Good day, ladies and gentlemen, and welcome to the Tempur Pedic Third Quarter 2010 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Barry Hytinen, Senior Vice President. Please go ahead, sir.
Thanks, Elizabeth, and thank you, everyone, for participating in today's call. Joining me in our Lexington headquarters are Mark Sarvary, President and CEO and Dale Williams, CFO. After prepared remarks, we will open the call for Q 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 and earnings, involve uncertainties.
Actual results may differ due to a variety of factors that could adversely affect the company's business. The factors that could cause actual results to differ materially from those identified include economic, competitive, operating and other factors discussed in the press release issued today. These factors are also discussed in the company's SEC filings, including the company's annual report on Form 10 ks under the headings, special note regarding forward looking statements and risk factors. Any forward looking statement speaks only as of the date on which it is made. The company undertakes no obligation to update any forward looking statements.
The press release, which contains a reconciliation of non GAAP financial measures to the most directly comparable GAAP measures, is posted on the company's website at tempurpedic.com and filed with the SEC. And now, as a reminder, the company will be hosting an Investor Day presentation and Q and A session on November 11, 2010 in New York. There will be a live webcast of the event available. For more information, you may visit the company's website or email us at investor. Relationstemperpedic.com.
And now with that introduction, it's my pleasure to turn the call over to Mark.
Thanks, Barry, and good evening, everybody. Thanks for joining us tonight. Today, I'll provide a brief overview of our performance in the Q3, an update on some of our strategic focus areas and commentary on our outlook. Dale will then provide a detailed review of the Q3 financial results and will discuss our revised guidance. We're pleased with the market share gains and the sales and earnings growth we've achieved in the Q3.
Sales were up 32% from last year and earnings per share were up 82%. Our focus on improving gross margins and operating costs also continues to be very effective. Fixed cost leverage in our productivity program helped increase gross margin by 3.40 basis points year over year to 51%. And with that improvement partially offset by strategic investments, our operating margin expanded by 400 basis points year over year to 23%. As a result of this better than expected performance and continued good indications for the remainder of the year, we're raising our guidance for the full year and Dale will go into the details.
Now we're doing this in an environment that's still unpredictable and we hear from many of our retailers that consumer traffic is still not back to normal, but we believe that our business will continue to grow and our share gains will continue. Now here's a brief update on some of our strategic focus areas for 2010 beyond. Firstly, I'm very pleased with the progress we made this quarter to ensure there is a Tempur mattress and pillow that appeals to everyone. The Cloud collection, which appeals to those consumers who prefer a softer feel, continued to sell very well and helped expand our market share significantly. The price increase we took on the Cloud Supreme in the Q2 has not affected consumer demand and the product continues to be very successful.
We are essentially complete with the rollout of the entry level cloud model and late in the quarter, we began the rollout of the Cloud Luxe. Retailer interest in the Luxe is high and we believe it will also help us grow share and improve average price. We are at this moment in the final stage of commercializing a cloud line of mattresses to be launched in our major international geographies and will begin distribution early next year. And similar to our kickoff events in the U. S, we will be focusing a lot of attention on the cloud as it begins its international distribution.
The second strategic focus area that I want to discuss is our commitment to ensuring that everyone knows that they would sleep better on a Tempur mattress and pillow. This quarter, we increased our total advertising investment 37% above last year to $25,000,000 primarily by ramping our Ask Me marketing campaign in the U. S. We believe awareness of our brand is a key component of market share and top line performance in every geography where we compete. During the quarter, we also launched a new much enhanced website.
If you haven't seen it, I encourage you to visit tempurpedic.com. The site does a much better job communicating our product architecture and allows us to more effectively link our direct activities with our retailer networks distribution. It's also designed to be much easier for the consumer to use. Our 3rd strategic area is our commitment to ensure that Tampa is available to everyone. We began opening some new accounts during September October adding about 200 doors and expect further increases in the Q4.
