Tempur Sealy International, Inc. (TPX)

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Tempur-Pedic International Inc. (TPX)

Q4 2009 Earnings Call Transcript

January 26, 2010 5:00 pm ET

Executives

Barry Hytinen – VP, IR, Financial Planning & Analysis

Mark Sarvary – President and CEO

Dale Williams – EVP, CFO and Secretary

Analysts

Mark Rupe – Longbow Research

Brad Thomas – KeyBanc Capital Markets

Anthony Gikas – Piper Jaffray

John Baugh – Stifel Nicolaus

Joseph Altobello – Oppenheimer & Company

Budd Bugatch – Raymond James

Jack Murphy – William Blair & Company

Matt McClintock – Barclays Capital

Presentation

Operator

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

Barry Hytinen

Thanks, Jay. 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&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, and 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 Tempurpedic.com, and filed with the SEC.

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

Mark Sarvary

Thanks, Barry, and good evening everybody. Thanks for joining us tonight. Today I'll provide a brief overview of our performance in the fourth quarter and an update on our key initiatives for 2009, and then I’ll outline our strategic focus areas for 2010 and beyond. Dale will then provide a detailed review of the fourth quarter, and full-year results as well as our guidance.

During the fourth quarter, we continued our focus on maximizing sales, improving margins, and generating cash flow. And sales were up 29% from last year, and 9% sequentially. Sales exceeded our expectations, both in the US and internationally, partially due to the gradual improvement in the macro environment, and partially due to the success of our sales and marketing initiatives. Our productivity projects, and fixed cost leverage help increase gross margin by 550 basis points year-over-year to 48.5%. And reflecting some expense leverage, operating margin was up 590 basis points year over year to 19.3%. Our focus on cash continued to drive results. We lowered debt $18 million during the quarter and our funded debt to EBITDA ratio stands below 1.7 times for the first time since the first half of 2007, and Dale will provide more detail on the financials in a moment.

I'll now move to a recap of the progress we made on our key 2009 initiatives. You will remember that we had five initiatives that we focused on throughout the year. The first was to improve gross margins, where we made solid progress with a full-year improvement of over 400 basis points. While commodity costs were helpful, the primary driver of improvement was our ongoing productivity program.

Our second initiative was to improve our retail effectiveness. In 2009, we launched traffic driving and in-store promotions. Overall we were very pleased with these programs, and we learned a lot from them. In 2010, we will apply these learning’s to make these events even more effective. In addition, our recently launched advertising campaign, called “Ask Me” is showing strong traction, as you all know our ongoing investment in highly effective advertising is a primary driver of customers to our retailer stores.

Third, we set out to broaden the range of product that we offer. In the fourth quarter, we rolled out our TEMPUR-Cloud Supreme, the first in the softer feeling TEMPUR-Cloud line. To some consumers our existing mattress offerings just feel too firm, and our Cloud line is aimed at broadening our appeal to this consumer segment. We have been very pleased with the rollout so far. Our retail partners and consumers have been very enthusiastic about the new edition to the TEMPUR-Pedic portfolio.

Internationally, the Sensation mattress line, another unique and differentiated product that we started shipping earlier in 2009 is also expanding our appeal to a broad new group of consumers all around the world. Our fourth initiative is to stem the declines and ultimately grow our direct channel. Here we made excellent progress in 2009, with sales up 9% for the year and with exceptional growth in the fourth quarter. This time lastly we made progress improving our household penetration in our international markets. The sensation (inaudible) is expanding our addressable market and we have started implementing plans to significantly grow our retail distribution across many geographies.

Now, I'm going take a minute outline our strategic focus areas for 2010 that are design to drive growth, which we first discussed at our October investor event. And from time-to-time this year we'll update the investment community on our progress against these focus areas. First, we will make sure that everyone knows that would they sleep better on the Tempur mattress and pillow.

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