People really appreciate the ergonomics and it's been a nice ticket driver for the trade as well as a margin dollar driver for us. A little bit about 2014.
2014, as we completed the organizational merger, was a lot about building capabilities, building the capabilities to successfully manage this great portfolio of brands and products. So we worked hard on our product development capabilities, the ability to launch effectively, to execute really well with a broad number of brands and products that were being launched, not only in 2014, but going forward. A big part of our strategy is to continue a stream of innovative products and we need to be able to execute flawlessly. So we put a lot of process rigor in place, stage gate processes, made accountabilities clear, and I think we've done a lot a great job in raising our game in terms of execution. And building our pipeline, we have spent a lot of time and effort to make sure that not only in 2015 in the products that I'll talk about, but in 'sixteen and beyond, we're going to continue to have a stream of great innovation.
I'm already very excited about what we're going to bring in 2016 and we'll continue to build this pipeline. And I should also call out that it's a global pipeline. It's really important to understand that to the degree that we can leverage our global scale, we have an advantage that no one else can match in our industry. So we're working really hard to make sure there's global leverage as well. From a brand marketing standpoint, we had to build our muscle in this marketing area now that we have a portfolio of brands.
So we brought in some talent. We have brought in a media expert who we never had before, who's done a terrific job in giving us good buying power, a PR expert who we've never had before. And as Mark said, a very experienced and capable CMO who was really attracted by the opportunity to take advantage of these great brands and make them even better. So building some nice talent there and I think it showed in our creative and our media plans, which I'll highlight in a second. We're also working really hard on serving our customer better.
So the channel has been changed where now our field organization is combined. The benefit of that is any Tempur Sealy employee now who walks in a store can articulate the portfolio and how each element fits together. So the RSA can now understand how to take the consumer to the right bed for that consumer, the right price point, the right field, the right technology, all coming from 1 rep. So the story hangs together really well. The other thing it does is it gives us productivity because now we don't have reps driving past each other all day.
We have more selling time versus driving time. So I think that's a really important change, and I think it's going to benefit both us and our customers. Category management, we've built this muscle. We want to be the company that goes to our customers and helps them make more money. What should be on their floor that's going to turn really well?
How do you drive ticket? What are the right promotional activities to get the most out of your investment? And we've made a lot of good progress there. And then operationally, a lot of great progress, and I'll talk about this in a bit, both on the logistics side, combining our network as well as kicking off a really, really important initiative for us, which is the Sealy manufacturing transformation. So in 2014, just quickly, we had a record number of launches.
All were delivered on time with high quality. We had all the supporting materials available right at the day of launch and they were compelling. And we did a good job in the transitions. There were a tremendous number of products to transition on sales floors and that went really well also. But not only did we execute, the products contain compelling benefits, right?
And that's really what's important. Did the products appeal to consumers? And with the features that we brought, they absolutely resonated well with consumers and we feel great about that. We put a lot of attention into consumer research and what was going to trigger the best reaction, the best appeal and we certainly feel like we delivered that. So we built this capability.
I'll tell you in 2014, the cloud and the Kontoor launch together was the largest ever, and we can certainly say it was very effective, and we're very pleased with the outcome. Stearns and Foster was launched in 2014 and delivered an all time record sales record for the brand. The product is beautiful. I hope you try it out and take a look at it before you leave. We also launched the new Sealy Innerspring product at the lower end and returned it to double digit growth, putting a good price value out there for the consumer.
And then Sealy Optimum, which is the gel memory foam bed below $2,000 to complement Tempur was also reinvigorated and I think definitely improved in terms of aesthetics and feel. So a nice job by the team and I think proving the capability that we can do this again and again. We had solid growth from other product categories. So despite the fact that we had these big launches, we also continued to get good business from Posturepedic. The hybrids continued to sell well.
Posturepedic, which was not new, sold very well. Adjustable bases were substantial in terms of the year over year performance. And then Tempur Breeze, interestingly, because it offers a great benefit of cooling, even though it wasn't new, continued to sell very well. And I think what is important here to take away is that the portfolio can work together. And you don't have to have if one product or brand is up, another is down.
In this case, we had strong performance across the portfolio and I think it's proof that this portfolio fits together well, works together well and we can be up across the board with the right appeal and the right execution. I think we did a strong job on our media buying. We were up nearly well, actually more than 20% year over year in the TRPs that we delivered, the target rating points in advertising. And we improved the creative. We spent a lot of time researching different campaigns to see which would be the most appealing.
And the campaign that we have on TV now has performed extremely well. It tested well. Our customers tell us that it works very well, that it's driving traffic for them. And we're very pleased with the way that that has gone as well. Just to give you some evidence, I said the target rating points were up more than 20%.
We saw adjustable base sales grow 32%. And a big part of that was because we featured it in the advertising. The other reason I think that they were up is when we launched Cloud and Kontoor, we made a concerted effort to put adjustable bases on display on sales floors under those products. And the ability to demonstrate them made a big difference as well. Again, back to the advertising effectiveness, our website visits were up 24% and retail locator visits, which obviously is an indication that the person is ready to buy and wants to know where to go buy, was up 62%.
So, terrific results. And between that and the discussions that we've had with the trade, we think our campaign was very effective. So, what are we going to do in 2015 to continue this market share momentum that we achieved in 2014? One of the things that I'm extremely excited about is our Tempur Flex. Tempur Flex really represents a third feel for the Tempur brand.
Contour is the traditional Tempur feel. It's a little bit more firm and adaptive. Cloud is what we call soft and supportive. And both of those have done very well, obviously. And people who own those have high loyalty, have high satisfaction.
But the interesting thing is there are quite a few consumers who prefer neither the cloud nor the Kontoor feel. It's just not the feel for them. And so our challenge was how to bring the benefits of Tempur to a group of consumers who didn't like either of those feels. And what we did is we created a bed that still had the essence of Tempur benefit, but was more responsive, a little bit more springy and helped you and made it easier makes it easier to move around in the bed. We innovated the foam so that the Tempur foam in this bed will actually recover 3 times more quickly than normal Tempur foam.
And we actually have an innerspring support layer, which is very dense and was specifically designed to work really well with the Tempur material. And the outcome is what we believe is an outstanding feel. It's a terrific feel and we believe it can be incremental because it now appeals to a group of consumers for whom the cloud nor the contour were the right choices. The other thing it does is it gives the retailer the chance to keep that consumer who's a premium consumer and was interested in Tempur above $2,000 whereas in the past, oftentimes to get that feel, they'd have to go below $2,000 So we think it's a good ticket driver for our trade customers as well. So we're really excited about this product and it's right over there for you to check out.
You can see how we're merchandising it. It will be laid out so that it will be easy to sell to the 3 different fields. We'll have the right signage. We had very successful point of sale material in 2014 with Cloud and Kontoor. We'll continue with that approach for the Flex launch.
It helps the consumer choose and as importantly, it helps the retail sales associate direct the consumer to the right bed for them. And you see some evidence of that on the wall over there as well on my right. Relative to Posturepedic, this is another very significant launch for us. We have an extensive Posturepedic launch this year. And what we're going to do is recommit to this positioning of back support.
This is an ad actually from 1950. I think it's a little risque for 1950, but it's actually an ad in a bed from 1950 that shows the original Poster Pedic mattress. And it was all about back support. And there's still a lot of residual equity in that positioning and we think we can recapture it. So our new product, we've definitely improved the aesthetics.
They look good. They feel great. But every bed in the posturepedic line is going to have a center third support area. And the reason is that your body weight is relatively heavier. The bed has to support more relative body weight in the middle third.
So we bolstered the middle third. In fact, if you try it, you'll feel a difference between the middle and the end. And that is going to speak to this back support positioning. And we think it's going to work really well. And we'll obviously support it with the right materials, training materials, point of sale materials, etcetera.
This is an example of our showroom and it shows the new bedding products that have been laid out. We use this to show our customers how to merchandise our line, how to step from good, better to best. And the response to that new layout was terrific. We also have some smaller launches. We have the Stearns and Foster.
Again, we launched that very successfully in 2014. We have some incremental product to bring in 2015. Again, it's going to be all about better craftsmanship, better materials. And we're really focusing on how this brand is different. It appeals to a premium luxury consumer.
And to bring that to life, we created a showroom specifically for Stearns and Foster,
so that you could see who
it is that we're speaking to, who the consumer target is, what they appreciate. It's a luxury bed. It's traditionally beautiful. And this layout, this configuration, this room helped our customers understand what we're trying to achieve, who we're trying to target, why this is a different approach. So we're really pleased with the way that came out.
We also have new pillows coming out. We launched some at the latter part of 2014 that are getting traction, and we have some new shapes that we're really excited about that we haven't shown publicly yet, but we'll be doing so soon. So we think that those pillows will provide some traction for us as well. So a lot of great product launches that should help us continue to have that market share momentum. We also continue to invest in marketing.
Obviously, it's an important part of our mix. We are always investing in TV with an always on approach. But more and more, we're bringing in and building sophistication in terms of how to reach consumers through the digital world. The marketing opportunities today are evolving and we can create efficiently opportunities to connect with and have dialogue with our consumers through digital, through direct mail and so forth. So a lot of great activity and a lot of knowledge now in the organization to deliver on that.
We also do, I think, a very good job partnering with our retail partners to spend our money as effectively as possible. So this is an example where we work with Mattress Firm using our creative, but they tag it with their logo and promotion at the end. We do a lot of work with them. We test creative together, not just with Mattress Firm, but with a number of our top retailers. We do we look at media buying to see if we can buy more effectively.
