As a reminder, today's conference may be recorded. It's now my pleasure to turn
the floor over Mark Group.
Sir, the
floor is yours. Thanks, Huey. Thank you
for participating in today's call. Joining me in our Lexington headquarters are Mark Sarberry, President and CEO and Dale Williams, EVP and CFO. After our prepared remarks, we will open the call for Q and A. Forward looking statements that we make during this call are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward looking statements, including the company's expectations regarding sales, adjusted EBITDA, earnings or adjusted net income or the integration with Sealy involve uncertainties.
Actual results may differ due to a variety of factors that could adversely affect the company's business. The factors that could cause actual results differ materially from those identified include economic, regulatory, competitive, operating and other factors discussed in the press release issued today. These factors are also discussed in the company's SEC filings including but not limited to, annual reports on Form 10 ks and the company's quarterly reports on Form 10 Q under the heading Special Note Regarding Forward Looking Statements and or Risk Factors as well as the company's press releases. Forward looking statement speaks only as of the date in which it is made. The company undertakes no obligation to update any forward looking statements.
The press release, which contains reconciliations of non GAAP financial measures to the most directly comparable GAAP measures, is posted on the company's website at tempersili.com and filed with the SEC. With that introduction, I will turn the call over to Mark Sarberry.
Thanks, Mark. Good evening, everyone, and thanks for joining us. Today, I will provide an overview of our performance in the 4th quarter and then discuss our key strategic growth initiatives in the context of our outlook for 2014. I'll then turn the call over to Dale, who will provide details on the Q4 and full year financial results and 20 14 guidance. Overall, our 4th quarter was in line with our expectations.
We achieved solid overall growth in the quarter and are pleased in particular with the improvement in our Sealy and Tempur International businesses. Sealy's 4th quarter sales were above our expectations, driven by continued strong demand for Posturepedic Inner Spring and Hybrid products, increased consolidated sales from our Comfort Revolution joint venture and higher international sales in South America. Tempur International returned to positive growth in the 4th quarter with sales increasing in Europe, Asia and Latin America. Our performance in Europe strengthened through the quarter with most of our markets showing growth. However, sales did remain weak in Germany.
Our Asia Pacific business also had another good quarter of growth driven by strong results in Korea and Australia. Tempur North America 4th quarter sales were down 1%. Sales in our retail channel, which account for 93% of segment sales, were up 1%. Sales of products priced at $2,000 and above grew for the 3rd consecutive quarter. And we saw solid growth in our adjustable base product, driven by higher attach rates and strong demand for our new Ergo Plus and Tempur UP products.
We had a good 4th quarter overall and have seen more stable performance in our business. However, demand continues to remain volatile week to week with some softness in January due to sluggish traffic at retail in the U. S. And as Dale will explain, there is a certain degree of caution in our projections for 2014. Now I'd like to discuss our strategic growth initiatives in the context of our outlook for 2014.
As I said before, the foundation of our strategy is the commitment to investing in 4 key areas of our business. These areas are product innovation, marketing, new market expansion and our supply chain, which we are striving to make easier to do business with. As previously communicated, we will fund these investments with a portion of the cost synergies realized from the Sealy acquisition and our annual cost productivity programs as well as through overall growth in the business. The first strategic initiative is product innovation. Our goal is to provide consumers the best bed and the best sleep of their life and to provide our retailers a complete and optimal offering across brands, products and prices to drive their growth.
To achieve this, we will increase our investment in R and D in 2014. We have an integrated global product development team that is focused on further leveraging the combined technologies of our comprehensive portfolio of products as well as developing new to the industry technologies. Our new up adjustable basis for Stearns and Foster and Optimum are the first examples of our ability to leverage technologies across our brand portfolio. In January, we introduced a record number of new products in Las Vegas and Cologne, Germany. Our new Tempur Cloud and Contour launches will be the largest in Tempur's which We also introduced 4 new Stearns and Foster collections, including a new hybrid offering at the upper end of the range.
The new Stearns and Foster lineup is integrated with outlast material and air vents for improved climate performance and has a clear step up story with features such as Intellicoil encased springs, ashmere covers and hand tufting. Our Tempur North America and Stearns and Foster introductions were very well received by our customers and in testing by consumers and RSAs. We are expecting boat launches to be important drivers of our growth in 2014 and we have already started production on both and are building inventory in anticipation of a rollout starting in the Q1. In addition, we are excited about our all new Optimum collection of 5 new beds featuring more Outlast material, more gel memory foam from the top to the bottom of the mattress and taller profiles that we believe will strengthen Optimum's competitive position within the $1,000 to $2,000 price segment. These will be rolled out in the Q2.
Not only were the new product features and aesthetics well received, but retailers also responded well to the fact that all the lines fit together with logical price points and step up stories from top to bottom both within and across the brands. New product introductions are occurring in our international markets as well. At the recent Cologne Fair in Germany, we introduced 6 new Tempur mattresses featuring Breeze technology with 2 models in each of the 3 mattress collections. As you know, we've been very pleased with demand for our Breeze beds in North America and are and are excited about the prospects for it internationally. Tempur International also introduced an innovative new Easy Clean Pillow, features a washable material that allows for the whole pillow to be machine washed and tumble dried as well as a new Breeze pillow and an integrated bedding system called Experience.
