Somnigroup International Inc (SGI) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Tempur Sealy Fourth Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder today’s conference call is being recorded. I would now like to turn the call over to Mr. Mark Rupe. Sir, you may begin.

Thanks, Candice and good evening everyone. Thank you for participating in today’s call. Joining me in our Lexington headquarters are Mark Sarvary, President and CEO; and Dale Williams, EVP and CFO. After our prepared remarks, we will open the call for Q&A. Forward-looking statements that we make during this call are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements including the Company’s expectations regarding sales, earnings or adjusted net income, or the integration with Sealy involve uncertainties. Actual results 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, 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-K 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. Any forward-looking statement speaks only as of the date on which it is made, and 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 and information regarding the methodology used for constant currency presentation is posted on the Company’s website at tempursealy.com and also filed with the SEC. And as a reminder we are hosting an Investor Day in New York City on February 18th. The event will begin at 10 AM and will include presentations from our CEO, Mark Sarvary, our COO Tim Yaggi as well as our President of International David Montgomery and our CFO, Dale Williams. If you are interested in attending please send an email to investor.relations@ tempursealy.com. Attendance must be confirmed in advance. With that introduction, I will turn the call over to Mark Sarvary.

Thanks Mark. Good evening everyone and thanks for joining us. Today I’ll provide a brief overview of our performance in the fourth quarter and full year and will then discuss our plans and outlook for 2015 and beyond. Dale will then provide details on the fourth quarter and full year financial results and 2015 guidance. We ended the year with a solid fourth quarter performance. In the U.S. both Tempur and Sealy sales grew double digits and all five of our U.S. brands grew in this period, a testament to the complementary nature of our portfolio. The success of our new products and effective marketing investments were the key drivers of growth. Sales outside of the U.S. were strong in Asia Pacific and Latin America. The strengthening of the U.S. dollar turned sales increases in Europe and Canada to declines when translated and also impacted earnings to a greater extent in the quarter than we had forecast. In total our net sales increased 9.9% and adjusted EPS increased 30%. On a normalized basis correcting for currency, sales would have increased approximately 12.8% and adjusted EPS would have increased approximately 39%. Looking in 2014 as a whole, this was a year in which a lot was accomplished. We launched a record number of new products in the first half of 2014 and the rollout execution went quite well. Furthermore these new products are very successful. Consumers and retailers unlike responded very positively to them and to our marketing programs. This drove considerable growth of Stearns & Foster and Sealy and returned Tempur [indiscernible] to growth, which led to U.S. market share gains for the Tempur Sealy portfolio as a whole. In addition we gained share in several key international markets including Argentina, Japan and the UK. We also positioned ourselves for future growth. In 2014 we acquired the Sealy brand rights in several markets throughout the world and Tempur distribution rights in Mexico. We divested our U.S. innerspring component manufacturing [indiscernible] and made significant progress on our new distribution network for the U.S. The organizational integration in North America relating to the Sealy acquisition is now essentially complete and our team is working well as a single entity. Cost synergies have been captured at a faster rate than projected and we are very focused on driving additional cost efficiencies in 2015 and beyond. So a lot was achieved and sales were good in 2014. However our margins were challenged and not as high as we had expected due to unfavorable mix, innerspring manufacturing inefficiencies and foreign exchange. On mix, essentially all of our sales growth in 2014 was through the retail channel and that decreased the proportion of our sales from the more profitable direct sales channel. In addition the products we sold included a higher proportion of our adjustable bases than we had anticipated. These bases are highly incremental and drive retailer ticket prices but have a lower gross margin. In addition the productivity in our innerspring manufacturing plants was lower than we expected and this is going to be a big focus in 2015 and an area we plan to discuss in more detail on February 18th. Lastly, both sales and EPS were negative impacted by significant foreign exchange moves through the year. At the beginning of the year we anticipated that foreign exchange would be a negative $0.10 EPS impact. It turned out to be a negative $0.15 impact. Indeed in the fourth quarter it was $0.03 more of an impact than we had anticipated when we spoke to you on October 30th. So in summary, full year 2014 sales grew 21% to $2.99 billion and adjusted EPS grew 11%. On a normalized basis correction for currency, adjusted EPS would have grown 18%. One final note on 2014. Cash flow was a major focus and we generated $225 million of operating cash flow and $178 