So there's some deep relationships in terms of spending the money as effectively as possible in marketing. And of course, really emphasizing in store execution, how can we help them sell our products better. We obviously work with them on promotional events. We try to create promotional events that can drive traffic, that create interest, but that are reasonable in terms of the value that they offer. Now, we talked a lot about growth, but clearly we have a strong profitability focus in 2015 and going forward.
As Mark mentioned, we have a number of areas that we're working very hard to deliver the savings that we've identified here. And I'll give you a little more detail on some of those. The first is the Sealy assembly transformation. Sealy, as we drove a lot of volume in 2014, we certainly saw some opportunities to improve efficiencies. And we've gotten after this in a big way.
We've partnered with one of the leading consultants in this area in the country, if not the world. And we have identified a number of buckets of opportunity where we can be more efficient and take cost out. One of them is standardizing best practices. We have 15 different plants in the U. S.
There's a wide variation in performance between the top and bottom. If we get the lower performers up closer or even with the top performers, which is very doable, that's a significant savings. We need to get after and embed lean principles. That's something that I'm committed to. I think some of those principles got away from Sealy over the years.
We're going to reinstitute and recommit to lean principles, eliminating waste wherever possible. We're going to improve hiring. There are places we have too much turnover and that cost you in terms of recruiting, it cost you in terms of training and we believe there are significant opportunities there as well. From a production standpoint, we had issues where we have peaks where we run substantial overtime and can be inefficient. And then we run less than 40 hours, much less sometimes.
And so you don't have an efficient production schedule. We absolutely believe we can fix that, better forecasting, building ahead on high runner SKUs, and we're getting after that right away. And really building a culture of quality, we can deliver better quality and it can be a cost saver as well, reducing returns for example. So a lot of great practices and activities that we're very committed to that have specific targets, leaders, people who are accountable to get this done. There's also an across the network set of initiatives, so improving forecasting and demand planning across the network, reducing SKU complexity.
Frankly, we have too many SKUs. When we launch new lines, the end of life of the old SKUs haven't been managed as well as they could, and it's created too much complexity. So we absolutely know that simplifying our offering can lead to better production efficiencies. And combining the network, taking advantage of the opportunity now through the network to combine Tempur and Sealy deliveries. So tremendous effort on this total cost return initiative through the plants.
We've already made some network changes. You can see that we've consolidated, if you recall, Fort Worth into Vrennam in 2014. We have announced the closure of Batavia and are about to open. In fact, the grand opening is Friday, a facility outside of Indianapolis. As well, we are under construction right now with another brand new facility in Williamsport.
And we're repositioning the Tempur warehouses so we can build mixed loads. It's important that these two plants, we're building them with our latest and greatest thinking on how to be most efficient, putting in appropriate capital where we can make the beds more efficiently, make it easier to build ergonomically. And so we're taking best practices as we build these 2 greenfield plants. From a network standpoint, you can see in the red circles that there are a number of areas already where we have mixing warehouses. So you can take Tempur loads and instead of shipping Tempur inefficiently sometimes through our LTL or less than truckload outside vendors, we're able now to build fuller loads by mixing Tempur and Sealy.
And so it's more efficient for us and it's better in terms of the customers receiving them as well. You can also see the green dots that are circled in the Indy area and Williamsport, Maryland, where we have they are multipurpose facilities. They will mix Tempur product in the trucks. And again, the latest and greatest thinking around how to build efficiently and effectively are Sealy branded products. This is just an example of Plainfield.
I'll be there on Friday to kick it off. This is the mixing warehouse in Plainfield, so you can see the magnitude of the operation, mixing the brands together more efficiently for building truckloads. The other thing that is really important as we think about driving margin is capitalizing on Tempur Pedic's brand strength. And one of the things that was most important about investing in Cloud and Kontoor, gaining market share, building really positive revenue momentum in the back half and supporting it with strong advertising was that now we can take pricing. We believe that we absolutely can achieve $25,000,000 this year in price realization.
The adjustable base pricing actually went into effect late in 'fourteen. So we should realize the carryover that for most of the year. And then we're taking prices on a number of the cloud and Kontoor models actually in early March. And we believe that we can collect $100 to $200 or the retailer can collect $100 to $200 So we can collect the dollars, but it's also a positive for the retail customer because they can also collect the higher price. So in summary, for North America, we have a great set of brands, complementary brands.
We have product innovation that we've just launched and more on the way. We've got a robust pipeline beyond just 2015. We're committed to continuing to strengthen our brands and support our customers with category management with the best in class in store support with delivering extremely well and above their expectations. We are absolutely focused on improving profitability, driving pricing and mix, as I just mentioned, capturing synergies and absolutely driving this cost productivity, whether it be in the Sealy manufacturing facilities or throughout the organization, driving cost out. So again, we believe we've created great momentum.
We think our new products in 'fourteen and our marketing campaigns can enable us to continue to gain share, and we're definitely lined up to take cost out and improve our margins in 2015. So with that, I'll turn it over to David Montgomery to talk about international.
Thank you, Tim. Thank you. Good morning everybody. My name is David Montgomery and I head up the International Businesses for the Tempur Sealy Corporation. I have an excess of 25 years of international experience in product marketing, in marketing and sales and in general management.
I've worked for many well known iconic American led brands such as Polaroid, Black and Decker, the Newell Rubbermaid Group of Companies and laterally for the last 12 years with Tempur Sealy. I'm going to go through with you today an overview of our international business, highlight the key achievements of 2014, look at our growth initiatives that we have as we move forward and also then deliver you a summary of our plan. The International segment as Mark highlighted covers a vast area of the world. It covers the sophisticated developed markets, the emerging markets, and also the unsophisticated third world. It is a business model that operates on different levels primarily through wholly owned subsidiaries but also with joint ventures, licensees and third parties.
Today in reported sales it represents around $600,000,000 in turnover. But when you include the total brand and sales through all of those different partnerships, the total brand and sales actually represents well in excess of $1,000,000,000 in sales. The market is huge. The World Market Report reports approximately $15,000,000,000 in market size. Now I would contest that the Asia Pacific region here is significantly overstated and sometimes reliable data can be hard to get from some of the emerging markets.
But regardless, it is a large market opportunity, highly fragmented though it may be. Let me just touch briefly on the 3 key regions. Europe remains a challenging market environment economically and from a consumer spend perspective. Particularly challenged in Central Europe. But in Europe, Mark alluded to this, our temper distribution is significant.
We have a strong position in Europe with the Tempur brand. And therein lies a significant opportunity for the Seabee brand and it's a significant opportunity that we will highlight in this presentation. Asia and Asia Pacific is a buoyant market across the board. It continues to experience solid growth. And we in that market with the Tempur brand, we have a mixed distribution model with both traditional retail and a significant number of company owned branded stores.
The joint venture that we have in Asia with the Sealy brand represents us in most of those countries apart from Japan. Latin America is relatively small in comparison but it is fast growing. It's a mixture of mature and emerging markets and we enjoy very strong positions in Mexico and Argentina with a rapidly growing business small it may be but rapidly growing in Brazil. Our business model of subsidiaries, joint ventures, licensees and third parties positions us very strongly in Europe, Asia Pacific and Latin America. We have broad distribution channels both traditional wholesale and our own stores.
Now, weight of distribution does vary by market and vary by local market practice. And from a supply chain perspective, we have a blend and a mixture of wholly owned manufacturing and contract manufacturing partners. Today Europe represents roughly 60% of our sales line with Asia and Latin America being equally split at 20% each. And also today Tempur is the major main contributor of the revenue. But the significant growth opportunity comes from the integration of the Sealy businesses into our international network.
So, I'll just touch now on our range of technologies and Tim also touched on this and we leverage that global nature from our product development as we move forward. The temper material, we have a range, a broad range of products that appeals to a broad range of consumers with clear distinction in feel and this brand plays in the upper end of our premium market segment in our international markets. With the Sealy merger and acquisition, we now also have a broad range of innerspring and hybrid and luxury innerspring offerings that cover a multiple range of price points from mainstream premium to luxury premium positioning with the Stearns and Foster brand. And we have started off our development with the Sealy brand initially primarily with the Sealy Hybrid, the innovative product that is the Sealy Hybrid and the upper end of the Stearns and Foster product range in the international markets. This is also complemented by a full range of adjustable bases and also innovative bed designs and bed systems that we market throughout the world.
And not forgetting that we have a significant pillow and accessory business internationally with unique and innovative product offerings and international the incidence of pillows and accessories is a higher level of impact on our turnover than it would be in the domestic market. So 2014 in review. We experienced very solid sales growth in 2014. We have significant double digit increases in Asia Pacific, strong growth in Latin America and despite the challenging macro environment we achieved positive growth in Europe with the Tempur brand and also adding the Sealy sales as well. We experienced significant growth in our direct business internationally.
It has been a strategic pillar of growth that we have had for several years as we build out our own store program and that direct channel enjoyed almost 40% growth in 2014 on a constant currency basis. Our operating margins were diluted by 3 main factors. One was the introduction of both the Sealy brands in Europe and the integration of the Sealy brands in Japan. We did have very unfavorable headwinds on FX And also we had a little bit of impact on our country mix because some countries would be more profitable than others. But it was a year really of building an incredibly strong foundation for the future.