During the quarter, we also expanded our average number of slots in our retail partner stores with the completion of the cloud rollout. Aligned with several of our key initiatives, including our commitment to ensure Tempa continues to deliver the best sleep, we utilize extensive consumer research and testing. And as we discussed last quarter, we're in the process of conducting a significant amount of strategic research across the globe. And while not yet complete, the findings are reaffirming our long term plans. In particular, we'll be focusing more attention on growth throughout our international markets, where we see marketing, product development and distribution gains as the keys to achieving our objectives.
For example, we plan to increase brand awareness in Europe and Asia by increasing our investment in advertising. Next month at our Investor event, when we have more time to review long term plans, we will share more of these findings. Throughout 2010, we have grown sales and profit, while improving our competitive position, strengthening our product line, improving the effectiveness of our marketing and increasing our margins. We continue to project considerable potential for growth in Tempur Pedic over the coming years. And over the coming quarters, we will invest to capitalize on this opportunity.
With that, I'll now hand it over to Dale.
Thanks, Mark. I'll focus my commentary on the financials and our 20 10 guidance. In total, 3rd quarter net sales were $295,800,000 an increase of 32% over the same period last year. Foreign exchange rates were unfavorable during the quarter such that on a constant currency basis, net sales increased 34%. North American sales were up 47% and international sales were up 4%.
On a constant currency basis, our international sales were up 11%. By channel, in North American retail, net sales were $198,000,000 an increase of 52%. Our North American direct channel was up $4,000,000 or 34%. Internationally, retail sales were up 4% to $64,000,000 On a constant currency basis, international retail sales were up 10%. On a product basis, mattresses were up 33% driven by a 29% increase in units.
North American mattress sales increased 46% on a 47% increase in units. In the international segment, mattress sales increased 3%. On a constant currency basis, international mattress sales were up 10%. International mattress units increased 3%, reflecting our comping the successful Sensation Mattress Collection launch and a continued sluggish economic environment in Europe. In total, pillows were up 20% driven by 19% increase in units.
North American pillow sales increased 39% on a unit growth of 35%. International pillow sales were up 3% on a 1% increase in volumes. Sales of our other product line, which includes items that are normally sold along with a mattress, were up 37% in total and 52% in North America. The other product line grew faster than mattresses, largely related to improved attach rates of our adjustable beds. Gross margin for the quarter was 51%, up 3.40 basis points year on year and 2.30 basis points sequentially.
On a year over year basis, the gross margin improved principally related to 3 factors. 1, increased production volumes to support higher sales resulted in fixed cost leverage 2, our ongoing productivity program generated improved efficiencies in manufacturing and distribution and third, favorable product and channel mix. Partially offsetting these benefits were higher commodity costs and unfavorable geographic mix. On a sequential basis, our gross margin was up primarily related to fixed cost leverage and improved product mix. Our 3rd quarter operating profit was $68,000,000 an increase of 60% year over year.
With significant sales growth, we drove over 400 basis points of operating margin improvement. Our operating expenses were up reflecting our commitment to investments in sales and marketing initiatives to drive growth. In addition, the increase in G and A expenses primarily reflects costs associated with the strategic research we had discussed last quarter. Interest expense was $4,100,000 and our tax rate was 30.5 percent, down from prior year driven by a one time gain due to the reversal of a previously uncertain tax position. Net income was $44,200,000 up from $25,700,000 Given our improved profitability, EPS was $0.62 up from $0.34 last year.
Now I'll turn to the balance sheet and cash flow for a brief review. Our accounts receivable balance was up reflecting sales levels. However, DSOs were down 4 days from last year. Inventories were up $20,000,000 year on year and modestly from last quarter. Inventory days were up 5 days year on year, yet down one day sequentially.
Payable days were up 3 days from last year and 7 days sequentially, reflecting seasonality and our focus on improving cash flow. We generated $72,000,000 of operating cash flow during the quarter and capital expenditures were $6,000,000 Through open market purchases, we bought 1,800,000 shares during the quarter. With first half activity, this brings our year to date buyback to 8,500,000 shares for total spend of $250,000,000 With the repurchase activity and $6,000,000 of capital expenditures, our debt was essentially unchanged from the 2nd quarter, while cash was up $23,000,000 from the last quarter. Our funded debt to adjusted EBITDA ratio was 1.7 times, well within our current desired range of 1.5 to 2 times. We are pleased that our Board has authorized an expansion of our share repurchase program by $50,000,000 bringing the total authorization to $150,000,000 Since we bought back $50,000,000 of stock in the 3rd quarter, our remaining authorization currently stands at $100,000,000 Now I would like to address our updated guidance for full year 2010.
