Tempur Sealy International, Inc. (TPX)

TPX 
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Tempur-Pedic International Inc. (TPX)

Q3 2009 Earnings Call

October 15, 2009; 5:00 pm ET

Executives

Mark Sarvary - President & Chief Executive Officer

Dale Williams - Chief Financial Officer

Barry Hytinen - Vice President of Investor Relations

Analysts

Mark Rupe - Longbow Research

Brad Thomas - Keybanc Capital Markets

Keith Hughes - SunTrust

Budd Bugatch - Raymond James

John Baugh - Stifel Nicolaus

Matt McClintock - Barclays Capital

Henry Kerpellen - Oppenheimer

Tony Gikas - Piper Jaffray

Joel Havard - Hilliard Lyons

Presentation

Operator

Good day, ladies and gentlemen and welcome to today’s Tempur-Pedic third quarter 2009 earnings call. This call is being recorded. Now for opening remarks and introductions I’d like to turn the conference over to Barry Hytinen. Please go ahead.

Barry Hytinen

Thanks Anthony and 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-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-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 website at www.tempurpedic.com and filed with the SEC. I would also like to remind investors that we will be hosting an investor presentation next Thursday, October 22 beginning at 10.30 am Eastern Time. A live webcast of the event will be available on our website.

Now with that introduction, it is my pleasure to turn the call over to Mark.

Mark Sarvary

Thanks Barry and good evening everybody and thanks for joining us today. Today I’ll provide a brief overview of our performance in the third 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 our updated guidance.

During the third quarter we continued our focus on maximizing sales, improving margins, and generating cash flow and uncertain environment. While sales are still down a 11% from last year, again this quarter they improved sequentially, they were up 21% in the third quarter compared to the second quarter.

Throughout the economic downturn, we have not seen normal industry seasonality, but in the third quarter we do attribute some of our improvement to a seasonal lift in all trends. Our productive projects help to increase gross margins by 590 basis points to 47.6%. Lower commodity cost and pricing also a big factors in the improvement.

Operating margin at 19% was also up and improvement of 200 basis points last year and 330 basis points the last quarter. Finally our focus on cash continued to drive exceptional result. We lower that $54 million during the quarter, a year-to-date debt reduction, $104 million, which exceed the high end of our full year target.

A funded debt to EBIT ratio stands below two times for the first times, since the first half of 2007. Dale will provide more detail on the financials in a moment, so I’ll focus the rest of my commentary on progress with our 2009 strategic initiatives.

The first initiative throughout the year has been to improve gross margin and as mentioned earlier we made great progress here. Improved productivity and utilization rates throughout our operations are having a big impact. Sourcing initiatives continue to drive lower material costs and pricing actions taken earlier in the year, continue to be a benefit. I’d like to take a moment right now to thank the many employees throughout our organization, who have been responsible for driving our strong result in this area.

Our second initiative, driving improved retail effectiveness and here to we’re making good progress. We’re continuing the promotional events that we’ve described in previous call. In the fourth quarter, we’re executing several retail promotions including one focused on our Ergo adjustable base and anther one on pillows.

Clearly, one of the most important ways we improved effectiveness with our retailers is to drive consumers to their stores and this quarter we launched our new advertising campaign, Ask Me and so far we’ve been very happy with the response, but it is gone in. The Ask Me campaign, leverages power of our passionate user applicant and the extremely positive word of mouth, that’s always been a differentiator for our brand.

The campaign encourages people to use social media through more about Tempur-Pedic. We’re also working with retailers to help them leverage the Ask Me campaign into their own marketing efforts. This quarter, we increased our investment in market spending and we intent to continue to grow our investments in the months and years ahead.

Our third initiative is to broadening the range of products that we offer. This quarter the Las Vegas Bedding Show, we launched the TEMPUR-Cloud line of beds, one of the most exciting launches in our history. For some consumers, our exciting mattress offerings just feel to from.

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