million of free cash flow and we lowered our total debt by $234 million. The past few years have been a transformational period for our Company. As we enter 2015 with the integration of the organization largely complete, we are entering a new period as a single, large, global company committed to steady top and bottom line growth. In accordance with this, we have established evergreen annual growth targets for sales and adjusted EPS that we will measures ourselves against every year. We expect these targets to remain consistent for at least the next three to five years. On a constant currency basis, we will target net sales growth of 6% and adjusted EPS growth of 15%. We expect our operating margin to expand by approximately 50 basis points each year. We will talk more about these targets on the 18th but our 2015 financial guidance is consistent with them. However as Dale would explain, our 2015 full year guidance includes an anticipated negative $0.27 adjusted EPS impact from foreign exchange based on current spot rates and this is on top of the $0.15 adjusted EPS effect from FX we experienced in 2014. In September of 2013, we communicated an adjusted EPS target of $4 for 2016. At the high end of our guidance we are on track to achieve that target a year late in 2017. However, if currency rates have not changed since September 2013, at the high end of our guidance we would on pace to achieve that target as planned in 2016. Now I’d like to discuss our strategy and initiatives in the context of our 2015 outlook. While we are already the global bedding leader, we are the share leader in only a few countries. It is our goal to become the share leader in every country we compete in. Our strategy everywhere in the world is focused on investing in our brands, developing consumer preferred products, expanding distribution and striving for highest dealer advocacy and where appropriate making strategic acquisitions. Our initiatives in 2015 are consistent with this strategy. In North America, in 2015, we are expecting good sale growth and even better earnings growth. We anticipate the sales growth will continue to benefit from our successful 2014 product introductions, as well as our 2015 introductions. A couple of weeks ago at the U.S. Bedding show in Las Vegas, we introduced two significant new product lines, TEMPUR-Flex which is a new third collection for Tempur and an entirely new Posturepedic offering. TEMPUR-Flex uses hybrid construction and new proprietary technology and will extend our brand appeal and expand the number of consumers that feel Tempur is right for them. It was well received by our retail customers and we’re optimistic about its prospects. Posturepedic is celebrating its 65th anniversary and we are rededicating the brand to its back support heritage. We have improved the value proposition across the entire line by incorporating encased coils, gel memory foam and a CoreSupport Center for unsurpassed back support. Like Flex we’re also very pleased with the reception it received from our retail customers. We remain committed to investing in our brands and will maintain a consistent level of marketing and advertising investments in 2015 as compared to 2014. We will continue to support Tempur-Pedic and Posturepedic on TV as well as digital and Stearns & Foster, Optimum and Sealy through a combination of digital and print. We also have cost initiatives underway throughout our U.S. organization, including the continuation of our distribution network redesign, improving the efficiency of our innerspring manufacturing plants, and overall productivity and expense initiatives. Now switching to International. This is an enormous opportunity for the Tempur and Sealy brands and we are investing to capitalize on it. As a result while we are expecting solid sales growth in 2015, we are expecting minimal earnings growth. At the Koln Fair in Germany last month we officially launched Sealy in Stearns & Foster and introduced a new Scandinavian Bed system [indiscernible] Tempur North. We will expand the distribution of Sealy and Stearns & Foster in Europe and invest ahead of sales and marketing to support distribution and build brand awareness. We will also expand our Tempur International direct business through the opening of new owned stores, which will pressure profitability early in the year. We also anticipate expanding the retail distribution of Tempur overseas. Apart from our investment and growth it’s important to note that weakness in central Europe, particularly in the German speaking countries is not abating, and we anticipate this to further pressure our international performance in 2015. Before turning over to Dale, I would like to contextualize our outlook. Today Tempur Sealy is a stronger and more stable company than it has ever been. We are developing great products that retailers and consumers are purchasing, investing our marketing dollars more effectively and positioning ourselves for substantial future growth across the world. Our cash flows are strong and while our costs have been higher than we expected, we have initiatives in place to reduce then and improve our margins. In 2015 we are expecting solid sales growth and significant margin improvement in North America, somewhat offset by investments in building Sealy and Stearns & Foster sales overseas and the continued weakness in Central Europe and as I have said FX continues to be a serious headwind. We look forward to sharing more details with you regarding our longer-term outlook in the couple of weeks. With that I will now hand the call over to Dale.