We made real progress towards capitalizing on the Sealy opportunity. We bought back the brand rights in Sealy Japan, in Continental Europe, and in the Southern Territory of Brazil for minimal capital outlay. We also acquired the Tempur distribution rights in Mexico. We also introduced the Tempur brand into our Sealy operations in Argentina. And that is something that we will continue to evaluate as we move forward will be the integration opportunities with licensees and third parties as we move forward and will form part of our growth strategy.
So the growth initiatives. The growth initiatives are many. The world we operate in is highly complex and varied and there are individual growth initiatives by country that roll up into an overall plan. But essentially, the growth initiatives fall into 4 main buckets. Sealy Europe is 1 and I'll allude to that later.
Our distribution growth whether that be distribution growth through the traditional wholesale channel or continued thoughtful expansion of our own store program. Tempur Seating Japan is also a significant growth opportunity. And then product innovation and marketing but really focusing to leverage the global scale that we have in both of those key disciplines. Sealy Europe, we believe it's a $200,000,000 opportunity for Continental Europe with the Sealy brands. And it is a key growth investment, one that we started off in 2014 and it will continue to be an investment market for us in 2015 and beyond.
Why a $200,000,000 opportunity? Well, the Continental European market is approximately $4,000,000,000 in size. Tempur enjoys a mid single digit market share of that market and we see no reason to believe why the opportunity for Sealy brands should not be the same as the current position that Tempur has in Europe. Thereby, we highlight over the plan period a $200,000,000 opportunity. Scale will be built through a mixed manufacturing model.
Today we import Stearns and Foster from North America. We will continue to do so. And the Sealy Hybrid initially was manufactured by our existing licensee in Europe but that is now transitioning to a new supplier in Eastern Europe with significant margin improvement. But the key thing here is that we are seeking to leverage the strength of the Tempur infrastructure in Europe. We have a wholly owned subsidiary in every single European market with strong relationships with distribution.
Already today we have secured almost 1,000 stores for the initial placement of Stearns and Foster and Sealy in Europe. That rollout continues as I speak in all markets apart from the United Kingdom. And in the United Kingdom we have a license agreement with a company called Silent Night that is one that is ongoing. We will continue to build brand awareness for the Sealy brands in Europe in a smart and intelligent way. And leveraging our global product development capability, we have lined up an innovative product portfolio across the technologies.
But the key thing is the premium brand positioning. Stearns and Foster positioned as the all American style luxury mattress. Celia Hybrid really targets that mainstream core positioning that is 6 below the Stearns and Foster and the Tempur brands. All of this is designed to lift the average unit selling price of our key retail partners something that they seek and that they actively pursue. We will make key investments in in store merchandising and communication.
We will utilize the global brand assets that we have. We're not reinventing the wheel. We're utilizing those assets that have been developed by our North American group for Sealy and Stearns and Foster. And it's selective smart advertising by a very targeted media for the Sealy and Stearns and Foster brands. So, significant growth opportunity, number 1.
Number 2 is the growth in distribution in general. Distribution in general internationally, the wholesale channel tends to be very country specific. Few of these major retailers cross national borders and if they do it's very limited in size and scope. But there are still some significant opportunities that we need to pursue to deliver continued growth for both the Tempur and the Sealy brands with increases in our distribution profile. Also, direct sales is a significant vehicle for our growth in total for our business model whether it be the wholly owned or partnership models.
In total, we oversee today in that business model we oversee in excess of 400 brand stores today across the world. And just to touch on how that has developed, Tempur brand direct sales growth since we really started off this initiative and concentrated on that initiative back in 2011 has enjoyed a 40% CAGR on an annual basis. This is our wholly owned Tempur stores across the world. This next slide illustrates what those stores look like. You can see here stores from the U.
K, Norway, China, Holland, Singapore. And today, we have roughly 100 of these stores in Europe, Asia and Latin America. Also in Latin America, we actually have a multi brand concept called Bedtime where we have approximately 50 stores in Argentina concentrated in the Buenos Aires area but that will be expanded beyond into the rest of the country with a very successful footprint. And in that store is sold the Sealy, the Stearns and Foster, and the Tempur brands. We partly own with our joint venture partner in Asia over 175 Sealy branded stores that is primarily concentrated in China.
And then through our 3rd party partners with the Tempur brand we also oversee approximately 100 branded Tempur only stores in those 3rd party markets. And here you'll see illustrations from markets as varied as India, the Philippines, Saudi Arabia, Dubai, etcetera. So it remains still a significant growth opportunity for 2015 and beyond. The 3rd growth pillar is Tempur Sealy Japan. We acquired the brand rights for Sealy in mid-twenty 14 and subsequently integrated that business into our Japanese Tempur subsidiary.
We expect Japan to develop into our largest single international subsidiary outside of the United States and Canada. That's obviously currency dependent. There are some strong currency headwinds today. But that really is a marriage of complementary strengths. Our Sealy partner did have a good strong business for Sealy in Japan.
But the strengths were complementary to the Tempur business and we see significant opportunities to deliver growth for both brands leveraging the strength of both companies. The last one is the product innovation and the marketing. And I sort of highlighted the focus we have on really leveraging our global scale that Tim alluded to in his presentation also Mark on our product development capabilities and delivering a robust pipeline of consumer preferred products across the portfolio of technologies and brands, mattresses, bed bases and bed systems. We are committed to continue to build brand awareness. Our brand awareness internationally is significantly lower than that that we have in the United States.
The Tempur brand awareness is often below 50% in many markets. And we have started with significant investments in the Tempur brand awareness program in selected markets and we will continue to evolve and deliver and invest in that brand. But we're also going to be selective in our investments in the CD brand because that again is quite patchy throughout the world and it requires investment but it requires investment in a smart and intelligent way. We do have a very effective TV platform for the Tempur brand and it's one that we will continue to utilize. It has led to significant increases in awareness for the Tempur brand in our major investment markets.
And the Tempur drive for brand awareness will continue to be a major focus for the international group. And it is an advertising that really does reflect the premium positioning of the brand in the international markets. Tim also touched the effective promotional strategies that we use in the domestic market in the U. S. It's no different internationally.
Good value marketing propositions are key for our trade partners and our consumers. We really have to drive consumer activation through high quality promotional vehicles that we do with our retail partners across the globe and this is just illustrative of some. Smart spending and again leveraging some of our ideas that we have on a global scale and Tim alluded to the new media. We are launching a very effective We Love Sleep campaign which actually begs, borrows, and steals very much from the North American Ask Me theme where consumers talk about their love for the Tempur brand and what it has done to their lives and this is one we're going to be operating in all markets in 2015 2016 and the illustration here is the one that we're actually currently doing in Australia. We will be spending our money on effective in store marketing and product investments.
We need to display our products in a high quality environment reflecting the positioning of the respective brands within the portfolio. And it's an important investment that we make and one that we will continue to make. And that all really leads to what Mark sort of touched on in his presentation, which is really striving for the highest dealer advocacy. And the nice thing about our strategy is it truly is global. What we do domestically in the U.
S, we're doing the same things in every market in the world all leading and striving for the same thing. And all of the aforementioned drives really to hitting the key cues that you see on this slide and that Mark highlighted in his opening remarks. So in summary, 2014 we enjoyed growth and significant growth delivered by strong performance in Asia Pacific, rapid growth in emerging markets in Latin America, good growth in our existing Latin American subsidiaries and despite the conditions in Europe, I emphasize we still delivered growth in 2014. We are investing in the future growth drivers for the international business. The acquisition of the Sealy brand rights in Continental Europe, Japan and also in Southern Brazil will lead to significant growth opportunities for our business worldwide.
There is a relentless focus on expansion of retail distribution and a thoughtful selective approach on our own store opening program. The product pipeline that we have lined up leverages our global scale and we have many exciting product introductions ready to go for 2016 and beyond and really leveraging our global capability as an organization. We remain committed to making the appropriate market investments to drive our brand awareness of all of our brands. And we continue to evolve our supply chain support for the Sealy brands in Europe with the change and source of contract manufacturer to support the CELE ramp in Europe. And it's exciting times, really exciting times for the international group with significant profitable growth opportunities in Latin America, Asia Pacific and in Europe.
And thank you for your attention. And I'll hand over now to Dale, our CFO. Thank you, David.
My name is Dale Williams. If you don't know me, a real quick background. I've been the Tempur CFO for 11.5 years. I'd like to say I grew up in General Electric. And in between the two companies, had a stint at SAGAS Software, which was a public CFO role and also at Honeywell.
I'm going to talk today about our financial overview. We'll look at our financial outlook and then discuss capital structure as we wrap up our prepared materials. But before I get into the numbers, I just want to make clear, I want to explain our change in reporting structure. On our earnings release and earnings call on February 5, we said that in 2015, we're changing the reporting structure of the company. As a public company, we are required to report the business the way we run it.
So if you look at what has occurred over the last year and a half since buying Sealy, we have changed the structure of the business such that we now run the business North America, International and Corporate. We used to run the business, Tempur, Tempur International, Sealy, But over the last year and a half, as we've completed this organizational integration of the business, this is now how we run the business. So we're required to report externally the way we run the business. We have one sales organization. We have one marketing organization.
We have one sourcing organization. We have one logistics organization. So the North America business really is one entity. And as David just went through, the international business is becoming one entity. So that's why we are changing our segment reporting on a go forward basis.
So what does that look like? Just to give you a very quick primer on what the business looks like under the new reporting structure. From a global standpoint, you can see wrong button. On a global standpoint, you can see roughly 3 quarters of our business is U. S, 80% North America.