While our business continues to perform well, the macro environment continues to be uncertain. We currently expect net sales to range from 1,095,000,000 dollars to $1,115,000,000 and we currently expect EPS to range from $2.05 to 2 point expect our gross margin to be up approximately 2 50 basis points for the full year, driven by fixed cost leverage in our ongoing productivity plan, partially offset by geographic segment mix and commodity costs. We expect interest expense for the year to be approximately $14,500,000 We anticipate the full year tax rate to be approximately 33% despite the lower rate in the Q3. We are using a share count of 72,800,000 for the full year and this implies a share count of approximately 70,500,000 in the 4th quarter. As noted in our press release, our guidance and these expectations are based on information available at the time of the release and are subject to changing conditions, many of which are outside the company's control.
This concludes our prepared remarks. And at this point, operator, we'd like to open the call to questions.
Thank you. Ladies and gentlemen, the question and answer session will be conducted electronically. Our first question today comes from Bob Drbul with Barclays Capital.
Hi, good evening.
Hi, Bob. Hi, Bob.
I just
have on the I guess, can you talk
a little bit about the Cloudlux and how it did post Labor Day? Any thoughts around that is my first question. And on the cloud internationally, are there any like metrics around the ramp up of doors or how we should think about it from that perspective?
Well, the cloud lux is really early in its rollout, Bob. I mean anecdotally, it seems to be going very well. There's a lot of retailers' interest. We have a very good timetable of how it's going to roll out, but it's going to take several months to roll out materially and it's going to take something like 7 or 8 months to roll out completely. So quite frankly, it's just too early to make any serious comment about it other than all indications are that it's doing well.
So it's doing fine so far, but it's too early to make a real database judgment. As for the as for international, it's a significant opportunity, but it's going to roll out kind of country area by country area. So it's not going to roll out all in one go. And we anticipate that it will get very significant penetration. The only but perhaps not as great of a penetration as we're going to get in the U.
S. Just because in general, as a rule, people in Europe and in Asia prefer firmer beds than they do in America. So while there is a demand for this bed, it's going to be somewhat less and that's going to be reflected in the number of doors and ultimately the number of sales. But the time it will take to get to the same proportion of distribution that we have here in the States is going to be it's going to take a little while to get there.
Okay. And then just one last question is on for Dale. Can you talk a little bit about any you talked about rising input costs or chemicals. Any pressures on the chemical input costs around polyol or TDI?
Well, Bob, as you may recall, we've talked all year that we expected kind of a quarterly increase on our primary chemicals. We had an increase right at the end of last year. We had an increase in the Q1, but we did not see an increase in the second late in Q2 or late in Q3 as expected. So right now, we've been fairly stable from a commodity cost standpoint since the March time frame. Now as we get into the New Year, our expectation is we'll see some pressure there.
But right now and for the balance of the year at this stage, given our contractual relationships, it's stable from where it's been for the last 6 months.
Great. Thank you very much.
Our next question comes from Mark Roop with Longbow Research.
Hey, guys. Congratulations on the quarter. Mark and Dale, on the Q4 kind of thought process on the outlook, is there anything that's different in what the trends that we've seen so far as it relates to kind of the U. S. Business and the international business as we head into the Q4?
Is there any change in inflection, demand trends or expectations?
Not fundamentally. The as you know very well, the comps that we're going up against are different in the latter part of the year than they were in the first half of the year. So if you look at it on a comp basis, it's different. If you look at it on a sequential basis, bottom line, the sort of simple answer to your question is nothing fundamental. Beyond the fact that there is a certain degree of the industry is reporting that they're expecting a weaker second half than they had in the first half.
And
to some extent that's factored in. But if you look at our numbers sort of sequentially, as you can see, the trends are essentially the same.