Our second strategic initiative is marketing and this includes advertising as well as in store marketing and direct sales. In 2014, we will increase our investment in marketing. We're committed to advertising direct to the consumer to drive retail traffic and demand. Tempur will be advertised on TV continuously throughout the year with elevated levels around major holidays. We will leverage our Ask Me campaign with new creative and we will also support Stearns and Foster, Optimum and Posturepedic with consumer advertising.
We will also gain more impressions per spent following our recently negotiated combined media buy. From an in store perspective, we will support our new Tempur Cloud and Contour collections with new point of purchase materials, including new fixtures and signage, new headboards and new top of bed merchandising. High quality POP is also supporting the new Stearns and Foster and Ultimate launches. Those of you who visited our showrooms last week in Las Vegas saw firsthand the visual appeal and functional benefits of the new POP, which we believe will not only differentiate our products on the floor, but also serve as a compelling tool for the RSA to increase conversion rates on sales of our products. The 3rd strategic initiative is new market expansion.
As we laid out in our Investor Day presentation in September 2013, our international opportunity is significant. And over time, we expect to realize over $300,000,000 in revenue synergies from international markets. We are advancing several initiatives across the world and we will communicate them as they come to fruition. For example, last week we signed an agreement whereby we regain Tempur Pedic distribution rights in Mexico previously held by a third party distributor. This is the first deal since our combination with Sealy.
Now while a relatively small business for Tempur today, Sealy has an established business in Mexico with deep and broad customer relationships and we are confident that the combination of the two businesses will enable us to drive our overall performance in Mexico. Also in January, we began integrating Sealy Canada and Tempur Canada. Now this is not a market expansion as both are already owned markets. Healy is the market leader and Tempo has a smaller but important presence. But it is an important strategic initiative that we believe will improve our overall business in Canada and importantly make it easier for customers to do business with us there.
And indeed, our 4th strategic initiative is our commitment to building a world class supply chain that is easier to do business with. We have several exciting initiatives underway that will improve customer service and lower costs within our transportation and distribution network and we will update you on our progress later in the year. In addition, we're rolling out our category management program, which is designed to help optimize floor plans to improve both our own and our retailers' sales and profitability. Our company accomplished a great deal in 2013 and we're excited about all of the initiatives we have in place for 2014. Since completing the acquisition last year, we have integrated all the key functions, delivered greater cost synergies than initially projected, developed and launched compelling new products across our brands and laid the groundwork for future revenue synergies both in the U.
S. And across the world. An enormous amount of effort is behind each of these company wide initiatives and I am very proud of how the organization has come together as a single team. With that, I'll now hand the call over to Eyal.
Thanks, Mark. I'll focus my commentary on the Q4 and full year 2013 financial results and then discuss our 2014 guidance. I'll address the performance on a consolidated basis then speak to the performance for each segment and provide commentary on the key areas or items where there's a notable variance from the prior year. As a reminder, the company completed its acquisition of Sealy in March 2013 and results for 2012 do not include the Sealy results of operations. Consolidated net sales for the Q4 were $678,100,000 Tempur North America net sales were down 0.7% and Tempur International net sales were up 4.5%.
Sealy sales were $333,500,000 By product, bedding net sales for Tempur North America declined 0.7 percent to $205,700,000 on flat units. Tempur International bedding net sales increased 4.5 percent to 88 $1,000,000 on a unit increase of 4%. Sealy's betting net sales were $305,300,000 By channel, Tempur North America retail net sales increased 1% and direct net sales declined 28%. And for international retail net sales increased 4.7% and direct sales increased 16.3%. 4th quarter gross margin was 40.2% as compared to 50% in the Q4 last year.
As we previously stated on conference calls, the inclusion of Sealy has altered the consolidated gross margin profile of the business. On a year over year basis, 4th quarter gross margin declined primarily due to the inclusion of Sealy and product mix. These impacts were partially offset by lower sourcing costs. On a sequential On a sequential basis, gross margin decreased to 40.2 percent from 40.6%, primarily due to fixed cost deleverage in the Sealy segment and product mix. These were partially offset by favorable geographic mix.
Consolidated advertising spend, which includes both national and cooperative, was $71,400,000 or 10.5% of sales in the 4th quarter. And for North America, advertising spend increased nearly 30% versus last year. D and A as presented for the full year 2013 reflects a $6,000,000 reclassification to selling and marketing of approximately $3,000,000 occurring in both the second and third quarters of 2013. This reclassification does not impact previously reported operating income. Consolidated operating income was $74,100,000 as compared to $51,300,000 in the Q4 of 2012.
Operating income in the Q4 of 2013 included $8,200,000 of transaction and integration costs related to the Sealy acquisition. Operating income in the Q4 of 2012 included $7,600,000 of transaction and integration costs related to the proposed Sealy acquisition as well as 1 point acquisition
as well as $1,500,000 of
restructuring charges. Interest expense was $22,600,000 The 4th quarter tax rate was 44% and reflects an adjustment to the repatriation tax based on final foreign earnings and profits for 2013. The normalized tax rate was 29.3%. In our 4th quarter income statement, we have a line item titled less redeemable non controlling interest. This deduction, the net income attributable to Tempur Sealy International Inc.