By channel, 92% retail. What that means is we are a wholesaler predominantly. We sell to other people who run retail stores who sell to the consumer. And from a product standpoint, 90% bedding, bedding as mattresses, foundations, adjustables, essentially what you see right there with the exception of the pillows. Pillows and other accessories are in the other category.
From a North America standpoint, even more retail, 96% retail, 94% bedding. From an international standpoint, a little bit more other. David talked about the direct business internationally. Certain markets in the world, 3rd party retail doesn't exist. We have to be a retailer to play in that market.
So we have a much larger direct business now internationally than we have had in North America. And also, as David mentioned, historically, there are markets where we are predominantly still a pillow business. The mattress business has not gotten there yet or it hasn't grown that much yet. But overall internationally a little bit more mix towards other which is essentially pillows. Frequently we get asked about cost of goods.
What's our mix of cost of goods from a company standpoint actually post the integration with Sealy. It hasn't changed a lot. You see 30% of our cost of goods is what we're calling commodities. That's chemicals, purchased foam, steel. About 35% is other materials.
Other things that go with the mattress, the ticking, the covers, packaging, etcetera, About 15% is overhead, manufacturing overhead. You can see logistics also about 15%. Hence, a big focus on the logistics efforts that the company has, Tim mentioned, looking to get tremendous synergies from being able to deliver Tempur and Sealy on the same trucks. And then labor is only about 5% of our COGS. So from an outlook standpoint, you've seen this chart several times.
This is very key to our plans. If you go back to our presentation in September of 2013, right after we about 6 months after we closed the Sealy transaction, these numbers are very similar. We said we wanted to grow the top line at 6%. We wanted to grow the bottom line at 15%. That's still our plan.
That's still our goals. That's still our commitment on an annual basis to achieve these targets. The mix of things may change a little bit, but the top and bottom line targets is exactly what we intend to do and internally we drive to do more. Sometimes we can do it, sometimes we can't based on what's happening globally in the business. Again, February 5, 2 weeks ago, we gave you guidance for the year.
We said from a top line standpoint, we expect to grow our revenues 2% to 5% this year, but that's after 3.5 points of negative headwind from currency. On a constant currency basis, revenue growth is 5.5% to 8.5%. So that speaks to the volume that we're expecting to see this year. From an earnings standpoint, we said we would see earnings per share growth of 2% to 17% and what we're talking here is low end of guidance to high end of guidance. Currency is costing us 10% in 2015.
On a constant currency basis, we would be expecting 12% to 27% growth in EPS this year. Looking at the new segments, North America sales growth 3% to 5%, some negative currency that's really driven by Canada. So on a constant currency basis, 4% to 6% growth in North America. Internationally, the range is -one to plus 6, 13 points of currency internationally. So on a constant currency basis, we expect to see 12% to 19% top line growth.
And we're expecting to reverse margin trends. On this chart, you can see from 2013 to 2014, we had a decline in gross margin. A lot of things drove that. One driver is in 2014, you're getting a full year of Sealy being in, where Sealy was not in for a full year in 2013. And structurally, Sealy has a lower margin than Tempur.
But then other things, currency is a big driver in 2014. It's going to be a big negative in 2015 too also, but we have all the programs in place to drive improvement and we'll talk a little bit more about that in a moment and particularly where we see that growth coming. But the mix of the business in terms of products, we had a lot of investment in 2014, as Tim talked about, the biggest product launch in the company's history. The significant impact of floor model discounts on the volume of products going out, all the costs associated with transitioning the product lines was a big drag for us in 2014. It will not be as big a drag on the Tempur business as it was in 2014 in the coming year.
The Sealy business with Posturepedic changing out, the Sealy brands will continue to see a lot of product transition costs. But we expect to see significant improvement in 2015 and on a constant currency basis, 150 to 200 basis points improvement. From an operating margin standpoint, again, same factors affecting gross margin are flowing all the way through to operating margin. It's a a function of having CELI in for the full year. It's a function of currency.
It's a function of the significant product investment that was made last year in the business. Now I will point out one of the kind of a new concept, adjusted operating margin. I know one of the sources of frustration that you have had over the last year has been we give you a margin guidance. And when we're giving you margin guidance, we're really talking pro form a because GAAP, which we report, has integration costs in it. We tell you how much the integration cost is, but I know that's been a source of frustration.
In 2015, we are beginning to start to give you, okay, this is what it is on a GAAP basis and this is what it is on a pro form a basis, which ties to how we guide, okay? But we do expect to see improvement in our operating margins this year. And again, on a constant currency basis, we expect that improvement to be 75 basis points to 150 basis points. Our commitment is 50 basis points of improvement on an annual basis. Our internal goal is 100.
We believe that we're on track for that this year. I wanted to use the next couple of slides just to really hit at some of the margin performance and also why we are very optimistic about our plans for 2015. Tempur North America and let me back up one other second. As we came into 2014, we had 4 key things that we needed to do. We needed, number 1, to get Tempur North America turned around.
It's been something we'd been working on for a year and a half. 2014 was the year that Tempur had to turn. And as you've seen from our reporting, Tempur North America turned in 2014. The last three quarters in 2014, Q2, Q3, Q4, every quarter Tempur North America saw double digit top line growth. From a profitability standpoint, while the year was slightly down, again given all the significant investment we had in Tempur North America in the first half of the year with the rollout of the new cloud and Kontoor, in the back half of the year we saw a 370 basis point improvement in operating margin on the Tempur North America business.
That improvement speaks to getting volume back in Tempur. That improvement speaks to getting through the big product investment. So, structurally, we have Tempur North America back. Several years ago, we said, look, we're not going to call the turn. It's turned.
We've called it. Tempur North America is back. We feel great about where we're at with Tempur North America. From a trend standpoint, we feel great about the new products that we have going in Tempur North America. And this is going to be the fundamental driver of margin improvement in the overall business in 2015 and beyond.
Sealy, related I said before, we had 4 key things we needed to do as a business. 1st was turn Tempur North America around. 2nd was integrate the business. We feel like we're substantially complete from an organizational integration standpoint. There's still some back end stuff we need to do.
Systems, shared services, still got to complete the integration of the distribution network, but from an organizational standpoint, we're substantially complete. The third thing that we need to do is get Sealy turned. Sealy had seen, prior to our purchase, several years of modest decline, both from the top line and the bottom line. Sealy had double digit growth in 2014. We've got the top line of Sealy turned.
As we as that volume came into the business, it uncovered some
rocks
or it presented some rocks to us, some efficiency issues that we need to deal with. Tim gave you a good overview of major focus area is transforming the Sealy assembly operations and improving the cost there. The 4th thing we needed to do was to take advantage, begin to take advantage of the opportunity that this combination gives us internationally. In 2014, David took the initial steps, got Japan
license, got
the Europe license back, integrated the business in other countries where we actually had 2 operations or were able to expand operations in other countries. But that comes at a cost from a margin rate standpoint. Tempur International's margin rate was down last year, variety of factors FX, country mix, product mix. A big driver was introducing Sealy business into the Tempur International business. It lowers the margin rate, but it will improve margin dollars as we get the Sealy business growing.
So over the next couple of years, we expect Tempur International's margin rate to continue to decline as we get more and more volume of Sealy in our international business. We expect to see significant improvement in the margin rate of the North America business, driven by the Tempur brands, driven by the specific projects, Sealy transformation, the synergies, the opportunities that we have in North America to continue to take advantage of that momentum that we're now seeing not only at the top line but having that flow through to the bottom line. We've talked about this chart a couple of times. One thing I just want to hit on this is these are vetted opportunities that we really believe are there, but this is not the all inclusive list. This is 4 major projects, 4 major areas of the business that are focused, but this does not include the list is historically had in our business continue.
They're not being replaced by this. They are being supplemented by these specific programs that we're driving. So, while this is giving us $125,000,000 The normal cadence, normal activities of the business should continue to contribute beyond to this. But realistically, bad stuff always happens too. So we've got it covered between this list as well as the other ongoing routine cost improvement activities that we work through.
So from an EPS standpoint, as I mentioned earlier, we're looking to drive 12% to 27% growth in earnings per share next year on a constant currency basis. In 2014, we saw 11% growth in EPS. On a constant currency basis, it was 18%. Next year, 12% to 27%. We feel that we have the activities and the momentum to hit those targets of 6% top line growth, 15% EPS growth on an annual basis.
We've talked a lot about currency. Real eye chart here for you. You guys can look at currency just as easy as we can. Essentially, what this is, pegging major international currencies to the U. S.
Dollar. And when you see the currencies going up and to the right, that means the U. S. Dollar is strengthening. So, we saw a significant improvement in the U.
S. Dollar late in 'thirteen, early in 'fourteen. It kind of leveled out a little bit. And then in the Q4, we saw the U. S.
Dollar just take off. That means all of our international business essentially gets devalued, number 1. Number 2, in certain circumstances, when you're purchasing in one currency and selling in another currency, that mix of currencies, we sometimes talk about cross currency, that's where we're purchasing things in one currency and selling in another currency. When those currencies get out of balance, you can get a real big margin squeeze. A significant portion of our Canadian cost is U.
S. Dollar based. So when the Canadian dollar is dropping in value, our cost is not changing. So it squeezes the margins. And we've the Canadian dollar is a big issue for us in 2013 or 2014.