Mark, I would just add that what we have laid out in this guidance is kind of pretty typical seasonality. Our U. S. Business would be a little bit softer in the Q4 from the Q3, international business a little bit stronger.
Okay. Okay, perfect. And then I know in the last call, you commented just briefly on kind of the core business non cloud. Anything you can offer on how that's doing as we speak?
Well, We're quite pleased to be honest. Obviously, the cloud has driven a lot of our growth this year. We had anticipated when we launched it that there would be a material amount of cannibalization. The cannibalization of the cloud has been less than that's when we'd anticipated quite significantly and the base business is growing sequentially. So overall pretty good.
Great. And just lastly, on the gross margin, I know you've had this 4 year productivity plan in place. You've done had great strides so far. Just curious to see what kind of the near term or mid term opportunity is on that and what kind of the key focus initiatives are right now?
Remember that the gross margin target is a long term plan and it was set in place in a different frankly in a different world. But the long term plan is still the long term plan. But on the other hand, there are investments that we are making and need to make in things like advertising to build awareness, which we're going to continue to do. So from time to time, from quarter to quarter, we're going to flex this. It's a long term target.
It's not something that we're going to get to quarter by month by month and
quarter by quarter. Okay. Perfect. Thank you.
We'll now hear from Budd Bugatch with Raymond
James. Good evening, Mark and Dale and Barry and congratulations on the performance. Thanks. Again, trying to piggyback on something you said Mark. You said that the average slots per door are up I think.
And any way to give us a quantification on that?
How would we look at that?
We haven't traditionally given that. But we haven't traditionally given that. And frankly, I don't want to set a precedent here right now. We obviously are very focused on it, because it's a very important metric. And obviously also the importance of cloud particularly is that it is bringing in a new consumer to the retailer and therefore it justifies its additional slots.
We are growing slots, but I'm not going to break the precedent here and then actually say what the number
is right now. But I would just say that we're well on the path that we had set out when we introduced the cloud where we said we wanted to get 2 incremental slots. We're tracking absolutely on that path and are very comfortable with that still.
Did we set a time frame for getting those 2 incremental slots?
Basically, it's when all 3 are fully rolled out. Okay.
So that would say that by maybe September of next year or actually mid part of next year that you think you would have had 2 incremental slots per door?
Yes. We would expect that the Cloud Luxe will essentially be fully rolled out by probably end of the Q1 kind of timeframe, ballpark ish. Mark, I think, said 7 or so months. So kind of by that timeframe, we should have achieved that target.
Okay. And how about quantifying for us the percentage of sales or units that are now cloud versus non cloud of the company and how that you've said that most of the growth or significant portion of the growth has come from cloud. How do we think about the percentage of total units now that are cloud domestically?
Well, we're not going to break down our revenue by product line. What I will say is consistent with what we've said before. The base business is outperforming the industry this year and outperforming it pretty well. And the cloud, as Mark has said, has been significantly incremental, much more incremental than we planned. So we're getting good growth on the core business and the cloud has been a very nice upside for us, but we're not going to get into trying to break out the business by product.
Okay. I keep trying.
That's all right. You can try. We'll just keep on answering.
We'll keep at it. Domestic versus international for the Q4, I know you said that international is typically stronger 4th quarter, apologize for that.
The is it going to
be just normal seasonality for that? Or should it be somewhat different than that?
We're expecting kind of the normal seasonality. Just U. S. Business tends to be just slightly down in the 4th quarter from the 3rd quarter based on historic seasonality. Recent years are not normal.
But and the international business tends to step up in the 4th quarter and tends to generally the 4th quarter is the strongest quarter of the year for the international business. So that's how we're expecting the Q4 to transpire.
Okay. And I was quite taken with the working capital improvement particularly in the receivables at a 4 day improvement. Is that sustainable? I think that maybe the lowest receivable days that I've seen since looking at the company.
We have had tremendous improvement in the receivable performance going on 2 years now even through the difficult times. And in terms of further improvements in days, it may be getting a little bit tougher to get further improvements in days. But certainly, we would not expect to have degradation in days. The only thing that would naturally cause some degradation would be if there was a growth shift where we had more international business because the days tend to be a little bit longer internationally than they are in the U. S.