And GAAP earnings per share is related to our joint venture with Comfort Revolution. Because we do not own 100 percent of Comfort Revolution, this amount has historically included the percentage of Comfort Revolution's net income that we do not own. As necessary, the amount will also include adjustments for changes in the redemption value attributable to our call option to purchase the remaining equity interest in the joint venture, which reduced net income attributable to Tempur Sealy. We will record non cash adjustments in future periods as necessary. These adjustments will not be reflected in our adjusted EBITDA or adjusted earnings per share.
4th quarter GAAP earnings per share was $0.37 as compared to $0.39 per share in the Q4 of 2012. Adjusted earnings per share were $0.66 in the 4th quarter as compared to adjusted EPS of $0.60 in the prior year period. Now I will summarize the income statement for the full year 2013. As a reminder, 2013 results only include Sealy from March 18, 2013. Sales increased 76 percent to $2,500,000,000 with the increase due to the inclusion of $1,100,000,000 of Sealy net sales for the period subsequent to the March close.
Tempur North America sales declined 6%, while Tempur International sales were flat relative to full year 2012 sales. Operating income was $244,000,000 as compared to $248,000,000 in 2012. Operating income for full year 2013 included $44,600,000 of transaction and integration costs related to the Sealy acquisition. 2012, operating income for the full year included $11,100,000 of transaction and integration costs related to the proposed Sealy acquisition and $1,500,000 of restructuring charges. GAAP earnings per share for full year 2013 were $1.20 as compared to GAAP earnings per share for full year 2012 of 1 $0.70 Adjusted EPS 13 were $2.38 as compared to $2.61 in 2012.
Now I'll turn to the balance sheet and cash flow for a brief review. As shown on the balance sheet, the primary changes are related to the acquisition and related accounting treatment. The company has consolidated funded debt less qualified cash $1,800,000,000 The ratio of consolidated funded debt less qualified cash to adjusted EBITDA was 4.4 times calculated on a combined basis in accordance with the company's senior secured facility. A calculation of this ratio is included in the press release. During the quarter, operating cash flow was slightly negative due to a $40,000,000 cash tax repatriation payment.
We initially accrued for this tax provision in the Q3 of 2012 based on the timing of our decision to acquire Sealy. Capital expenditures were $11,600,000 Now I'd like to address our 2014 guidance. Today, the company issued financial guidance for 2014. The company currently expects net sales to be in a range of $2,800,000,000 to $2,900,000,000 This reflects growth of 1% to 5% compared to 2013 had we owned Sealy for all of 2013 and approximately 50 basis points of headwind from forecasted unfavorable foreign exchange. Adjusted EBITDA to be in a range of $415,000,000 to $435,000,000 including a forecasted unfavorable foreign exchange impact of approximately $9,000,000 and adjusted earnings per share could be in the range of $2.60 to $2.85 This includes $0.19 per share of depreciation and amortization related to the Sealy purchase price allocation or PPA and unfavorable foreign exchange of $0.10 per share.
We're also providing the following additional full year and amortization of approximately $93,000,000 which includes the PPA depreciation and amortization of $17,000,000 interest expense of approximately $89,000,000 annual tax rate of approximately 31 percent average share count 62,100,000 shares and capital expenditures of approximately $65,000,000 It is important to note that our 2014 adjusted EBITDA and adjusted EPS guidance excludes the impact of ongoing integration costs related to the acquisition of Sealy. From an earnings perspective, our guidance reflects margin expansion resulting from cost synergies and leverage, offset partially by investments in new products, marketing and R and D as well as forecasted unfavorable exchange foreign exchange as compared to 2013 related primarily to Canada. Based on these assumptions, we expect our operating margin to be in a range of 11.7% to 12% for the full year 2014. We are planning for Q1 2014 sales to be flat to slightly up as compared to 4th quarter 2013 sales of $678,100,000 As Mark indicated, order trends have been somewhat soft in January due to sluggish traffic at retail in the U. S.
Our Q1 sales outlook also assumes a slight transitory impact as customers wind down inventory on existing models, advance the flooring our new Tempur Pedic and Serns and Foster products. We expect our operating margin to be approximately 10% in the Q1 of 2014. In the Q1, we will ship a record number of floor models as we launch the new Tempur Cloud and Kontoor offerings as well as the new Stearns and Foster collections. In addition, we expect floor model shipments to remain elevated in the Q2 as we complete these rollouts and begin shipping our new optimum beds, but expect floor model shipments to be much lower in the second half of the year. Through January, we are tracking to these expectations.
In considering our guidance, it is possible that our actual performance will vary depending on the success of new initiatives, macroeconomic conditions and competitive activities or the consequences of other risk factors we've identified in our press release and SEC filings. As noted in our press release, our guidance and these expectations are based on information available at the time of the release and are subject to changing conditions, many of which are outside the company's control. With that, operator, please open the line for questions.
Yes, sir. And it looks like our first phone question will come from Josh Borsheim with Longbow Research. Please go ahead. Your line is now open.
Hi, Mark, Dale and Mark. Thank you for taking my questions here. Just on the guidance, is it possible to talk about what the guidance implies for each of the 3 segments on the top line?
Sure. For the full year, we actually expect all three segments to grow mid single digits. For the Q1, as I mentioned, we expect Sealy to be flat to slightly up. We expect the Tempur International to be flat. We expect Tempur North America to be down mid single digits.