Thanks Mark. I'll focus my commentary on the fourth quarter and full year 2014 financial results and then discuss our 2015 guidance. I will 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 is notable variance from the prior year. Consolidated net sales for the fourth quarter were $745.5 million, up 9.9% versus last year. On a constant currency basis fourth quarter sales increased 12.8%. Tempur North America net sales increased 16% and were driven by strong demand for our new mattresses and adjustable bases as well as certain heavier year-end buys from a few customers that elected to stretch to higher rebate tiers for 2014. Bedding net sales increased 18% on a unit increase of approximately 10%. Within bedding sales growth on an adjustable basis were significant and once again higher than we forecast. Sales of other products declined 8%. By channel Tempur North America retail sales were up 17% and direct sales declined 2%. Tempur International net sales were up 3.3% and on a constant currency basis up 11.4%. Growth was driven by a combination of higher Tempur sales and sales from Sealy Japan and Europe. Bedding net sales increased 6% on a unit increase of 11%. By channel Tempur International retail sales were flat while direct sales increased 27%. Sealy sales increased 8.2%, driven by strong growth in the U.S. On a constant currency basis Sealy sales were up 11%. Bedding product sales were up 12% as were retail channel sales. Fourth quarter consolidated GAAP gross margin was 39.5% as compared to 40.2% in the prior year. On a year-over-year basis fourth quarter gross margin declined primarily due to product and channel mix, increased discounts and most notably customer rebates and unfavorable foreign exchange. These impacts were partially offset by operational efficiencies, primarily in Tempur North America. Consolidated advertising expenses of $82 million were 11% of sales as compared to last year’s 10.5%. Consolidated operating income was $76.5 million in the fourth quarter of 2014, and included $18.9 million of integration cost related to the Sealy acquisition and $1 million of financing cost related to the October 2014 amendment to the Company's senior secured credit facility. This compares to operating income of $74.1 million in the fourth quarter of 2013, which included $8.2 million of transaction and integration cost. There are several factors that drove up the integration cost during the fourth quarter. First our work to improve our warehouse and distribution network in the U.S. has led to various actions including certain plant actions, closures and openings. We also incurred integration costs related to integrating Sealy into our international operations. Interest expense was $21.4 million. Other income was $13.3 million and included income from a partial settlement of a legal dispute. The fourth quarter tax rate was 31% and the pro forma tax rate was 26.1%. Fourth quarter GAAP earnings per share was $0.75, as compared to $0.44 per share last year. Adjusted earnings per share increased 30% to $0.86 in the fourth quarter as compared to adjusted earnings per share of $0.66 in the prior year. Now I’ll summarize the income statement for the full year 2014. As a reminder 2013 results only include Sealy from March 18, 2013 onward. Sales increased 21% to $2.990 billion as compared to $2.464 billion in 2013. Tempur North America sales increased 9%, Tempur International sales increased 7% and Sealy sales increased 37%. Operating income was $276 million as compared to $244 million in 2013. Operating income for full year 2014 included $43.8 million of integration and financing cost and 2013 included $44.6 million of integration and transaction cost related to the Sealy acquisition. GAAP earnings per share for full year 2014 was $1.75, as compared to GAAP EPS for the full year 2013 of $1.28. Adjusted earnings per share in 2014 was $2.65 as compared to adjusted EPS of $2.38 in 2013. Now I’ll turn to the cash flow and balance sheet for a brief review. Operating cash flow during the quarter was $44 million and for the year was $225 million. We reduced total debt by $234 million in 2014. At December 31, 2014 the company had consolidated funded debt less qualified cash of $1.6 billion. The ratio of consolidated funded debt less qualified cash to adjusted EBITDA was 3.9 times calculated in accordance with the Company’s senior secured credit facility. A calculation of this ratio is included in the press release. Today the Company issued financial guidance for 2015. The Company currently expects net sales to be in the range of $3.50 billion to $3.150 billion which reflects growth of 2.5% compared to 2014 despite approximately 3.5% headwind from 2014 based on current unfavorable foreign exchange rates, adjusted earnings per share to be in the range of $2.70 to $3.10, which includes $0.27 per share of unfavorable foreign exchange impact. We’re also providing the following additional full year 2015 guidance assumptions. Depreciation and amortization of approximately $95 million, adjusted EBITDA of $420 million to $455 million, interest expense of approximately $86 million, annual tax rate of approximately 30%, non-controlling interest of approximately $2 million, average share count of 62.5 million shares and capital expenditures of approximately $65 million. It is important to note that our 2015 adjusted earnings per share guidance excludes the impact of ongoing integration cost related to the acquisition of Sealy. From an earnings perspective our guidance reflects margin expansion resulting from improvement in North America offset partially by investments internationally and continued weakness in Europe. In addition, our guidance assumes an unfavorable $24 million operating income impact from FX. Based on these assumptions we expect our operating margin to be in a range of 10.8% to 11.5% for full year 2015. We are planning for first quarter 2015 sales of approximately $710 million to $720 million, which reflects growth of approximately 1% to 3% or 5% to 7% correcting for FX. Another factor impacting the first quarter growth is that a few of our customers made heavier year-end purchases in order to qualify for a higher rebate year which we estimate pulled forward approximately $15 million to $20 million of sales into the fourth quarter of 2014 and out of the first quarter of 2015. There is very modest earnings benefit to our fourth quarter as the higher rebate was applied over the full year’s purchases. We expect these higher fourth quarter purchases to somewhat dampen our first quarter results. While year-end buys are not uncommon, 2014 was the first year in some time that customers who had achieved significant growth in 2014 were in a position to capitalize on stretching to a higher rebate tier. In addition we were also expecting unfavorable FX to impact first quarter 2015 earnings per share by $0.07, and our International business to be a drag on profits. Taking this all into consideration, we currently expect adjusted earnings per share to range from $0.45 to $0.50 in the first quarter of 2015 as compared to $0.53 in the first quarter of 2014. Our adjusted earnings per share guidance is pro forma and as noted in the press release does not include integration cost related to the Sealy acquisition, discrete tax items associated with the repatriation of foreign earnings and certain non-recurring interest expense and financing cost. And considering our guidance it is possible that our actual performance will vary depending on the success of our new initiatives, macroeconomic conditions, unexpected changes in foreign exchange rates and competitive activities or the consequences of other factors we have 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. Before turning the call over to Q&A I would like to make one final comment. Beginning in 2015, in recognition of the progress made integrating Sealy into our business, the Company will be changing our segment reporting to North America, International and Corporate. We plan to file an 8-K next week with historical segment data to provide perspective on the changes. In addition, the material we will present on February 18th will reflect the segment reporting changes. With that Operator please open the line for questions.