But am I right to calculate the composite days at about 39s? Yes. And is that the right number? And is that within your terms? What are your domestic terms typically in terms of days outstanding?
Domestic terms are typically 30 days international terms and vary by country on average, it's probably closer to 60 days.
Okay.
All right. Thank you very much. Congratulations again and good luck for the Q4 and
for the season. Thanks, Budd. Thanks, Budd.
We'll now hear from Brad Thomas with KeyBanc.
Thanks. Good afternoon, guys, and congratulations on another great quarter.
Thank you, Ed.
I just wanted to follow-up a little bit more on the cloud and then ask kind of a question on its rollout in, I think, a different way. Could you maybe just talk a little bit about the floor space you're getting by the different line and maybe what inning you're in and how many doors you're in? I mean, it seems like the Supreme, even going back to last quarter, was in just about every door you thought it would get in and we were pretty far along on the entry level cloud as well. But could you just maybe characterize it from that perspective?
I think the way I mean, very broadly speaking, we think that the cloud supreme should be in every one of our retailers. And if it isn't, it's going to it nearly is and it will be. What I mean? It's very, very essentially penetrated. We think the cloud is going to be in the big majority of our retailers.
It's not going to be in everyone. It's not going to have quite the same penetration, but it is going to be a very, very well distributed product. And Deluxe for a premium product, which by its nature is going to have a lower distribution, is going to be one of our highest distributed premium products. So I think that it's sort of like 1, 2, 3 in terms of number of doors that we're going to end up with, all of them material, starting with the Cloud Supreme essentially everywhere. Does that make is that useful?
Yes. That's helpful, Mark. And then within your other category, I know during the quarter you rolled out the entry level priced adjustable foundation. Could you tell us a little bit about what you're seeing in terms of the initial response? And is that getting more people to buy the foundation or having and are you seeing anything in the way of cannibalization?
It's early days again. And so again, it's longer days than Deluxe, but it's still early days in terms of how long we've had it in the stores. But what we're seeing is, as of now, interestingly, no impact on the minimal impact on the advanced logo. In fact, in some ways, many of the retailers are telling us, we've heard from more than one account, that it helps people talk up. If you introduce them with the lower priced one, then you can move them to the higher priced one.
So in fact, it's actually an aid to selling the higher priced one. So we're seeing very little cannibalization at this stage. But again, very early days. I want to be cautious about how I characterize it. We're pleased with how it's rolled out.
It's been well accepted. Too early to really comment on it.
But I mean, you've really had some phenomenal results within the other category for the last 3 or 4 quarters here and it seems to be a big opportunity within foundations. I mean, where are you guys from a slotting standpoint in terms of having your foundations on the floor? And could you just talk a little bit about your strategy there?
Well, the thing about I mean, I don't know if I'm exactly correct, but we're essentially 100% distributed with those bases. It's the issue of how many of the slots are carrying the base. And we find the retailers who have the greatest number of their beds with a Ergo underneath them, their attachment rate is higher. And in fact, those customers have higher AUSP in general. So it's a win win and most of it's a conversation that we have with our customers and it's something that is the kind of demonstrability of that is something that's driving the growth of our other business this year because our attachment rate is growing because people are doing it.
It really is a function of making sure that the consumer can try an adjustable base whatever bed that they prefer. It's very what customers find is that it's much easier to sell somebody the adjustable base if the bed that they prefer has an adjustable base under it rather than having to show them how it works on another bed. And that is what we're driving and we're growing the number of spots per store that carry it and that is one of the primary drivers of that growth of business.
Great. Thanks, Mark. And then just lastly, if you could give us an update on how things are progressing on Canada in Canada that would be great.
Good. It's a great it's obviously a very important business for us. The transition has gone well. We are fully integrated as a subsidiary now of ours. And I'm not going to get into again setting a precedent of breaking our business, but I will tell you they're doing quite nicely and we're quite pleased with how they're doing so far.
Great. Thanks, Mark. We look forward to seeing everybody in November.
Good. Look forward to seeing you.
Our next question will come from Joe Altobello with Oppenheimer.