And again, that's a function of the transition of essentially the core of our product line.
Okay. Thank you for that. That's very helpful. And then the deal that you said you inked in Mexico, can you talk a little bit about maybe a little more detail what
North America or for Tempur, it's a relatively small business, mid single digit million. But for Healy, it's really quite a large business almost 10 times the same. And I think it's one of the examples of where we can leverage 1 infrastructure, I. E. In this case Sealy to gain greater distribution of another of our other product line, in this case Tempur.
The way that it's done though has been very consistent with the way around the world. We have acquired what we call 3rd party center 3rd parties. We've done this all across the world in Australia, in Austria, in Poland, in Korea. This has been our traditional method of seeding a country and then growing it when it gets to an established stage.
And Josh, the cost is fairly minimal. It's about $1,000,000
Okay. Great. And then if I could just sneak one more in. With respect to the rollouts, it seems like I think you mentioned this will be the greatest rollout in terms of SKUs going out for Tempur. How does this compare to the previous rollout last year in terms of the gross margin impact that it might have?
Well, if you think if you want kind of as a model the way to think about this is in the Q2 of last year, we launched we had more floor models combination of Tempur and Sealy, had more floor models than ever before. I think we set a number of around 70,000 floor models. This year in the Q1, we will have a number comparable to that. And so that's a much bigger number than has ever been done in the Q1. And traditionally these big rollouts are done in the Q2.
This year we're going to have that number in the Q1. And then in the Q2, we're going to have an elevated level roughly comparable to what we had in the prior year. So it's going to have an impact on gross margin
and Yes. From a margin implication standpoint for the year, we are expecting a gross margin for the business to be about 41%. In the first half, we would expect that to be roughly 100 basis points lower as there'll be significant floor model expenses in both the first and second quarters. And then in the second half, obviously, better as we get past the big rollouts. And to put
that in context, that 41% is about 100 basis points better than the last three quarters of this year, if you average that. And that's a function of the cost synergies that we've been able to get offset by the product the investments we've made in these new products as well as FX, which as Al said has been hurt this time.
Okay. So 70,000,000 SKUs rolling out this quarter and 70,000,000. All right.
That would be great.
That would be a big number. And an additional 70,000 in 2Q as well then, right?
Yes. I'm not giving exact numbers. I'm just using that as a that's a good basis because that was the number we used last year. That was the number we quoted last year. And that is roughly right for both quarters.
Okay. Terrific. I appreciate the help. Thank you and good luck.
Thank you. Thank you, sir. Our next phone question will come from Brad Jones with KeyBanc Capital. Please go ahead. Your line is open.
Hey, thanks guys. Just to follow-up around the some of the financial outlook for the first half of the year. I know you're not giving specific quarterly earnings guidance, but Dale could you give us maybe a little bit better sense of what range you think this Q1 might come in given that it's such an unusual kind of stub period that we're up against?
Well, from a total business standpoint, we're looking at sales at the top line of minus 1% to minus 2% on a year over year basis. And what that means to give you a gauge since you don't know what the Q1 last year was, except because that was essentially Tempur only, that's why we gave you the gauge against the sequential of the 4th quarter. 4th quarter Q1, we expect to be flat to slightly up from the 4th quarter. And then also in the Q1 of this year, we're expecting EBIT margin to be around 10% impacted by the floor models. And as we said in the prepared remarks, January sales were a little bit softer than we would have liked.
Actually it's from an overall standpoint, most of the country was fine. There are a couple of segments of the country, basically the Northeast and the Midwest that were a little bit soft. And anyone's guess as to what could have caused that here over the last month. But I think that gives you a pretty good indication of how to gauge Q1.
That's very helpful. From a synergy perspective, I know as time goes on, it'll get more and more difficult to quantify it. But you did say you're finding more opportunities and getting them realizing them faster than you had expected. Where do you think synergies have come in since the deal closed? And what are you modeling for 2014?
Well, I would say we're not inconsistent from what we said at the Analyst Day last September or the Investor Day in September in New York. When we did decided to purchase Hilli, we had an estimate of $40,000,000 of synergies being recognized over the 1st 3 years in year 1. To the best of our ability to track it, we believe we ended up right about the $18,000,000 number that we talked about on the Q3 earnings call. For this year, just as we talked about in September, we believe that we will see about $40,000,000 of synergies. But also consistent with what we said in September is that some of these excess synergies that we're getting, we're reinvesting in the business, we're reinvesting in the product, we're reinvesting in R and D, we're reinvesting in marketing.
And that's what consistent with what you're seeing in our plan for 2014.
Great. Thanks so much.
Thank you.
Thank you, sir. Our next questioner in queue will come from Budd Rox with Raymond James. Please go ahead. Your line is open.
Well, good morning. I didn't know who he was talking about. Good morning, Dale. Good morning, Mark. Good morning, Mark.
Good afternoon, Mark. Good afternoon, Mark. Good evening. Sorry about that. A couple of questions, if I could.
1 on the pro form a, Dale, for the year, if
we were to take it because
you say the year is going to be up 1% to 5%. Is that about $2,780,000,000 or $2,770,000,000
How do we
think about that?
It would
round to 2.8% to 2.9%. We're really
Well, that's what your guidance assumes. And you said that's up 1% to 5% versus the pro form a last year, if I read that right?
