Tempur Sealy International, Inc. (TPX)

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Tempur-Pedic International, Inc. (TPX)

Q2 2009 Earnings Call

July 16, 2009 5:00 pm ET

Executives

Barry Hytinen – Vice President, Investor Relations and Financial Planning & Analysis

Mark A. Sarvary – President and Chief Executive Officer

Dale E. Williams – Chief Financial Officer

Analysts

Robert Drbul - Barclays Capital

Brad Thomas - Key Banc Capital Markets

Keith Hughes - SunTrust Robinson Humphrey

John Baugh - Stifel Nicolaus & Company, Inc.

Joseph Altobello - Oppenheimer & Co.

Budd Bugatch - Raymond James

Mark Rupe - Longbow Research

Robert Straus - Gilford Securities, Inc.

Presentation

Operator

Welcome to the Tempur-Pedic second quarter 2009 earnings conference call. Today's call is being recorded. At this time I would like to turn the call over to Mr. Barry Hytinen.

Barry Hytinen

Thank you 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&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-K under the headings Special Note Regarding Forward-Looking Statements and Risk Factors. Any forward-looking statements speak only as of the date on which it is made. The company undertakes no obligations 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 Web site at www.tempurpedic.com and filed with the SEC.

And now with that introduction, I will turn the call over to Mark.

Mark A. Sarvary

Good evening everybody and thanks for joining us today.

Today I will provide a brief overview of our performance in the second quarter and then will give you an update on our progress on our key strategic initiatives. Dale will then provide a detailed review of the quarterly results and guidance.

During the second quarter we executed well. Our focus on maximizing sales, improving margins, and generating cash flow continued to show progress. From a sales perspective, volumes are still significantly down from last year and we don't yet see any clear evidence of a turnaround in trend. Sales continue to be volatile week-to-week and month-to-month and retailers continue to report the environment is tough.

But having said that, we have seen a degree of stabilization in U.S. demand and we do know the initiatives we have underway are helping. Our domestic sales performance in the second quarter clearly improved versus the first quarter, with sales up sequentially 13%. Indeed, some of the programs we had in place during the second quarter exceeded our expectations.

Productivity projects helped us expand the gross margins and together with pricing and lower commodity costs, gross margins increased 220 basis points compared to last year and 40 basis points compared to last quarter.

Throughout the quarter we managed expenses tightly and our EBIT margin of 15.9% was higher than last year and last quarter. And we will continue to manage costs tightly until we see further evidence that the macro environment is improving.

Finally, our focus on cash generation and the strength of our business model enabled us to lower debt by $31.0 million during the quarter.

Looking forward, we are confident in our ability to continue to improve our margins, manage our expenses, and lower our debt, and with each quarter we become better positioned for the eventual economic recovery.

Dale will provide more detail on the financials in a moment so I will focus the rest of my commentary on progress on the strategic initiatives that we have outlined previously.

The first key strategic initiative is to improve gross margins and talked about it and here we have made good progress this quarter. Our operations teams have improved productivity and utilization rates. The redesign of our transportation network is nearing completion and has allowed us to lower inventories and sourcing initiatives continue to drive lower raw material costs.

We expect continued margin favorability as these actions should continue to modestly ramp through the rest of the year.

We also showed progress on our second key initiative, to improve effectiveness with our retail customers. We executed the second with a series of scheduled promotional events timed with the Memorial Day shopping period with the Tempur-Pedic test drive promotion, we are successfully driving consumer traffic to retail and most of our retail customer base to start.

In addition, we successfully completed the transition of our U.S. entry level offering to the Advantage bed and we are experiencing strong sales of this model and I believe we are expanding market share.

Finally, the foundation close out event was very successful as we transitioned from our old foundation to the new, improved model now in the market. Retailers across the country took advantage of the close out price and the event exceeded our expectations. We believe it drove at least $5.0 million in incremental sales. And we continue to look for and evaluate additional ways to improve our retail effectiveness.

Read the rest of this transcript for free on seekingalpha.com