Thank you (Operator Instructions). And our first question comes from the line of Budd Bugatch of Raymond James. Your line is now open.

I guess Dale if you could, would you take us through maybe the FX effect on revenues, gross profit and operating expense, maybe by segment, if it’s possible for the fourth quarter?

For the fourth quarter. Yes, I don’t have the fourth quarter in front of me. Let’s go to the next question and I’ll pull that up.

Okay, and [Multiple Speakers]

I’ve got the full year but not the fourth quarter?

I'll take it that way. That’s fine.

Well, for the full year of 2014 FX cost us $41 million in revenue. It affected our gross margin by approximately $24 million. Operating expenses were improved by about $11 million and operating earnings were reduced by $13 million. In terms of our expectations for 2015, the current FX rates would negatively affect revenue and this is incorporated into our guidance -- this negative effect, by $110 million. So the guidance that we are giving on revenue is $110 million lower due to foreign exchange. The gross margin impact is $58 million. Operating expenses would be improved by $34 million and the operating income impact of foreign exchange would be $24 million negative.

And so you run that…yes, go ahead…

No go ahead what was your question?

Give us a little bit by segment. I know you’re going to change the segment accounting but I would think most of that -- is most of that factored in Europe? How much of that’s in the International segment?

If we look at 2014, the impact was about two thirds Canada. So the bulk of that impact affected Sealy, some impact in Tempur North America. One third is Asia, Latin America. That also attracted Sealy and Tempur International. And 2015 the impact is half Canada so that affects under the new segments, North America. Under the old segments it would affect both Sealy and Tempur North America. And half is in Europe and that would be all in Tempur International.

And is the effect equivalent across all three functional buckets still, revenues, gross profit and operating expense?

[indiscernible]

No, I mean the split is pretty similar. I think that from a gross margin standpoint the impact is probably skewed a little bit heavier to Europe and I don’t have it laid out exactly that way, but just looking at the pieces here, from a gross margin impact the bulk of the -- probably two thirds of the earnings impact is on gross margin in Europe, but then you have a better operating income give back on that where the expenses get lower. So of the total, about half of that earnings impact is in Canada and half is in Europe. The issues we had in Canada is our -- a significant portion of our purchases, of our COGS is U.S. dollar denominated. So as the Canadian currency declines, your cost is in U.S. -- a good portion of your cost is in U.S. dollars but your revenues being knocked down because of the currency. While I was able to pull up Q4 here. In Q4 currency affected the Company $20 million in sales, $11 million in gross profit, $6 million in operating income. And I'm not going to break that down by segment.

Yes I understand. I don’t want to take too much more time on that, but it okay it's obviously a big issue. And Sealy Canada over indexes versus what we'd normally expect and Tempur Canada under indexes. Is that still the case?

Yes.

Okay. Last question for me is just trying to walk through gross profit differential in the fourth quarter versus your expectations. You had expected significantly better gross margin. Maybe if you can quantify where those significant variances were, that might be helpful for us?

Yes, well I mean the gross margin, it was down 70 basis points year-over-year. FX was much worse than we expected. The adjustable -- as I said our adjustables over performed expectations again in the fourth quarter and.

So that was a mix impact. Where would that have taken down gross margin?

What would it have taken down?

Yes well gross margin rate, right, it would have been [indiscernible].

Right. Well the adjustable mix would have impacted the gross margin negatively by -- North America was impacted negative on the mix by about 150 basis points.

Okay.

And then the other big factor was the rebate pacing.

And what was the impact of that? You said that was $15 million to $20 million of revenue. So would the impact of that would be $6 million to $8 million?

Not quite that high, but almost.

Okay. I was hoping for numbers too. Okay almost. We'll live with almost. All right. Thank you very much. Good luck on the balance of this quarter. And we'll see you in a week or two.

Thank you and our next question comes from the line of Josh Borstein of Longbow Research. Your line is now open.

Just on the guidance, is it possible to talk about what the guidance implies for each of the three segments on the top line?

Yes, for the year what we are -- and this is on the old segment basis. For the year we are expecting Tempur North America to be up mid-single digits. Now when we talk about what the guidance implies, we always talk to the midpoint of the guidance. So the high end of the guidance would be a little bit better, the low end of the guidance would be a little worse, but at the midpoint Tempur North America would be up mid-single digits for the year; Tempur International up high single-digits. Now keep in mind despite our discussion of continuing issues in Europe, we are rolling out Sealy and Stearns & Foster in Europe. That is included in the Tempur International old segment because it's going through the Tempur distribution system and that's where we expect to see significant growth internationally. Sealy, we would expect to be up low single-digits and Sealy was heavily affected by FX.