Yes. You're saying for 20 13. Yes. On a pro form a basis, 2013 would be about 2.77.
Okay. All right. And when you talk about the you said 50 basis points of foreign exchange drag. Is that against the 2.77000000000
dollars Well, that's included in the $2,800,000,000 to $2,900,000,000
Okay. And the $9,000,000 of foreign exchange drag on the earnings line that looks like it's got to be pretax if I is that right? Correct. Okay. All right.
When you look at the operating margin by segment in the Q4, I know we're going to get that with the K. Can you kind of give us an early look at what the operating margins by segment were?
Sure. And because in the K you're going to see GAAP, I'll give you GAAP. On a consolidated basis operating margins were 10.8% in the quarter. The Steely operating margin was at 6.4% for the quarter. I'm going to come back and give you a little color here.
Tempur International 23.8 percent and Tempur North America 10.3%. Couple of things to point out there. Number 1, on Tempur North America, the Tempur North America bears the cost of corporate. So all the corporate costs get borne in that Tempur North America number. In addition, a significant percentage of the transaction all the transaction costs, but a significant percentage of the integration costs are borne in the Tempur North America number.
Sealy in the 4th quarter was a little bit lower than what it had been running. But Sealy in the 4th quarter, that's a softer quarter traditionally for Sealy. Certainly, it's Sealy's 4th quarter business is much less than the 3rd quarter business, particularly on a new calendar basis that they're on. So you get some fixed cost deleverage within Sealy. Also as Comfort Revolutions is growing and that's becoming a little bit bigger piece of the Sealy segment.
Comfort Revolutions being a startup is not very profitable yet. So that also drags the Sealy margin.
Okay. And at the end of 2014, where do you think you will be with your debt to leverage ratio? Where do you project you'll be?
We at the midpoint of our guidance, that would imply a debt to EBITDA of about $3,800,000
Okay. And how does that compare to where you thought you would be by now? I know that if you can go back and think about where you were when we originally when you originally planned the acquisition and came to us?
Well, for the end of 2014, we would have thought we would have been probably in the 3.5% range. Certainly, the our business in 2013 was not as strong as we would have liked and as strong as we thought it might be at that time, particularly on the Tempur side. Tempur North America
did not perform as we
expected it to Tempur International did not perform as we expected it to at the start of the year. So that Sealy actually performed slightly better than we expected it at the start of the year. So overall, it's basically the Tempur business in 2013 was a little softer than we would have liked. And so that translates on a compound basis to just slightly better slightly higher on the debt to EBITDA than what we would have expected a year ago.
Okay. And do you think you catch that up? Or how does that
Yes. But I would say that again going back to September in the Investor Day and the 3 year plan we talked about, the guidance we just gave for 2014 is absolutely consistent with that plan. We said we wanted as a overall as a combined business
to
have a 6% or more compounded growth rate. And we also said we expect it to be a little bit lower than that at the beginning. And for that growth rate to grow over that 3 year period as we got further into the integration, as we got further into the benefits of the integration and being able to share more on the technology side and on the customer side. So I think that we're right in line with what the plan we outlined last September.
Okay. And my last question just is on the FX. Is it all is that pretty much all euro? Or how do we should we think about the
Actually a significant piece of that is Canada, the Canadian dollar. So the Canadian dollar is a significant piece of the FX problem. Actually the euro is doing pretty well right now. But in Canada, we have a very sizable business in Canada on a combined Tempur Sealy basis. Just if you look at last year 2013, the average exchange rate was $0.97 Our planning for this year was to have the exchange rate be about $0.92 today.
Well, I didn't see today, but I assume it's not that different. But right now, the spot rate is right about $0.90 So the Canadian dollar has significantly weakened. That creates the reason why that creates a little bit more earnings pressure than what you might expect is a significant portion of the COGS of the Canadian business both for Tempur and Sealy is U. S. Dollar denominated.
So their COGS goes up while the revenue is going down. And internationally, we do have some we've got a mixed bag on Tempur International side. There is some FX pressure there as well. And the euro, as I said, is and the European community in total roughly is okay. Most of the FX pressure that we're seeing is in Asia.
Got you. Okay. And one, Mark, I'm sorry. One thing for you. The acquisition in Canada and the combination in Canada and combination in Mexico, is that kind of you're thinking that's strategically something you're going to do in most other parts of
the world now? You're going
to combine Sealy and Tempur that way? Is that a model for outside the U. S?
Just to be clear, the license in Mexico was an acquisition, but the Canadian one was not. That's just a merger of 2 companies that were already owned by us. But what I think is the model that we will replicate wherever we can is where we have a strong infrastructure of 1 company and a weaker one if we have 2 companies, both Tempur and legacy Tempur and Legacy Sealy in geographies, we're looking for places where the infrastructure of 1 can help the sales of the other. And as I said in my prepared notes, there are several things that we're working on. Obviously, I can't talk about them until they come to fruition.
But that's the model that we're looking at.
Okay. Thank you very much. Good luck on the rest of the year.
Thanks, Budd.
Thank you, sir. And our next phone question will come from John Baugh with Stifel. Please go ahead. Your line is open.
Thank you and good evening. A couple of things. First, could you just comment on what drove the Tempur Direct business
in
the quarter negative year over year?
