Tempur Sealy International Inc. (NYSE:TPX) Q4 2014 Earnings Conference Call - Final Transcript
Feb 05, 2015 • 05:00 pm ET
the Sealy brand rights in several markets throughout the world and Tempur distribution rights in Mexico. We divested our US innerspring component manufacturing plants and made significant progress on our new distribution network for the US.
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 negatively 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 measure 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