Okay. And then just on that International high single-digit growth rate, how much do you think is organic? How much is the Sealy rollout?

Well we're not going to break it down, but the Sealy rollout is organic. That's our product. So it's our distribution channels. So it's just adding product to our existing programs.

No, that makes sense. I guess put other way -- how much do you think is coming in from the legacy business as opposed the new Sealy products that are rolling out?

The Tempur legacy business would be -- we actually expect Tempur legacy business to be kind of mid-single digits and the new Sealy products to drive that higher from an overall growth.

Okay. And just on the gross margin expectations for Tempur North America, what are your expectations? What's baked in the guidance for Tempur North America?

From an overall business we're looking for gross margins to be in the 39.5% to 40% range. We expect significant improvements in profitability in North America. We actually expect both Tempur and Sealy North America business despite the Canadian FX headwind to see significant improvement in both gross margin and operating margin in 2015. We saw very strong improvement in the performance of Tempur North America in the back half of the year and we think that, that will continue throughout 2015. We expect Sealy North America business next year to see good improvement in profitability through the programs and initiatives that we put in place. And from an overall business, International gross margins are going to be down, and despite the revenue up. FX affects that significantly, but also we're investing in the International and we are rolling out a lower margin product line in International.

Okay, thanks for the color. And just one more for me on -- a lot of talk obviously about commodities here lately. What are your expectations for the year? Do you have anything baked into guidance? What are you seeing in terms of either foam, steel wire for the coils or on distribution cost?

Yes, on the commodity side what we have baked into our guidance for 2015 is actually very modest slight inflation. Now let me explain that, because there's lot of people that think that we ought to be seeing dramatic deflation. If you look at raw materials that we buy certain chemicals, foam, steel that -- particularly around the chemicals and the foam that we buy, those products -- the key components of those products obviously are oil or natural gas based, but way down the chain you get into the chemicals that -- essentially are developed into polyol, TDI, MDI that you use to make the polyurethane foams. Last year, all year as we talked about on our third quarter call, we saw a price inflation in those key ingredients and those chemical inputs, such that the peak pricing was in December. And so even if we start -- and we have started to see some improvement in the feed chemicals that ultimately lead to making polyol, TDI, MDI. We started here recently to see some improvement in those feed chemicals but we're starting from the highest point of the year last year where we saw increasing price pressure in those inputs all year. So we have to see significant reduction before we would ever get any benefit. Another key component is we do have contracts in place with our suppliers. Those contracts are three, six, nine depending on the supplier and the input. And they're done that way to principally protect us on the -- in the other direction, that they can’t jerk our prices around when prices are going up, that we have clear visibility to price increases months in advance. But in a situation like this, that works in the negative, where it delays giving price declines. But it provides for a more stable environment. Certainly we will work hard with our suppliers to get advantage despite the contracts of some improved input cost that they are experiencing, but right now our expectation is our expectation.

And the coil or the steel costs, you're not seeing any deflation there either?

Not a lot. A significant portion of our material cost is chemicals or foam. Steel obviously is another key component that we buy but steel similarly we expect to see some price improvement there, but not dramatic.

And our next question comes from the line of Brad Thomas of KeyBanc Capital. Your line is now open.

I wanted to first ask about the heavy year-end buys and perhaps give a little more color about what do you think that did in terms of earnings impact in the fourth quarter and what kind of a drag it could present in the first quarter?

Yes. Well, as I said in my comments, because of the success of Tempur last year, at the beginning of each year there are -- we set up these programs. A couple of customers had a very successful year, made significant improvement in their business and our business. They coming into the end of the year were in a situation where if they took some inventory, they could get up to the next rebate tier and that’s why rebates work is -- it's retroactive for the full year. So that buy up that a couple of those customers decided to exercise really did not contribute much margin to us. So we had a lot of moving parts, the biggest moving part we had in addition to -- from where the business was and on what our outlook was on October 30th was three times worse in FX. So from a fourth quarter standpoint, revenue was higher, earnings were marginally different. The first quarter impact is we don’t have that full value revenue in the first quarter. So that dampens first quarter from both from a top and the bottom line.

Got you. So if I think about a contribution margin on $15 million or $20 million or revenue or 25% or 30%, that might get a $0.05 or $0.07 drag. Is that how we should be thinking about what's baked into the first quarter guidance?

Yes.

Great. And then I wanted to follow just on the Sealy side. This is an important refresh they have underway this year. Their big competitor is in Simmons and of course they’re getting refreshes this year. Could you talk a little bit about what the placements look like, what the initial demand from retailers looks like on that product?

The product is yet to start to rolling, but they will at the end of first quarter and into second quarter. The retail reaction has been quite positive actually. So we feel -- we’ll see it when we see it but we feel quite positive about it. The products have been well received both from an aesthetic point of view but also very much from a feel point of view. We’re quite proud of the way that we’ve improved the interior of the products and improve the feel as I said in my comments focused on the back support, which is obviously the heritage. That resonated well with retailers. The aesthetics have resonated well and quite honestly we’re quite excited about how that has been received. So the proof will be in the pudding but as of today it looks quite positive.