The fact is it hasn't been good. It hasn't been good. It wasn't good for much of last year. And there are several reasons for this. One is several macro reasons for this.
One
is that
there is a fundamental growth by retailers to have direct businesses, which effectively provides another way for people to get Tempur products online. And so that kind
of puts a form of competition in place, not to mention that there are other
obviously competing viscoelastics. A form of competition in place, not to mention that there are other obviously competing viscoelastics. It also is affected by the fact that it's very sensitive to advertising. And as you know, we didn't advertise continuously throughout last year and we are doing that now. And also it's very susceptible to promotion.
But having said all of that, we have a big focus this first part of the year on direct. We put our first focus last year on retail because at 93% of our business that was where we had to put our focus. But we have now put a degree of focus on that direct business. And we know it's an important part of our business and we do intend to stabilize it and use it effectively. But it is not we're not pleased with the results.
Now having said that, direct includes what we traditionally think of as direct, which is telephone sales and Internet sales and catalogs and so on. But it also includes it is both international sorry, it is both in North America and internationally and it also includes retail stores. And if we look at our direct business internationally, that is going quite well. Retail stores are growing quite well internationally, but so are so is our direct Internet business. And in the North America, as you know, we have our flagship stores, the 3 flagship stores and they too are performing quite well.
So it is we are now turning our attention to that area.
Great. And then Mark, could you maybe give us an outlook internationally, not just for Tempur, but Sealy as well in the key markets both brands address?
Well, if you look at I mean in a very broad brush, if you look at Europe, Tempur is very established in Europe, all the large countries, literally obviously all the large countries and we have a strong business there and we're well established and a good infrastructure. Sealy has a licensed business in that part of the world and clearly over time there could be an opportunity there. In Asia, it's a bit broad to call it Asia because Asia is so different. But if you look at Sealy and Tempur Sealy as a joint venture in much of Asia, which is a strong and growing joint venture. And Tempur has business across Asia, China, Japan, Korea and so on.
And so there are opportunities there across the board for a combined not necessarily combined, but there are opportunities in different places in different ways. It will be different. We have the joint venture is one that is planned through 2020. But we have opportunities for sharing and leveraging each other's infrastructures in different parts of Asia. And in South America, I talked about Mexico.
And then in South America, Sealy there is both Sealy and Tempa have businesses, but Sealy has a more established infrastructure, particularly in Argentina than does Tempa. And both groups are growing well in Brazil. So there are opportunities there for combination.
Great. And then lastly maybe for Dale. There's so many moving parts. You mentioned the segment or Tempur North America EBIT at I think 10.3%, but it's got all the corporate. Is there any way and I know in the first half we're going to have a bunch of noise with product launch.
Is there any way to think about where Tempur North American EBIT margin is settling out on an annual basis ex corporate cost and ex transaction cost and product intro noise, etcetera? Thank you.
And for North America, as we look at it is from a 2013 standpoint stripping out all the integration, all the transaction costs, all the corporate costs, Tempur North America on a standalone basis actually had pretty decent results, actually had a pretty good year. From an overall EBIT standpoint for North America is more in the high teens. And for next year, we would actually expect Tempur North America to improve its profitability. We believe that Tempur North America in 2014 will see some gross margin expansion. And while we are investing some more in marketing, we'll see leverage in R and D and in some other selling aspects that as we get benefits in the business because of the improvement in the synergies year over year.
There's $22,000,000 additional synergies in 2014. So we do expect to see some improvement in the bottom line of Tempur North America as a standalone entity. One of the complications is over time Tempur North America is becoming less and less of a standalone entity. Tempur North America and Sealy are as the integration goes further and further are becoming more of one entity.
Great. Those numbers were helpful. And then just lastly, if I could, it sounds like weather has impacted January to a degree. Are you able to look at the other areas of the country? And is there any perceptible change from, I don't know, I guess December was tough too with weather and the holiday, maybe going back to the October, November comparative period?
Well, I don't have October, November in front of me, but certainly in January, the bulk of the country, we saw good performance, but we did see specific weakness in the Northeast and the Midwest. And I'll let you draw the conclusion as to what drove that with a few weekend storms. But this business is heavily reliant on weekends. And when weekends are impacted, it can affect the business.
Great. Thank you. Good luck.
Thank you, sir. Our next phone question will come from Denise Chai with Bank of America. Please go ahead. Your line is now open.
Okay. Thank you. I wanted to ask first about gross margin and if you could break that out for us roughly by the 3 divisions?
What time period?
For the Q4, please.
Gross margins, again, this is on a GAAP basis. Tempur North America about was 43.6%, Tempur International 60.1 percent, Sealy 30.9 percent, consolidated 40.2 percent.
Okay, great. Thank you. And was there any kind of ForEx hit in 2013?
It's fairly minimal. We had normally when we have much movement in foreign exchange, we particularly on our international business, we talk about here's the actual performance. Here's what it would be on a constant currency basis. If you noticed, we didn't talk about that on this release. And all year, really, the impact of FX has been fairly nominal.
There was some impact in the particularly in the Sealy business in the second half of the year as the Canadian dollars was starting to weaken. But the primary impact and the significant weakening occurred late in the year and that's why we're projecting a big impact in 2014.