Thanks. Good afternoon, guys. First question, I just want to go back to the gross margin for a second. And Dale, you talked about the productivity program and fixed cost leverage, but it just seemed like it was much higher both year over year and sequentially than I was looking for. Is that just because the sales base is so much bigger this quarter that the fixed cost leverage was that much greater?
Yes. I mean, certainly that's one of the components. We have obviously, the Q3 was a record quarter for us. It's our best revenue quarter ever that generated a lot of fixed cost leverage. If we look at the improvement in gross margin, fixed cost leverage was probably about half the improvement on a year over year basis or on a sequential basis.
And productivity in the channel mix being the other half. The productivity program continues to progress very well. The team is driving tremendous cost improvements throughout the business. And so we're very pleased with the productivity program. It's still tracking slightly ahead of schedule.
And there are some the negatives. The segment mix of more U. S. Less international does drive a little bit of pressure. And on a year over year basis, chemicals does create some pressure.
And even though they've been stable for about 6 months, there is still year over year pressure there. So we've been able to get very good improvement across the business.
Got it. Okay. And then in terms of your longer term target, you've talked about a 50% gross margin and you're just about there now and a 25% operating margin as a target. I thought that was about a full year target and this I guess is year 1 of that. I mean are you still on target to get to that 25 percent EBIT margin by let's call it 2012 or 2013?
Well, it was a 4 year target to get to 25% and actually it was a 4 year target to get to 50% on the gross as well, but it was a very different environment. So with chemicals being a little bit easier than they were in 2,008 and much higher volume, we've gotten there much faster. And I'll reiterate what Mark said before that there's not a magic alarm that goes off when we hit 50% that says now we have to do something that that was a long term target with assumptions that some of those assumptions are not as bad as what was assumed back in 2,008 when we said that. That gives us some flexibility to continue to maybe be a little bit over 50% and drive the kind of investment that we think we need to help drive the international growth in the business. The 25% operating margin target that was a 4 year target going out to kind of the 2013 2014 timeframe.
And I would say we're well ahead on that target and pleased with our performance. And we'd like nothing better than to get there sooner, but we're not going to project that yet.
Got it. Okay. And then just one last one. I think you talked about doing some consumer research, particularly on the international side. International today is about what 30% of your sales.
What could that number be 3, 4, 5 years out?
Well, I think that the thing that the consumer research has shown and that we'll discuss more when we're together in the next month is that there is very significant potential internationally in Europe and in Asia. And that the penetration that we have in those countries is significantly lower than it is in the United States and that there is no fundamental reason why it cannot grow quite significantly. And that's what we'll share with you. And also the path to what needs to be done in order to make that growth is also quite clear. At the same time, however, we believe there's enormous opportunity for growth in the U.
S. Too. So I'm not projecting in percentages relative size of the two businesses. I think that both sides, both the domestic business and the international business has significant growth potential. So whether the ratio of their sizes changes, I don't know because they'll both grow.
I see. Okay. Great. Thank you.
We'll now hear from Keith Hughes with SunTrust.
Thank you. You talked earlier about 200 I believe 200 new doors. Were those domestic, international? Any kind of color on that would be helpful.
Yes, that was domestic. 200 new doors domestically. Internationally,
we had
it looks like international in the Q3, it was kind of flattish.
Flattish. And what kind of doors are there in the U. S? Are they specialty sleep or what type of retail?
A mix of specialty sleep and I'm not sure how to categorize the other one, kind of a mixed retail environment.
Okay. And in terms of advertising, the number you referenced earlier, is that what we're going to be seeing per quarter in the future?
The $25,000,000 Yes. So I wouldn't think that if we keep growing the business, we'll see higher advertising. We've said all year that our goal is to get advertising back up to 9%. We're not quite there. We've been chasing revenue all year.
It's a good kind of problem. And so we still are tracking below the 9% of revenue and over time we'll get there.
All right. Thank
you. From William Blair, we'll now hear from Jack Murphy.
Thanks. I'd just like to start by asking about the quarter, how it trended. And in particular, did you see much difference between the beginning of the quarter toward the end of the quarter in international? And was there any particular month July, for example, that might have been weaker in the U. S.