[Operator Instructions] And our next question comes from the line of Jessica Mace of Nomura Securities. Your line is now open.

My first question is on the annual 6% growth target. Can you break that down for us as far as your assumptions for market growth, as well as what your market share opportunities are, especially with a significant opportunity abroad.

It’s a broad top line number, but if you were to use just a rule of thumb, we would say approximately 4% is what we’re kind of baking in as the global market growth. It will vary by country and so forth, and as will our performance by country. But broadly speaking as I said in the comments, our expectation is to outgrow the industry and the 6% is sort of expectation of the growth measurably faster than that of the industry.

Great. Understood. And then if you could just talk a little bit more about the Sealy Europe business in particular, maybe if you can quantify the top line contribution you had this quarter versus your expectations and just how you see that ramping throughout 2015? I think you had mentioned in the past some expectation for EBIT contribution from leveraging the Tempur infrastructure, and what you think the timing for that is in 2015, given the currency headwinds.

Yes. Well the currency headwinds are obviously applicable across international Sealy and Tempur. So that is a factor. But the rollout has gone okay so far, and the reason is this. We’ve got distribution. Our distribution has rolled out as we expected and so far customers as we anticipated want to carry the product. We’ve been quite pleased with the reaction. As I said we showed it in Cologne, which is a big fair in Europe and the reaction there was very positive. One thing though that has slowed the rollout is that we will -- our third party supplier was effectively the licensee that we used to have, the licensee from whom we bought the rights. Their business has frankly got into trouble, not from us but from their other customers, and as a result that company very rapidly went out of business. We got an alternative supplier which is ramping up right now, but it’s giving us a little bit of hiccup in the rollout here. So what I anticipate is that we’re going to get the rollout. The rollout will keep going. I think that as customers get the products, the sales per, store per slot will continue to grow. So overall we are seeing a little bit of a slowdown in that. It’s not going to materially affect the overall volume for this year but it will be a little slower. So I think the readout is going to be at least a quarter behind where I had hoped it would be in terms of the ramp speed. But the fundamental acceptance and sell through that we’re seeing is actually not bad at all. So that’s good. We’ve got to get this supply situation worked out. We've got it worked out. It’s just going to take time to ramp up.

Thank you. And our next question comes from the line of Peter Keith of Piper Jaffray. Your line is now open.

Mark, I was curious, in the prepared remarks you had said that at sort of at the high end of your guidance, you should be on track with the 2016 operating margin goals of 13.5. So I guess reading into that it sounds like [indiscernible].

I said EPS…

On EPS, okay. So maybe it sounds like you are a little bit behind where you thought you should be. Could you highlight what's sort of stalling your progress here to that 2016 goal?

FX.

Yes, I mean FX is there. What I said was this. If we were to use the FX of 2013, at the high end of our guidance I'm assuming a 15% growth again this year. We’d be at $4 EPS. But obviously the FX is not what it was in 2013. But -- so right now what it says is that at the current tracking rate we'll hit that $4 threshold in 2017 assuming that we achieve the high end and we get to 15%. That was the point I was making.

I know you are talking about that excluding FX. So there's nothing that’s come up between now and when you flick [ph] those numbers forth that’s slowing down your progress? Is that….

No, I mean obviously our revenue -- one point to make is our revenue is higher than we had anticipated at this time. But that said obviously we gave guidance at the beginning of last year and what our final numbers were, were at the lower end of that guidance. So clearly I would have liked to have been in the middle or above the guidance in terms of being on track for that run rate. There's a variety different things that are driving that. One of them is the fact that we have had some issues from a productivity point of view on the spring manufacturing plants that have slowed our bottom line growth. But we are still on track. We’re not -- but they have -- we're not as far ahead or as far along as obviously we would like to be. Just obviously given the fact that our guidance was -- that we’re not in the high end of our guidance from last year.

Peter just putting context from -- by the end of ’15 if everything played out exactly as we just discussed, both from the top line, from an execution standpoint and we were at the high end of this guidance, over a two year period you would have -- from the ’13 rates to the ’15 rates we’ve lost $150 million of revenue and we would have lost 220 basis points of gross margin and 110 basis points of operating margin, all just to currency.

Fair enough. The one thing I just want to get clarification on -- last quarter there was some quality control issues as you ramped up Sealy hybrid in Europe with the contract manufacturers. You’re now shifting over to a new one. Are you fully ramped up with quality control or could there be some risk that you’re going through some more margin issues in the first half of 2015?

I don’t think that -- this is -- it's a big -- it’s an important part of the business. I don’t -- it's an important part of the process. So I don’t want to trivialize it. I think that the quality control processes we have in place I think are quite good. So that I feel pretty good about. And in terms of the ramp up, I think -- I feel pretty good about that too. I think that the supplier is good. I think the issue is always though transitioning from one third party supplier to another is not a trivial activity. So it’s not that it’s going to be -- I think that’s why I put the caution as I did to the prior person on the phone. I just -- that sort of transition is always something we have to take with caution. But in terms of quality, I feel pretty good. And in terms of capability of supply, I feel very good.