It continues to be a big issue for us in 2015, just as one example. What's the currency mean for us? Real quickly, we touched on this at the earnings call in 2014. It cost us $13,000,000 on the bottom line. 2015 based on our plans, based on the mix of currencies, the currency rates that existed, We did this all based on January 31 rates.
It would cost us $24,000,000 $0.15 impact and $0.14 impact and $0.14 impact and $0.15 $0.42 on a compound basis. Not a big point we want to belabor, but in September 2013, people always ask us how are we tracking to those goals. Well, quite frankly, on a constant currency basis, the currencies that were in place and that we were living with and dealing with in 2013 when we had set up the goals for 2016, the business would deliver if we deliver high end of the guidance in 2015 and repeat that committed performance in 2016, we would deliver on a constant currency basis what we thought we would deliver in September of 2013. Ideally, on an annual basis, we'd like to do better. We strive to do better, but we feel those are good repeatable commitments to make.
So let's talk a little bit about capital structure. A couple of key points here. This is our capital structure as it exists today, dollars 1,600,000,000 in debt. We've reduced debt quantity approximately $350,000,000 from the time that we closed the transaction. We reduced our debt $234,000,000 in 2014.
Pretty good spread in terms of maturities. 2016 is the 1st maturity of note where we're able to take out the 8% Sealy notes. So we feel very good about the debt structure, how it was put in place. And basically, our debt structure cost us roughly about 5.25%. From a cash flow standpoint, 2013 was a tumultuous year with completing the new credit facility, completing the acquisition.
2014, we got back to delivering cash. Had a very good cash year last year, dollars 225,000,000 from an operating cash flow, dollars 178,000,000 from a free cash flow. And the way that we measure free cash flow, the money that we got for selling the spring plants is not included in that number. So we have very strong cash flow year. In 2015, we expect to see again very strong cash flow year.
As a reminder, currency affects cash. The euro that we earned in 2014 is worth less dollars now than it was worth last year. So currency also affects cash flow. Hence, we are expecting a little bit better cash flow next year than we had in 2014, but not quite the growth that you might expect given the earnings growth, currency driven. Also, we had a nice one off at the end of the year where we had a sizable legal settlement that contributed a fair amount of cash right at the end of the year.
But strong cash flow business, we continue to expect to drive very good cash flow performance in the business, which will lead to ongoing delevering. Adjusted EBITDA also turning this year. Again, currency effects EBITDA. Our international earnings get devalued. So on a currency basis, in 2014, we would have had $418,000,000 of EBITDA.
But as we've said, we feel we've turned the corner. We feel like we've got things on track to where we want them to
be, where we need them
to be, and we'll start to see EBITDA growth in 2015 that we've been anticipating. So what's that all mean from a debt to EBITDA standpoint? Again, in September of 2013, told you that our debt to EBITDA target for the business was 2x. However, I put a big caveat on that. That was the debt to EBITDA target optimal capital structure for Tempur.
And at the time, I said, look, this is the Tempur goals that we worked with. We haven't changed them. We haven't updated them, but we'll do that at the appropriate time. Well, over the last 18 months, the appropriate time has come. We're starting to see the leverage drop in the business.
In October, we talked about we had made an amendment to our credit facility that allowed us more flexibility particularly and what we were seeking the flexibility around was acquisitions. But acquisitions can't be always strictly planned. We have 2 big acquisition opportunities in terms of the joint ventures 2017 Uncomfortable Revolutions, 2020 on the Asia JV. There are other licensees that at some point we would like the opportunity to bring in house, but those are not things that just happen on a schedule. So as we built that flexibility into our credit agreement, part of that flexibility was around use of cash.
In the old credit agreement, we were restricted on our cash usage until we got down below 3x debt to EBITDA approaching 2.5x. We now have the cash flexibility once we get below 3.5x. That was part of that October credit agreement amendment. As we look at that which prompted us to now review what is our optimal capital structure. As a larger business, as a more stable business, we now believe and had several bankers verify our analysis that on a risk adjusted basis, 3x is our optimal capital structure.
So our anticipation is as we get below 3.5x, unless there were happen to be a pending acquisition opportunity, we will start returning value to shareholders. And that's something that's always been very important to us. That's something that we've always seen as a commitment on our part. And as a proof point on that, from 2,005 through 2012, we returned $1,300,000,000 to shareholders over that time. And this is something that when we first did the acquisition, we thought this would be several years out.
But it looks like we hit our guidance for 2015 2016, we would be in a position to start returning some value to shareholders. With that news, I'll turn it back to Mark to summarize.
Thank you, everybody. I realize this has been a long presentation, but we had a lot to cover. So let me just, in this summary, just very quickly summarize the key elements of the strategic priorities. And so bear in mind that what we're saying is now with this consolidated company, we have enormous opportunity. We have very clear numeric targets.
But importantly, we have a very clear global set of strategies that are leveraging the assets that we have to deliver the growth that we're looking for, both top and bottom line. Leveraging and strengthening the portfolio of brands and products is number 1, expanding our distribution and increasing advocacy, expanding our margins but with a focus on driving significant cost improvement, leveraging the global scale that we uniquely have for a competitive advantage, and then accretive acquisitions of licensees and joint ventures. Sales growth of 5% and EPS of 15%, percent, strong cash flow and an internal goal of 100 basis points improvement of operating margin, delivering value for our stockholders. Thanks for your patience. I realize it's been long.
But now we're going to open it up for Q and A. So I'll ask my other colleagues to join me and we have a couple of microphones and Mark will lead the Q and A. Yes, Barry
Heitner and Michael will be going through the room for Q and A.
Thank you for all the detail. It's very helpful. Certainly a lot to think about, Pat Bugech with Raymond James. I guess my first question really is the Sealy integration of the Sealy plants. You have talked about, I think, dollars 25,000,000 opportunity this year, if I remember right.
And what's the and the 15 plants, what's the difference in operating performance between the best and the worst? And if you can give us kind of a feel of what that differential is?
Let me kick that off and then I'll hand it to Tim. There is a quite significant difference, but it's intriguing. If you look at it on an aggregate basis, cost per unit, for example, there's a difference. You can rank them top to bottom. But if you look at it on a piece
by piece basis, like for
example, the cost of putting the top cover up or the cost of building a foundation or the speed that we or the number of damages that you get, it's remarkable. There's no one that is really good at all of them. And so it's part of why we believe we can aspire to raise the level is because it's not as though there's a paragon and we should all aim for that. It's that each of them have different strengths. And so there's quite a material difference if you look at them in aggregate.
But again, it's even more important if you look at them by key element of the task.
Yes. But I believe that from a lean standpoint, if there's a best way to build a particular bed, there's a best way that should be deployed across the whole organization. And in the past, for whatever reason, the plants were on their own basically and the processes and the practices were different. I think we need to align and we will align on the best process, standard operating procedure, which we'll find at the best plans and then standardize that across the operation. And I believe that the other thing that's interesting is in the past, in my view, the Sealy metrics were a bit narrow.
So when you get focused on one particular metric, you can lose sight of the holistic view of cost. And so one of the key elements of our cost approach is going to be to think about cost holistically. So we don't want to move cost from 1 bucket and just shift it to another. And I think that was something that was a little bit of a challenge in the past. So we're thinking about it holistically.
We have confidence we're going to be able to get after it. Some of it can happen quickly and some of it is going to take time because it requires network changes, it requires changes in the way we do demand planning and so forth. So we think there's some low hanging fruit and there are things that will take longer. But we absolutely feel that there are a number of initiatives and we both internally feel that way and we have worked with, as I said, one of the top consultants who's helped us to quantify these opportunities and to go execute. But Chile has had a
lot of changes over the last 15 years. It's been through a number of different hands. Even coming through the downturn, you've had a lot of turnover at the plant level. How do you have capability in the organization? How can you get confidence to get the people to do that in place?
Because even after your acquisition, you've made a lot of changes.
Yes. We have. We've made some leadership changes. We need to drive change in that area of the business. And some people bring great experience, but yet are excited about driving change and improvement, right?
And those people will be integral to the approach going forward. Some people have a harder time with change and those people will not be part of the group going forward. Right now, we have a structure with there will be an East leader and a West leader. The West leader is a legacy Sealy person who's a young up and comer who's going to help drive change, but be knowledgeable about the history so that we learn from the past, but yet he's open to change. The person who's going to lead the East is actually a great outside hire that we got from Owens Corning.
He's been running the Albuquerque plant for Tempur. He's done a terrific job and he's going to bring some new ideas, some new approaches. And so I think we have a nice combination of people who have history, but are willing to change and people who have new ideas that can help us go to the next level. Okay. I have
a whole lot of other questions, but I'll just focus on one other one. You talked, I think, Mark and Dale, about returning in terms of getting the margins up. Talk about capital returns. I haven't heard that really talked at all about and how is compensation changing and how do we get an idea that you're going to have good returns on capital? Phil, I'll take it.
Well, from a return on capital standpoint, certainly we are focused on making sure that investments that we make in the business are very good returns. We have very tight controls on where we're spending money, where we're spending money in areas like redoing the distribution network. We expect to spend money on improving the Sealy factories. We had some investment in the 2 new Sealy factories, indeed, that's opening this Friday, the Williamsport facility. But beyond that, we have very tight controls in terms of where we spend capital in the business.
And with the improving performance of the business, feel very confident that, A, they'll be driven by those capital spends, but also we will see very strong returns on a go forward basis. Compensation?
I'm sorry.