Okay. Got it. Thanks. And just going back to Tempur North America, where was the performance in line with your expectations of kind of flat to up low single digits if you take out the Northeast and the Midwest?
The Northeast and Midwest we're talking about is January.
Okay.
So, yes, I mean, Tempur North America was close. I mean, it was down 0.7%. We thought it would be flat to slightly up. So, it's a little bit below our expectations.
Okay. Okay. Got it. And just last one. Can you tell us what level of guidance sorry, if advertising is embedded in your guidance?
Yes. For the next year from a percent of revenue standpoint, we're looking for something in the ballpark 10.5% to 11% of sales kind of consistent with what we have normally run.
Great. Thank you so much.
And importantly one thing on advertising is that we will be running continuously throughout the year. That's more important. Just although the rate we will be we will the way of doing it is going to be special, we will ensure we're on air order.
Understood. Thank you.
Thank you, ma'am. Our next question will come from the line of Joe Altobello with Oppenheimer. Please go ahead. Your line is open.
Thanks. Good afternoon, guys. Just wanted to start I guess with the advertising you mentioned Dale just now to a previous question 10.5 percent to 11% and 2014 just for comparative purposes. What was that ratio in 2013?
That's a complicated one, Joe. It was right around 11%. And the reason why that's
complicated is we don't
really have the results really for most of the Q1.
True. Okay.
It was ballpark right around 11%.
Okay. Got you.
And in terms of
the Q1 guide, you mentioned obviously weather impacting you in January. If you can just look at those markets that are not weather impacted, what are you seeing in terms of year over year increase? What would Tempur North America be up in the Q1 ex weather, I guess is
the best way to ask that?
Well, I'm not going to parse it that way, Joe. Weather has some impact on January. All that business could come back in February if the weather calms down. Certainly, it could come back in March. Just because the consumer doesn't buy this weekend, they might buy next weekend and they may buy 2 weekends from when they don't have something planned.
So while it may affect 1 month, but it could come back in the quarter. But we are factoring that in a little bit. But one of the big things is we've got this humongous transition occurring. And as retailers are taking product off the floor, they got to sell that. And as they are putting the new product on the floor, they got to sell the old product off the floor.
And while retailers don't have a lot of inventory, there is a little bit of inventory they got to clear out. There's some inventory we got to clear out. So the transition, particularly when you're talking about changing 7 models from a Tempur standpoint, from a Sealy standpoint, all the Stearns and Foster products is changing. So that's quite a few models as well. So that's where we're just trying to say, particularly for Tempur, we've never seen this level of transition before.
So we believe that there's some transitory impact that will affect the performance over the quarter.
Okay. And that will probably continue with the 2Q, it sounds like, given all the slow models you're shipping?
Yes. Yes, it will continue some into Q2. Yes, it will. Okay.
And just one last one in terms of the overall environment. I mean, obviously, you guys are stepping up the advertising spend and I think your retail partners are very happy about that. What are you seeing across the competitive landscape? Are others in your space come to the realization that maybe heavy promotion is not the way to go and really shifting those dollars to more of an advertising based model is probably smarter for everybody?
I think what the industry certainly what retailers tell us and what we know is that 1st and foremost is great product. Sealy we mentioned that Sealy had a great quarter last in the 4th quarter. And you can attribute it to a lot of things, but it's because the new Posturephetix were really well liked by consumers. It really worked well. So, 1st and foremost, I think that what everybody realizes is product drives the game.
And I think what we showed in Vegas, what we showed in Cologne, both on both the showrooms
is something that we're very proud of.
And we really believe that's the backbone. And I think I really do believe that the industry believes that too. But secondly, I think people believe that advertising is driving people to the cause. And we know that. And we also know that the continuity in advertising is important.
It's not good to just do it in spurts and that requires sort of conviction to do that. And we are going to do that and I know that the retailers appreciate that too. And I think the third thing is a kind of worldview that it is best to make products that just that are premium priced products that consumers are prepared to pay a premium for. And so having ASP grow by having a focus on the best the better end product is something that's in everybody's interest. And I think certainly, we think that and I believe from all of the conversations we've had with retailers that's a common belief there too.
So I can't really speak for our competitors.
Okay. Okay. Great. Thanks guys.
Thank you, sir. Next question in queue comes from the line of Carroll Mattson with Deutsche Bank. Please go ahead. Your line is open.
Hi. It's Karru Martinson with Deutsche Bank. Just when we look at the step up in advertising, I've certainly noticed a pickup in how many times I've seen your commercials already. When you look at the spend, are you shifting more dollars out of co op into that kind
of national advertising campaign? Or do you
feel that co op dollars will kind of stay the same?
Well, one thing is that fundamentally, I just as a kind of backdrop, the way that Tempur and Sealy have gone to market for many years is different as you know and both of us have direct to consumer and cough at this point. We're not going to change to be the proportion that Tempur has on direct to consumer is different and will remain so in the and the same is largely true for Sealy. But in terms of overall, I think that we are committed to advertising. One of the things that I mentioned briefly in the prepared notes is that one of the synergies that we are that we hope to see the benefits of this year is that by putting together the media buying for the combined companies and then going and we went through a formal process with RFPs and the whole thing to negotiate a good buying rate of media to negotiate good prices for media. We have not only been able to as we said, we're maintaining our level of spending, but we're also being able to get more bang for the buck.