Thank you. And our next question comes from the line of Keith Hughes of SunTrust. Your line is now open.

You talked about the launch of the Sealy products. Just wanted to ask on Flex. Can you give us any sort of feel of client reception, how doors -- how quickly they'll be out, things like that, would be helpful?

Again, I have to caveat it by the fact that we haven’t obviously started properly shipping them. But the reaction was very positive. In Vegas the customer reaction was very positive and we anticipate this going to all of our major customers. And so we had a very positive reaction. We anticipate it getting a very good distribution. It will roll out at the end of the first quarter and the beginning of the second quarter. And in terms of thoughts, we anticipate that we’re going to get -- there are three products in the line. So we’re expecting somewhat -- obviously between two and three slots per store. And we’re expecting of the order of one -- give or take one incremental slot per store; one incremental slot as a result of this product line. So we'll see but we're quite excited. The thing about this product as it really, as I know you know, it has a very different -- it provides the support and the uniqueness of a Tempur, but at the same time there's a very different feel to either the Cloud or the Contour. So we think that it is -- we hope that it will be quite incremental.

Question to Dale. You had talked about the Tempur North America as part of your sales guidance for '15 and being up mid-single digits. Is there some Canada currency in that number as well?

There's some Canada currency associated with Tempur North America. Yes.

Can you give us kind of rough indication as to what...

So Tempur in Canada under indexes versus what we would like it to be. So the impact on Tempur North America of currency is much smaller than the impact on Sealy from Canada. But there is a slight negative there. It's not a big headwind for us.

And the final question is on advertising views for 2015. [Indiscernible] any details you give us there, what you're going to be looking to spend?

We're going to spend -- roughly speaking as a ratio and -- we're going to spend very consistently with what we spent this last year in '14.

Consistent in terms of the dollar spend. Is that what you're referring to?

Percentage. The rate. The rate spend.

Thank you. [Operator Instructions] And our next question comes from the line of Joan Storms of Wedbush Securities. Your line is now open.

So with the re-segmenting of the segments to North America, International and Corporate, and I know there were a couple of questions on this a little bit earlier, but on the projected growth rates for sales gross margin, I'm assuming -- so the sales on a blended rate were going to be about -- I think you said about 6% and then minus some FX a little bit lower than that. And then on the gross margin up in TPX, up a little bit in Sealy and then down in International. So maybe you could just maybe give us a general guidance on the sales for each of those new segmented channel?

Joan, since you don’t have any information on the new segments, we're going to send out an 8-K end of next week in advance of the Investor Day, so you start to see historical numbers in these segments. But right now with nothing to look at, I think it's better just let's wait for Investor Day, let's go through it then. In advance of Investor Day you'll see historical data and the new segment format and then there'll be much better conversation once you have seen that and have that.

Okay. So we'll just continue to model it the way we have been. And so…

Yes for the next week, please. Yes.

Okay. Then we'll do it again. And then also on the Flex products, felt that was pretty interesting. Was there any indication on -- it seems like although -- like Mark had just said they expect all the major retailers to take it. Is there any fall out between Flex and the other products on the Tempur North America, in that region?

Yes, as I said, we think that we'll -- as we said what our expectations are is that we'll get two to three slots in each on average, and that of that one of them will be incremental. And so 1.5 will be taken away from other slots. What we anticipate, and in fact what most of our retailers are doing is taking out Weightless, which is a product that we have had for some years, but which is a relatively smaller volume product and putting in its place Flex, which both from us and for Tempur and for the retailer is going to give a better turn on the floor. So that's what we see happening. We don’t see it affecting the core Contour or Cloud.

Thank you and our next question comes from the line of Karru Martinson of Deutsche Bank. Your line is now open.

To take a big picture view here, when you talk about wanting to become kind of share leader in every country that you're in, what's the time horizon that we're looking at this of International investment and the opportunity incoming from there?

Well that's a good question. There's not a single -- there's not a single answer, because you are quite right. It's different in some countries than others. In February -- I'm sorry on the 18th when we meet we will talk specifically about how we're thinking about which countries are the ones that are sort of first on the list and which is the second tier. And so -- however we are in the top-five in more countries than you would imagine. It's not as though this is sort a -- would be far away. And one of the things that you may know is that in many of the countries, certainly in Europe there are no very large players and that Tempur, while relatively small is actually by itself a relatively major player. The combination of Tempur and Sealy puts us in a situation where we have a portfolio that will give us that opportunity. So what I would say is that in some countries -- in some countries we're talking two to three to four years, some countries it's going to be longer than that. But it is a strategic objective wherever we are to be able to use the combination of the organic drivers of growth and where appropriate and possible strategic acquisitions to move ourselves to be number one wherever we compete.