I don't know,
I
don't know. It's a good it's an interesting question. We don't have compensation tied to return on capital as a direct thing. We have most of long term compensation tied to those appreciation of stock price
and top amount of mine growth.
And obviously, there's a lot of focus within the organization on a short on a budget, I mean, annual performance basis focused on different metrics like return on capital, but it is not a core component. It's an interesting question.
Denise Chiang from Bank of America Merrill Lynch. So I have a couple of questions for Tim. From your Whirlpool days, what are the learnings from the Maytag integration? And how do you think that applies to Tempur Sealy? And as a follow on, where do you see the
biggest opportunities from here? Well, one of the things that is really important is to be able to differentiate the brand and make sure that you have different positioning and then deliver product innovation against that positioning. So when I talk about Stearns and Foster being about craftsmanship and the way it's built, We're going to continue to deliver a stream of innovation against that position. For Tempur, it will be about the best sleep of your life, the best support. For Posturepedic, it will be about back support.
What you don't want to have is just to commonize the platform so that there's really no difference other than the label. And so it's important to have not just distinct messaging, but to make it come to life. And then to be able to execute that through the trade so that when a consumer comes on the sales floor, the RSA, the retail sales associate can quickly identify what kind of consumer is it, what are they looking for and which brand and which product would best deliver. So it goes right through to the sales force. I think we were thoughtful when with my experience with Whirlpool, we combined the sales force fairly quickly.
And I would admit to you that probably forced it together too quickly. So we were much more thoughtful and made sure that they were ready to take on the other brands that had been competitors. But through a lot of training and a lot of work, we're now, as of January, fully integrated. And I'm excited about that because now you don't have reps who are talking about the other brand as if it's a competitor. They're talking about it in a complementary way.
So those are some key observations. Obviously, Whirlpool was because of the industry that it competes in, very good at cost productivity and we're going to continue to drive cost productivity, leveraging wherever we can the combination or even independently what can Sealy do, as I said, with the manufacturing process to drive cost out. That's a key part of the ability to succeed in appliances and we can do it here as well.
Got it.
Thank you. And also, could you
give us a clearer picture
of the Sealy manufacturing facilities and combined DC network, network of the transformation before and after?
Yes. Right now, well, the Tempur network was obviously completely separate. And because of the lower units that go out in Tempur, oftentimes Tempur was delivered in a less than truckload format. So that would be a common carrier and we would fill up part of a truck. It's both more expensive and you have more vulnerability to damage, right?
And they're not necessarily as reliable as our own network or a dedicated network, even if we don't own them as a dedicated network would be. By building loads commonly in a mixing warehouse, we can now fill up the truck. So Tempur can go on a devoted truck to a customer. So it's more efficient from a cost standpoint, the damage is lower. And from a trade partner standpoint, they get to receive one load instead of having to staff for 2 different receiving days.
So there are a lot of benefits that come with it. We're about 2 thirds of the way through. Some of that has just transpired. The Indianapolis facility that I showed you on the slide, The mixing warehouse is underway. The production of Sealy is about to kick off.
And then we'll have a mixing warehouse in Williamsport. In other cases, where we have reconfigured the Sealy manufacturing facility, they become the mixing warehouse for Tempur. So we're very confident that there's not only cost savings, it's a beautiful thing because there's cost savings, but we can also deliver more effectively to our trade customers.
Keith Hughes from SunTrust. Question was on adjustables. I believe you had mentioned that the Tempur brand is seeing attachment rates in excess of 50% right now? Correct. Just my question is, number 1, how much further do you think that can go?
And number 2, what's the future for attach where are attachment rates and what are the future at like Foster Pedic and Stearns and Foster?
Well, we've got evidence there are customers who are way ahead of that, big customers, so way ahead of the 50% attach point. So when you say what could it be, it could be a lot more than it is. And big customers and middle. So it's not like some little store which is very focused on it, big customers. And also it can be very moved in a given period.
So you can have a promotion on adjustables and it can dramatically raise the adjustable attachment. So to my mind, there's
a lot more over it. I think we have I'll make
a couple of comments because Tim this is a bigger focus for Tim, but let me just a couple of other points. First of all, from a U. S. Point of view, we have very good attachment rates on Tempur, less good attachment rates on everything else. And so the big opportunity is to try and raise that.
It's not trivial because it's different price point and so on, but we know we can get quite a bit better there. And then internationally, we have good attach rates, not as good, but good. I think one of the things that we really focus on is as this I've talked repeatedly about the importance of innovation and evolution, a place where we can really have a benefit in terms of continuous innovation is the bringing together of this sort of design for the future for a global multi brand platform. And that will be an important part of our
business. Yes. I think there's definitely an opportunity to particularly for Stearns and Foster and the higher end, Posturepedic part of the line to create awareness and interest in adjustables. I'm not sure how much higher the attachment rate can go in Tempur. Can't really say.
Is there a little bit of room to grow? Yes, I think so. But I think there's a lot of room. The attachment rate is much lower. And people still don't know.
There wasn't awareness. So I think what really took caused the adjustable business to take off was showing it in the advertising and people thought, wow, that looks great. That's part of my lifestyle. I can watch TV in bed. I can read in bed, etcetera.
So making people aware and then getting it placed when we had new products, getting it placed with adjustables under them so they're easy to demonstrate on the floor is important. And as we design product going forward, say in the Stearns and Foster brand or Posturepedic, we want to make sure it's very friendly to adjustability. So the edge, rails and so forth need to be able to articulate. The other thing I'll say about adjustables and if you think about and going back to my Whirlpool experience, one of the ways that in appliances, you have to have global scale in order to compete. In our business, we're the only one who has it available to us.
And right now, we have adjustable bases that are Tempur bases. We have some are sourced from Asia, some are built here. We have different bases for Sealy. We have different bases altogether again in international. And we have the opportunity to combine and create scale against a common design platform and both take cost out and be able to innovate globally.
So we're excited about that as well.
Yes, a question. John Baugh with Stifel Nicolaus. And I guess this is for David because it's about Sealy Europe. Could you tell us historically what the brand got to the Sealy brand got to as a peak in sales under the previous ownership when it was licensed? How many doors do you need to go into?
I think you mentioned 1,000. How many SKUs per door are you in on 1,000? And I think you mentioned over the period, is that a 4 year goal of getting to $200,000,000
Thank you.
A lot of questions in one question. Historically Sealy achieved sales between the branded products and the private label products. I think the peak back in 2,007 or 2,008 was something like $50,000,000 or $60,000,000 max. Distribution strength really was only concentrated at that time in the two areas where they had manufacturing facilities at that time which was Italy and France. So Italy and France were a reasonable percentage of that sales number.
From the perspective of now moving and by the way that declined then significantly once Sealy exited Europe in 2010 and handed the business over to the licensee. We inherited a business that was extremely small when we took the business over in the middle of 2014. Tempur in Europe and this is in Continental Europe has an excess of 3,500 to 4,000 doors. Our target is to penetrate a significant number of those doors with the Sealy brand. The Stearns and Foster brand will be significantly more limited due to the positioning of Stearns and Foster at very much the higher end luxury part of the spring mattress.
We have had some hiccups with our initial supply chain in Europe in the back half of twenty fourteen. That is now being resolved and that has impeded our speed of rollout so far. It's ongoing. We have specific targets by country by market for both slots and for stores. We're very confident of hitting our store target primarily because of our strong relationships that we have with that existing retailer base.
Our slot targets are also within reach. I think our slots targets will remain an internal target for now. And the important thing is that we achieved the velocity targets that we're setting ourselves in order to deliver the numbers that we believe that we can achieve with the expansion of the Sealy distribution in Europe. And then to answer your final part of the question, yes, the 200,000,000 dollars goal doesn't come in 2015. It's a multiyear goal.
We need to build it. We need to serve it. We need to build a degree of brand awareness. We need to invest in a smart and effective way in order to gain that penetration. So the $200,000,000 goal is within the plan period.
One minor correction. Sealy, I believe, got a little bit in excess of $100,000,000 when they owned Europe.
Yes. Brad Thomas with KeyBanc. A question about gross margin. And I was hoping you could talk about for this year some of the puts and takes from an operational and competitive standpoint on gross margin? And as we look out a little bit further, what your level of confidence is that this is an inflection point rather than perhaps an issue of comparisons or something like that?
Roland, you don't have to?
Yes. I mean, from a gross margin standpoint,
what are the
drivers? It's a lot of things. We're seeing volume leverage back in the business, okay? We've gotten through a significant investment period. We talked about the new cloud and Contour.
Well, that was expensive to roll out. But any time and we've always said this, any time that we introduce a significant change in technology or complete redo of the product from the core out, initially it's a little bit lower margin than what we've normally run, but we have very quick learning curves. As the volume grows, we improve the cost, production cost of those products very quickly. Cloud was when we first introduced cloud, it was a lower margin product than what was our average. Then very quickly cloud became accretive.
So as we have more and more experience with these products, we have the volume leverage, we have cost improvements in the distribution network, etcetera. We see Tempur brand margins continuing to improve for a sustained period of time. Similarly on Sealy, Sealy right now should be at kind of the low watermark. And we have significant efforts and that Tim has spent quite a bit of time talking about in his presentation on how we're going to improve Sealy.
We're going to have the additional Tempur as Dale said, Tempur margins are significantly better in the second half than they were for the full year and we expect that trend to continue. Sealy, we are clearly very focused on improving the margins. We want the growth, we're improving the margins. International, we have a don't forget what Dale did say though. There is going to be a constraint on margins because of the fact just by the nature of the mix.