And then recovery toward the end?
I would say both domestically and internationally, we saw our pretty typical seasonality. And what that means is we tend to have a good July and then you see a little bit of ramp in the business going into Labor Day and then it traditionally softens a little bit post Labor Day. And what we saw in the U. S. Business was very typical of the normal seasonality that we've seen in the business.
And conversely, I would say that what we saw in Europe was pretty typical from the seasonality also, where certain countries they have their vacation month, some countries it's July, some countries it's August, they're all back to work and they're all home in September. So September tends to be a little bit stronger internationally in the Q3 and that leads into kind of the peak period for the international business, which is 4Q.
Okay. I just want to follow-up on some of the discussion earlier on commodity costs. Obviously, you said that commodity costs were a drag year over year, but I was wondering if you could give us a sense of what type of benefit relative to guidance that commodity costs might have been given that you were expecting sequential increases that didn't happen?
Well, I think that we had said that our we were expecting to get kind of a low to mid single digit commodity increase. If that's it may have been a small portion of I didn't look at it that way, but that probably contributed a little bit of upside to the gross margin performance this year, not a dramatic upside versus what we were expecting. Okay. And finally, just sort of
a big picture question for Mark and maybe you're saving this for the meeting. But as it relates to the research for Europe and International, could you just give us a sense of sort of the timeline on that research and development? And maybe at what point you think we would hear something specific around a new product? And how that might fit into sort of brand architecture for Europe as it's different from the U. S?
I think you're asking a question I mean, I think that's where it's going to be when we'll talk about that. And I think that the implementation of it is going to start it's essentially starting, but it'll start in the beginning of next year. As I said a little earlier, it won't be every country at once because as you know, the situations in each country are different and the steps we have to take are slightly different. But you said an interesting word there, the architecture. The architecture, which has been very important here in the U.
S, is something that we're going to make as important in the rest of the world. And it has been a significant change in our ability to speak not only to the consumer, but also to our retailers to make it easier for them to display and communicate our products and even for our internal people from a research and development and marketing point of view to focus how they're doing it. So and while there are differences and we'll talk about it between Europe and Asia and the U. S, there are great similarities too. Okay.
Thank you.
Our next question will come from John Bau with Stifel Nicolaus.
Thank you. Congratulations. On the advertising spend, is it similar as a rate of sale in Europe or Asia versus the U. S? Or is it lower and you plan to go higher based on your feedback?
Yes. Traditionally, we've spent at a little bit higher rates in the U. S. Than we do internationally. And certainly, we would expect based on some early feedback from the research in terms of the opportunity, that's one investment area that Mark mentioned is we do need to step up the level of brand advertising that we're doing around the world.
Okay. And I think the number was $3,000,000 correct me if I'm wrong on your strategic consumer research. Is that correct? And is that going to evenly fall in Q3 and Q4? And then what line item again is that in?
I'm sorry?
What line item is that in? In Q
and A, yes, the number was about $3,000,000 It was at the start of last quarter. We said it would be fairly balanced between Q3 and Q4. It might skew a little bit more to Q3 at this stage based on the progress that's been made, but there still will be some spend in Q4.
Okay. And my last question maybe for Mark. There seems to be some thought out there. I'm not saying this is my thought, but you've had such a great year with cloud that you can't comp that. In other words, that the initial sale rate is so high and in subsequent years it will fall off.
I've certainly not seen that pattern in the mattress industry in general and not seen that pattern with you. So I was wondering if you could comment specifically on that. And then also, if you had any and I know you wouldn't give us any specifics, but do you have any significant product rollouts planned for the United States in 2011?
Well, let me do them in the order that you asked. I think that the two key things to think about when you think about the rollout of cloud is that, 1st of all, from a very simple point of view, we didn't have complete rollout of any of them for the whole year. So if you just take the proportion of the year where we have them fully distributed versus this year, there's a natural growth by that. The second thing is that, as you know, we do extensive consumer research and I just literally a week ago saw some more and which was looking at a specific segment of consumers. I'm not going to go into details of this, but for which we were evaluating products.