And forgive ignorance, but when we look at the International market and recognizing that there is great variability between them, as far as for long on kind of the specialty mattress equitation as our market here or is there more of an education curve that we still need to realize there.

They might say we need an education. It depends how you look at it. I think it really -- one of the most remarkable things about the international business is how different it is from country-to-country, and how literally neighboring countries have totally different product lines but also product types. This is somewhat modifying, but I think it would be a mistake to think of the specialty of the U.S. as an advanced thing. It is -- the brand, one of the things that I think is unique -- I know is unique is that although the countries are different, the major competitors are different by country, and even the types of products are different by country, one of the remarkable things is that there are no brands that transcend multiple countries in a meaningful way except Tempur. Tempur is really quite unique in this, in that it exists as a material player in countries who's every other competitor is different. But I wouldn’t think as it as sort of scale of more or less advanced. I would think of it as more or less different. Then I think the most important thing is brand awareness. As we think about our single biggest requirement, obviously distribution is critical but also brand awareness, and that is the kind of the metric that you use to drive leadership in the country, that we will use to drive leadership.

Thank you. And our next question comes from the line of John Anderson of William Blair. Your line is now open.

Two quick ones. Just an update on any supply chain simplification efforts and the associated cost synergies. And then I know you made a -- I think a fairly significant investment in point of purchase materials and displays to support the new product launches this year. I'm just wondering what the response from the RSAs and consumers has been to that? And whether you think you're getting a good return on that investment?

I will take the supply chain one. This is Dale. And from a supply chain standpoint one of our major initiatives as we have talked about is the business with a portion of that is the distribution network realignment that we've been doing across the U.S. We're probably at this stage about two-thirds of the way through that. And it's one of those things that you can’t do it all at once and you've got to go region-by-region and operation-by-operation and realign how the customer orders come in, realign what your trucking process is, you delivery process et cetera. That’s why it’s being done region-by-region. The thing that led to that question was around the synergies. We had said at the beginning of the year that we expected to have achieved $40 million cumulative synergies by the end of 2014 and we are slightly ahead of that. And we'll talk about that a little bit more next week. And then Mark.

Supply chain contributed the amount -- that you had anticipated to come from the supply chain was achieved in 2014. And as far as the POS and POP in concerned, it has been very well received. The reason that the POP in my opinion has been effective is it is attractive and it attracts the consumer to come to the stand and to take a look at the bed. But it's also actually relatively simply informative, not only for the consumer but for the retail RSA. It makes it easier to sell the product because the information is there. And as we are rolling out Flex, one of the things that we've done is that although the Flex rollout is a smaller rollout than the Contour and Cloud rollout that we did last year, it’s still a very big rollout. It’s possibly the second biggest rollout we've ever done. So it’s another big rollout. But what we are doing is again tying it with new POP, but very much in the family the old POP. So it capitalizes on that structure. So we actually are quite pleased with it. And Posturepedic too is going to have new POP, and while quite different and designed for whole different purpose -- whole different structure, that too was well received and that too we're going to be rolling out this year.

And your next question comes from the line of Sam Reid of Barclays. Your line is now open.

Quick question here regarding the Sealy distribution in the U.S. Just curious kind of what the follow-up was on that with relation to some of the issues you guys had in 3Q, and what your outlook is on that heading into 2015?

All right. I referred to it in my comments. So -- in some ways one could point to kind of one off things that happened that caused these inefficiencies. So to some extent, each one of them or each thing happened was in itself a one-off event. But one of the things that I think that we will know and one of the big focuses for 2015 -- indeed it will be a big part of what we talk -- one of the things that we'll talk about somewhere in New York on 18th is a systematic review, and -- from top to bottom review of the process, from supply chain as well as the manufacturing process to try and systematically reduce posted inefficiencies, to make the productivity higher but also to reduce the likelihood of one-off problems like this. And it’s an improving and the systematizing of the plant. So I don’t want to imply that the plants are broken or that they're not good. They're good. We just need -- what we need to do is to be able to systematize better, to take the best practices from each plant and apply it across the board. And that process is actually underway. It’s something that we have positive traction on. I’m quite excited about it. But it’s not a thing that can be fixed or changed in a day. This will take a little while. We are well on our way through the distribution component of it. The manufacturing component of it now is going to be a big focus.

That was very helpful. And then one quick follow up here and apologies if you guys have already addressed it but what sort of adjustable contribution are you guys modeling in your 2015 guidance? Obviously I know it’s very preliminary. But sort of generally speaking kind of how do you expect that to impact the top line there.

We are expecting our adjustable mix to be relatively consistent with what we’ve seen here over the last quarter or two. It’s grown dramatically. We’re not expecting significant further growth but we are expecting some continued growth on attach rates of adjustables.

Thank you. And I’m showing no further questions at this time. I’d like to turn the conference back over to Mr. Mark Sarvary for any closing remarks.

Thank you very much. And we look forward to talking with you again at our Investor Day in New York City on February 18th. Thanks for joining us this evening.