But overall, margins are planned to improve, and I think we have good sign of sight of that for this year.
And just putting those gross margin goals into context, how much risk inherent is there with this relaunch of the posturpedic line that is of course so important for Sealy?
Well, you mean the risk in the U. S. Of the relaunch of the yes. Well, it's an important relaunch. It's a big I mean, it's a big relaunch.
It's 2 years since the last one. The last one did very well, did very well all through much of last year. The reaction to this has been very good. And we anticipate getting greater distribution of it. But yes, it's a big deal.
I mean, we haven't shipped it yet. We're about to. It's got positive response. It's important, but it's got very positive response. And I think both from a design and an aesthetic and I think that one of the things that is good is that by laying the groundwork or laying the ground laying the foundation for reestablishing this positioning as being back support, the back support product, it has obviously a benefit from a consumer communication point of view, but it also has a benefit which is that the more understood what the difference between Posturepedic is and the rest of the competitive set, the easier the less you have to do each time you come out again.
We have to do that, but more so rather than invent a new thing for this new one. Alternative every year you turn out with and here's another idea. This by really reinforcing and focusing on this 65 year old concept, I think is actually a very this is laying the groundwork for it and I think it's a powerful thing. So yes, it's important, but we feel pretty good about it.
Hi, it's Jessica Mays from Nomura Securities. I had a question on the pricing increases. And if you could talk about the differences in the environment now, macro and competitively versus the last time you increased price, what gives you the confidence of not meeting resistance in those increases? And then just a second question on the margin. If you could talk a little bit about the warehouse initiative, if there's any increase in costs we should expect with the opening of the new warehouses before we start to see the benefit to margin?
Thanks very much.
I'm going to ask Tim to talk about this because he's leading the pricing initiative. But it's important because Tim wasn't here at the time to contrast it to how it was several years ago. Tempur, as you know, has a unique characteristic in that it has unilateral pricing. So when we raise prices, it raises prices for us, but it also raises prices for the retailer. And the retailers can be very confident that those prices are going up.
So unlike in most industries where price release increases are resisted by the retailers, In this case, they're never resisted. They're always keen to have it. The issue though becomes what does it do to the elasticity of the products. What had been the past and up until 2012 was from time to time, Tempur would take price. This is an important transition that it is now again the product is established and well received and like and has the consumer demand to offset the elasticity concern that both we and the retailers feel very good about this.
And we have, as we said, some of these prices have gone through already, some are about to go through. But the reaction that we've received has been really quite good. So Tim, you want to add a little bit?
Yes. I think the key to taking price increases in Tempur because it's unilateral price is whether the velocity will be impacted. And when the Tempur business was declining a couple of years back, it was difficult to continue to take pricing up. We had an excellent back half. The velocities are very good and the trade is supportive of being able to collect another $100 to $200 on many of the Cloud and Contour products.
And we think given the momentum and the lack of sensitivity in that price range that we won't see a volume loss or a velocity loss. So we feel very good about it. And the feedback so far is that we should be able to achieve this from our trade customers. With respect to the warehouses, many of the warehouses are actually being created from Sealy factories. So there's not incremental or construction cost or even lease cost.
We have to reconfigure to some degree to be able to create the capacity, but it's not necessarily that it's there's a lot of incremental expense. We are building 2 facilities. They're build to lease and we'll get the cost out the fixed cost out of those facilities that will close, that will where the volume will migrate into the new facilities. So, Dale?
Yes. No, that answers it well, I think.
Hi, there. Peter Kueh with Piper Jaffray. Thanks for all the detail today. I want to ask 2 questions. I'll ask them separately because they're unrelated.
First off, on the Sealy Continental Europe launch, you talked a lot about the initiatives to drive sales, drive slots. I was hoping you could talk more about the back end execution. You're now going to be working with a 3rd party contract manufacturer. Do you have the resources in place to manage that relationship? And then what does the time line look like where you may ultimately have to have some capital investment to build your own facility to meet the demand over in Europe?
Go ahead, David.
Okay. We did have dealing difficulties and just let me put it into a little bit of historical perspective for you. When we bought back the distribution rights of the Sealy brand in Europe With the information that we had at hand, the obvious decision was to partner with the former licensee. Hindsight is a wonderful tool for decision making but hindsight you never have at the time you make the decision. That partner did have significant financial difficulties and we tried in many ways to help them through.
That led us to a new direction and we have identified a very capable partner located in Eastern Europe that is now fully up and running with the manufacturing and the supply of the Sealy branded products for Europe. Until such times as we really understand the velocity, the volume and the true potential of the CV brand we prefer to operate with the contract manufacturing model. Time will tell if it is then viable for us at some stage to then consider our own manufacturing operation. It's not something that we are contemplating in the short term, but it is certainly something that will be evaluated as time goes on because it's going to depend very much on the development of the business at a particular time. But we are extremely pleased with the new supply that we have found.
And as I repeated to John's question, we're very confident of our ability to roll out to our distribution targets and also to achieve the slot velocity that we're seeking to achieve with the brands. Stearns and Foster on the other hand will continue to be manufactured in North America. The positioning of Stearns and Foster really is about the American craftsmanship quality really high end luxury positioning and it lends itself to an import program. It's never going to be a major high volume category for us due to its luxury positioning. And it makes sense to utilize our North American manufacturing base as that sort.
Okay. Thanks for the overview. And one then unrelated question. Just on the earnings algorithm you provided to drive 15% earnings growth over time. If we look at the FX adjusted guidance for this year, at the midpoint, you're guiding for 20% earnings growth.
So it's a little bit above the go forward algorithm. What are the little nuances this year that are giving you confidence that you're going to be above that long term growth rate?
Yes. No, as we I think that this year, and you're right to characterize it as it did, which is FX adjusted because we are getting significant FX headwinds. But putting that aside, we are seeing the benefit in this year of a couple of things. One is that the improvement in the gross margins and the operating margins of Tempur in North America. We are going to see some improvement in the Sealy margins.
And we have these specific initiatives, for example, the pricing, which are relatively short term. So the pricing and the latter part of the synergies will drive it for this year. So we have kind of clear line of sight for those.
Philip Pfal from Standard Partners. So let's talk a little bit about the progress you've made since 2012. In 2012 Investor Day, you promised to achieve $8 in EPS by 2016. Now you're guiding towards $4 in EPS in 2016. So it's clear that 2012 target was off.
Can you give us some color on what went wrong here? And then I have a quick follow-up.
In 2012, that Investor Day was in the first it was an early part of 2012. And it was before the change in the environment, which not everybody may know about, which was that until that time, Tempur, although it had had competitors, had really never had a successful competitor. And in the first half of twenty twelve, effectively 3 significant competitors came in and it had several effects. Obviously, it took share from Tempur. It had another effect.
It lowered the prices for the average retailer, not just for Tempur, but for the retailer. And what happened was that the premium price product of Tempur now had competitors that were bringing the pricing down. And at first, and I think that and I know this from speaking to many of our retail partners, at first this was seen as a good thing. Maybe this is going to generate more volume. But what was seen was it actually brought overall prices down.
However, it was what happened. And in 2012, in the second Q3 of 2012, we recognized that we were going to have to change our strategy. And we laid out 2 key components of what we were going to change. 1 was that we were going to revamp the line from top to bottom. And the other one was that we were going to improve the retailer economics to make it so that there were more incented to sell Tempur.
And we said that was what we were going to do and that is what we have done. And in addition, we made the acquisition of Sealy. But the thing was that that was your right to contrast it. It was under a different set of assumptions completely. And so the 2013 number of $4 is still essentially the number that we're targeting.
As Dale showed on a currency corrected basis, we're very close to that number. And going forward, we would anticipate progressing above that. So there was an event that happened in 2012 to which we made both operational and strategic changes, which we have now implemented. We're seeing the benefit of the operational changes from a Tempur side and the strategic changes from the acquisition of Sealy are obviously manifest.
So today, I think you made a lot of statements about where you want our company to be in 2018. And since the 2012 guidelines were not achieved, could you give us some clarity on what's really different this time? Is there something different in the way you guys are approaching running the business, in the executive team, in the Board, something that you can point to, to give us confidence that you will be able to achieve by 2018, what you're telling us you will?
Well, I think there is a fundamental change in that Tempur Sealy today is a significantly larger and company but with a bigger portfolio, therefore less at risk to a single change in an environment. When Tempur was a single entity, a change in one product line in one country could have a dramatic effect, a very significant effect. We're now insulated against that to some extent by having the portfolio. I think the likelihood of that or similar that exact event obviously that exact event will happen, but something like that is less likely because I think one of the other things that's changed in the world is that the retailers are very aware that that is not a good thing for them either. So that there is a change in our company and a change in the retailer environment.
And I would say that the leadership team that we have here is a very competent leadership team working together for a long time and worked through that 2012 issue. And quite frankly, I think responded to a very difficult situation that we had not anticipated, redirected and are now essentially on plan with what we had expected to do afterwards. So, I don't see another major shock like that, but and I do believe our 2018 guidance is good or projections are good, the evergreen numbers are good. And as we've said, we have deliberately set them at such a level that we're striving to do better than them right from the very first year. Hi.
Josh Borstein, Longbow Research. Thank you for the presentation today. Just two questions. 1 on the expectations for 1% decline in SG and A as a percent of sales. Could you talk about the various buckets where you expect to see those savings?