We found that again the cloud is extraordinarily preferred by a group of people that we hadn't guessed would be the ones who would prefer
it. And so it brings me to
the fact that we haven't fully reached anything like what I think is the potential of who it's for. And the third thing is, as much as we have increased our investment in communication and we are and we're being sensible about it, we continue as Dale says to chase this 9%. We continue to have opportunity. Most consumers don't know about the cloud yet. There's a lot of work to be done just to get that across.
So I think there's right now I think there's still significant potential in the cloud. As for the other new products, I'm not going to tell you about anything as you know, it's not our practice to talk about things before they're done. But I will say this, you can see that our investment areas where we put investment has been in marketing and advertising and in consumer and product research. And you'll see we continue to do that. And we're not doing that idly.
Obviously, we're being very thoughtful about it. But we're very serious about our objective to find a bed to make a bed that appeals to everybody. And so we've got
a lot of opportunity areas that we're working on right now. Hey, John, still I would just add that we don't believe our base product line, our core product line is fully there yet in terms of consumers knowing about it, consumers preferring it. And our base product line, we still expect to grow significantly for the foreseeable future. And our expectations on the cloud are no different. We still have tremendous opportunity with the cloud.
Great. Thank you. Thanks, Joan.
We'll now hear from Joan Storms with Wedbush.
Hi, good afternoon. Thank you. Congratulations.
Thank you. Thank you.
So I wanted to ask about just push Daryl to remark a little bit further on the gross margin because that seems to be a major opportunity going forward as you build new product lines into the business, in particular when I visited the Albuquerque factory like you sort of stuck to that 50% goal and I know you'll probably talk about it at the Analyst Day, but can you delve any further into you have some commodity price increases that you're anticipating, but that seems pretty small compared to the opportunities that you have beyond 50%.
I think the thing about the 50% is that we intend to make our products continually evolve our products. The 50% number, as I said, I like Dale's analogy. There's no alarm going off when we hit it. We're trying to make our gross margins as good as we can. But at the same time, what we'll do over time is improve the functionality of the products and improve the investment in advertising.
It doesn't have this sort of steps don't happen quarter to quarter. They happen year to year. And we as I just said in last question, there's many new products and innovations that we're looking at. What the 51 percent or the 50% plus I should say, the 50% plus opportunity gives us is it allows us in the short term to do some of the things that we're really trying to focus on right now, which is to make sure that people know about Tempur and Tempur Cloud. So we're using it at the moment and we will periodically as the years go by appropriately.
But these targets are long term 4 year targets.
But I would also add, John, to your point, there's still significant volume leverage available to the business. Sitting here today, even with the tremendous growth we've had in the business this year, we still have ample capacity to utilize in our facilities. We can again our view is we can get somewhere between $2,000,000,000 $2,500,000,000 in revenue without needing another facility. So that gives tremendous volume leverage available to the business. The productivity program is not done.
We're not even halfway done in the original program. So that's going to continue. And once this original program ends, it doesn't mean the productivity initiative is going
to stop. It means it will
be a new program. And it will just keep adding to it year by year. So we will continue to drive for improved cost and improved efficiency and getting the volume leverage, which will provide tremendous benefit to offset future significant increases in oil prices if that were to come or fuel investment in the business where we see the opportunity for investment that will provide good payback or continue driving the improved profitability.
That's a very great answer. Thank you. And then just a quick question on the Cloud pillow. How's that doing? I heard it was sold online for a period of time.
So how are you doing there producing that product?
Doing very well. We're very pleased with the Cloud pillow and watch this space. So it's exciting. It's doing very well and it's a great pillow. It's very different than our other pillows.
People love it and it's selling very well.
I'm waiting to get mine.
So thank you.
Have a great afternoon. Thank you guys.
Thanks, John.
Ladies and gentlemen, that does conclude today's question and answer session. I'd now like to turn the call back over to the company for any closing comments.
Thank you. And thanks everybody for joining us. We look forward to talking with you again next month at the investor event we've been discussing in New York. But thanks for joining us this evening. Thank you.
Ladies and gentlemen, that does conclude today's conference call and we thank you for your participation.