We'll be able to get more GRPs for our dollar. And so that I think is going
to be something we will see and that's going
to affect particularly direct to consumer advertising. So fundamentally, there's not a change in how we're allocating it, but what I think is we're going
to see it's a greater effectiveness as we're able to
combine the 2 together. Okay. And when we look at the kind of the Q1 and into the Q2, the rollout of the new beds, I mean, do you feel that you've picked up significant additional floor spots with the new product launch? Or do you feel that this is more of replacing the SKUs and possibly putting a higher turn product out there?
We hope that we will gain some floor space. But it is important to note that this launch particularly for Tempur, I mean it is true for Cerns 2 is a replacement. Historically most of our new launches have been a new product that's an addition. And it is important we're very conscious of this and investors should be too that this is a replacement. And therefore, we are going to be to a great extent swapping out floor models.
However, we do hope to gain some floor space with it because the new collection of 7 products from Tempur has been very well received and it's too early to tell right now. But the initial indications are that that's going to be positive. So we do hope for that. What we're really counting on though is the increased churn per slot as a result of these new items. And in the case of Stearns, I think the exact same thing could be said.
The new Stearns product line has been received extremely well. People are very positive about it. They particularly like and interestingly and importantly, the high end kind of comes back to the thing I was saying a little earlier has been very well is very much appreciated by retailers. We are expecting we're hoping that we'll gain more spots, but what we're also hoping is that we're going to get better churn and we're also hoping that we're going to get higher ASPs.
Thank you very much guys. Appreciate it.
Thank you, sir. Our next question will come from Keith Hughes with SunTrust. Please go ahead. Your line is open.
My question is answered. Thank you.
Thank you, sir. Our next question will come from Jon Andersen with William Blair. Please go ahead. Your line is open. Your questions please.
Good afternoon. Thanks for taking the question. I think Mark you talked not that long ago about the importance of training and educating the RSAs, particularly on the more kind of complex products to overcome selling hurdles or to improve selling effectiveness. Can you just talk a little bit about kind of where you sit today visavis that effort and particularly in
the context
of the significant number of kind of new product launches this year? Thanks.
There's no question that that's true. And it's when we were talking about global challenges for the industry and I talked about the fact that product is important, marketing is important, but no doubt about it, training the RSA is critical. And two things on that. I think that we with the new products that have just been launched from Tempa, One of the things that is important is that the way that the product is demonstrated with the zip off top is something that's very easy for an RSA to do and yet it's very demonstrable and it's very kind of appealing and interesting to a consumer. So it really passes the test of being relatively easy to do, but a valuable thing to have done and therefore easy to learn and easy to use.
And that is one of the reasons that our customers and RSAs have responded very positively to the product. The other thing is that our focus on POP, Tempur Pedic, probably particularly because it has been something that we have put a big focus on for this launch and Stearns and Foster consistently with the PARS, again, have put big focus on POP. And in both cases, with an eye to making it easier for an RSA to sell. So for example, the POP with Tempur products, the new Tempur Contour and Power products have a very simplistic description of the product and its key differentiating features and its step up story, which has people responding very well because again it's easy to train and easy to use and makes the RSA confident about justifying why one product is better or more expensive than the next one. And in the case of the Stearns and Foster product, some of the POP enables RSA to easily demonstrate how a what is inside a Stearns and and what is and how that is different and what it looks like when you're looking at a Stearns and Foster hybrid.
So again, we do believe that and that's a very important part of the POC.
Thanks. That's helpful. Maybe just a quick one for Dale. Dale, how much stock based comp are you forecasting for 2014? And is that included in or backed out of the EBITDA forecast?
Thanks.
Stock comp is included in. Our stock comp will increase in 2014. And essentially, this is why stock comp builds on itself over time. So our long term incentive plan is a stock based plan, partly options, partly RSUs. If we go back several years ago, we had a long term and the long term incentive plan tends to be 3 years.
So back in 2011, we had a new long term incentive plan that would have accrued over 2011, 2012, 2013. And then in 2012, we had a LTIP plan that would have accrued over 2012, 2013, 2014. Well, based on the results in 2012, both those plans, because there were minimum hurdles, based on the results in 2012, both those plans were essentially blown up. So if you recall in 2012, we 2 different points during the year had significant progress where we essentially eliminated those 2 years of plan. So as we came into 2014, we started with a blank slate.
We had a LTIP plan in or 2013, I'm sorry. As we came into 2013, we basically had a blank slate because the 2010 plan had finished. But we have stock comp in 2013 for the 2013 plan. We will add a layer to that, if you think of like LIFO inventory. We'll add another layer to that next this year in 2014, where you'll have the 2013 plan and then layer on the 2014 plan.
And so it kind of builds up to until you get 3 years in. But stock comp is in our earnings per share. It is in our guidance. It is in a D and A element. So it's not included in EBITDA, but it is in EBIT.
Is that helpful?
Yes, that's helpful. Thank you.
Thank you, sir. And presenters at this time, I'm showing no additional phone questions. I'd like to turn the program back over to management for any additional or closing remarks.
Thanks a lot. We look forward to talking with everybody again in early May when we host the Q1 earnings conference call. Thanks for joining us this evening.
Thank you, gentlemen. And thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation and have a wonderful day. Attendees, you may now all disconnect.