It's not SG and A, it's OpEx. So maybe that's the same thing, but I mean everything. And I think that one of the things is that that's going to be driven to some extent purely by leverage. So as we grow the top line, there's going to be a degree of improvement in that. But the other thing is that it is part of what we put in place in the organization that we are expecting improvements in sort of productivity at every level.
So one of the things that we talked a lot about today, for example, is our investment in R and D, which is a significant investment and an important strategic investment. And we are going to continue to invest in R and D. But at the same time, we're going to put an expectation on R and D to find ways to be more productive and to get their percentage improvement their cost as a percent of sales to be going down each year. And that's going to be asked of every every part of the organization. So this is not by carving out one element of it.
It's by systematically putting a degree of expectation of productivity improvement everywhere. And just one more. The Sealy gross margins is a divestiture of the plants there a contributor to the improvement in gross margin? Or this 300 basis points through 2018, is it all coming from the assembly transformation? There's nothing about the I don't know if there's anything about it.
No.
It's probably neutral.
Hi. I have a question on Sealy. Specifically, what is Sealy's 2014 EBIT margin?
Sorry, could you repeat that question? I didn't quite hear.
No, I'm trying to understand the margin evolution of the Sealy business specifically. So in 2014, what was the EBIT margin for Sealy? And then also in some of the previous earnings calls, I think you mentioned that part of the Sealy corporate expense is now allocated to Tempur North America. So kind of as of in terms of basis points, how much is that?
Sealy's EBIT margin for 2014 was
6%. And
how much of Sealy's corporate expense is allocated to Tempur North America?
Yes. I believe that from a corporate expense standpoint, in 2014, Tempur North America, where corporate was, picked up about $20,000,000 of expense from Sealy.
Okay. So I guess what I'm trying to understand is in 2012 when Sealy was a standalone entity with November year end, I think the EBIT margin for Sealy in that year was 9.2%. What has happened that it's 6% now and if you take out that corporate overhead reallocation, it's almost half of that. So kind of like they had the same plans, they had the same business. What's changed so dramatically that the EBIT margin performance is half of what I mean, there should have been synergies, instead the performance has just if you could walk me through kind of what the puts and takes are for that?
Thank you.
Yes. I don't have a reconciliation of 2014 to 2012. We can follow-up with that. A significant driver is FX. I showed in the presentation, there was $14,000,000 or $0.14 but we had $14,000,000 of negative FX in 2014.
There actually is a significant portion of that was Canada, and that's all Sealy. Another significant portion was Latin America. That's all Sealy. So, Sealy bore the brunt in 2014 of the negative FX. Some negative FX in Tempur had affected the Tempur International, but the bulk of the problem on FX was in Sealy.
In 2014 and 2015, it split more evenly. Tempur International with the weakness of the euro, Tempur International is seeing a lot of negative currency this year. Canada continues to be even weaker. So, Sealy continues to see that. But so that's a big component.
But from an outright, here's a reconciliation from 12% to 14%, we'll have to follow-up with you on that.
Sam Reid from Barclays. Two quick questions on advertising here. First, are your assumptions for advertising in your targets largely consistent with your current run rate? And then the second question is, does your advertising strategy with respect to CLE change as you continue to grow and scale that business in the U. S?
Thanks. Tim? Yes. We expect from a rate standpoint to be consistent over the next couple of years. But obviously, as with everywhere else, we'll look for productivity.
We got tremendous productivity in 2014 and we'll continue to look for ways to spend the money more efficiently, but we're committed to the same kinds of rates. The bulk of the TV advertising for 'fifteen will continue to be Tempur Pedic, but we will advertise Sealy on TV. And going forward, as we bring innovation, we will certainly want to continue to build and invest in Psiliplastropedic, not only on TV, but using other means like digital, which we think can be an efficient way to build that brand. And then, Stearns and Foster actually had not had advertising support in, as I understand it, more than a decade. And we supported it with national advertising mainly in print in 2014.
And the awareness numbers and the visits to websites went up dramatically. So we think that that brand deserves more investment. It's probably I would describe it as a jewel of the integration that maybe had been under supported. And by giving it some support in 2014, we got a nice response. So we think that that can continue as well.
Hi, Seth Basham from Wedbush. Could you contextualize some of the profit improvement initiatives you have for 2015? From a confidence standpoint, which ones are at the highest level and which are at the lowest level?
Okay. From a profit improvement standpoint for 2015, at the highest level, the pricing essentially is done. A component of the pricing occurred in 2014. So we're just continuing to roll that forward. The 2015 price changes go into effect in a couple of weeks.
So, very confident that the retailers have known about that for almost 3 months now. No pushback at all. So that will be flowing through. So pricing is essentially done. We have the momentum and traction that we've seen in the Tempur North America business from a volume standpoint, from a productivity standpoint, from a learning curve standpoint of getting up to speed on how to produce the new Oslo Contour and Cloud products that were introduced last year.
So we're seeing cost improvement on those. Within Sealy, we have a number of we're starting to get more and more benefit from the network optimization. That has been a project that Tim said just a moment ago, we're about 60 percent of the way through that. So we're getting more benefit on an ongoing basis from that one. So we feel pretty good about where we're at on a cost standpoint.
There's the benefit from
a smaller rollout of Tempur than there was last year, but I wouldn't overestimate that because there's a pretty big rollout as well with Flex. So it's better, but it's not like black and white. There's a big there was a very big rollout last year, a big but not as big rollout this year.
Great. And just on the flip side of that, outside of FX, what do you think the base risks are to hitting your numbers for 2015?
Well, I think I mean, inevitably, when we're in a situation like being here on whatever the February, whatever day this is today, with both Flex and Posturepedic rolling out literally within days, you never quite know for absolutely sure how something's going to sell until it's on the floor. So calling it honestly, we've got very positive reaction. We think they're going to do very well. We've got great placement from retailers. We're feeling good about it.
But still it's not selling. It's hard to know. So I would say that. But I think that some of the other initiatives in terms of the focuses that we have on cost, some of the improvements that we're going to make in operations, I feel quite good about those.
Can you please share your energy cost assumptions and provide some sensitivity analysis around through the P and L if those energy assumptions are proved wrong?
Energy? Manufacturing distribution. Commodity costs. Commodities in general. Yes.
Yes. Yes.
I see what you mean. Yes. Okay. Well, let me just kick it off. Adele, you can I mean, essentially, obviously, there has been a lot of a primary driver of our input costs, as Dale showed, are energy related products or oil related products?
However, they're far down the process of converting oil. And so it is always remarkable how little or how little the correlation between the movement of oil and the raw materials that we buy are. And so we have been seeing we have certainly not been seeing the benefit that has been seen in the rest of the industry for the raw material. We're starting to see some cracks in it. So it may be starting to trickle through.
I don't know, Daniel, if you'd like to add that.
Yes. What was specifically built into our plans this year was actually slight inflation in our chemical costs and commodity costs. The reason for that was we actually saw inflation all year last year. From the Q1 to the Q4, pricing went up every quarter. Even despite oil really coming off in the Q4, our commodity costs continued to increase.
So even if we actually start to get these cracks in the armor, if you will, of the suppliers, it's got to come down quite a bit before we even get even with last year. So, we have slight inflation built in to the plan.
As we said on
the earnings call 2 weeks ago, we are starting to see some softening on that side, but it's got to come down quite a bit before we even get back to a breakeven.
Keith, you use SunTrust. Two questions. 1, you had talked about a pre buy by some of your customers in the Q4. Do you think that's normalized with terms of inventory or product in the channel? And then number 2, if you want to give any comments on Presidents Day weekend outside of the Northeast, how sales went?
Go ahead, Tim. Yes. We think that the inventory largely has been worked through. As far as Presidents Day goes, we think generally it was fairly good to okay depending on the region of the country. And obviously, we would have preferred not to have frigid cold weather and a lot of snow in some parts of the country.
So in those places, naturally, we didn't get quite the sell through that we had hoped, but still okay. In other parts of the country, it was very good. So on balance, I think it was about where we needed to be and we don't see any issues relative to how we feel about the Q1.
We've got time for a couple more.
One distribution area that wasn't mentioned today is the warehouse club channel. It looks like you guys do have some availability at Costco that just started. I was wondering if you could talk about the positioning of the products there using older models and the pricing comparison to your broader retail partners in the U. S?
Well, Cosco is a very important customer for us, particularly for Sealy. And that has been that's a long established business and a good business and continues to grow. We have different products in there than we do in the main channels, but that's not a big conflict issue.
Okay. I think this wraps up the formal presentation. Did I get your question though? You're looking at the
did I get the question? Peter, were you speaking to Tempur? Yes, Tempur.
Right. Yes. Okay.
Yes. So the fundamental business in Costco is with CELIEN and Stearns and Foster. It's a very good customer. One of the things that we have done is and are in the process of doing is a roadshow. So Tempur Pedic will set up product and it will only be there for, let's say, a week and then it rotates.
And so it's just an opportunity to expose Tempur to the Costco customer base. And interestingly, what we find is that when there is a roadshow, we see a lift in our other retailers' business around that time because often what happens is someone comes into Costco, they're not necessarily shopping for a mattress or a Tempur. They've maybe never tried a Tempur. They try it and they think, wow, this is pretty good. And they eventually go buy potentially at a retailer.
So we actually see a nice lift, but it's not a permanent placement. It's a rotation.
And one thing I would add is we've actually done this Costco roadshow for probably 3 years. So it's not brand new in terms of using having Tempur in these roadshows going through Costco.