Tempur Sealy International, Inc. (TPX)

TPX 
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Tempur-Pedic International Inc. (TPX)

Q3 2010 Earnings Conference Call

October 19, 2010 5:00 PM EST

Executives

Barry Hytinen – SVP

Mark Sarvary – President and CEO

Dale Williams – CFO

Analysts

Bob Drbul – Barclays Capital

Mark Rupe – Longbow Research

Budd Bugatch – Raymond James

Brad Thomas – KeyBanc

Joe Altobello – Oppenheimer

Keith Hughes – SunTrust

Jack Murphy – William Blair

John Baugh – Stifel Nicolaus

Joan Storms – Wedbush

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Tempur-Pedic's Third Quarter 2010 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Barry Hytinen, Senior Vice President. Please go ahead, sir.

Barry Hytinen

Thanks Elizabeth, and thank you everyone 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 statement speaks 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 tempurpedic.com and filed with the SEC.

And, now as a reminder, the company will be hosting an Investor Day presentation in Q&A session on November 11th, 2010 in New York. There will be a live webcast of the event available. For more information, you may visit the company’s website or email us at investor.relations@tempurpedic.com.

And, now with that introduction, it’s 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 third quarter, an update on some of our strategic focus areas and commentary on our outlook. Dale will then provide a detailed review of the third quarter financial results and will discuss our revised guidance.

We’re pleased with the market share gains and the sales and earnings growth we’ve achieved in the third quarter.

Sales are up 32% from last year and earnings per share were up 82%. Our focus on improving gross margins and operating costs also continues to be very effective. Fixed cost leverage and our productivity program helped to increase gross margin by 340 basis points year-over-year to 51%. And with that improvement partially offset by strategic investments, our operating margin expanded by 480 basis points year-over-year to 23%.

As a result of this better than expected performance and continued good indications for the remainder of the year, we are raising our guidance for the full year, and Dale will go into the details.

Now, we’re doing this in an environment that’s still quite unpredictable, and we hear from many of our retailers that consumer traffic is still not back to normal. But we believe that our business will continue to grow and our share gains will continue.

Now, here’s a brief update on some of our strategic focus areas for 2010 and beyond. Firstly, I’m very pleased with the progress we made this quarter to ensure those are TEMPUR mattress and pillow that appeals to everyone.

The Cloud Collection which appeals to those consumers who prefer a softer feel continued to sell very well and helped to expand our market shares significantly. The price increase we took on the Cloud Supreme in the second quarter is not affecting consumer demand and the product continues to be very successful.

We are essentially complete with the rollout of the entry-level Cloud model and late in the quarter we began the rollout of the Cloud Luxe. Retailer interest in the Luxe is high and we believe it will also help us grow share and improve average price.

We are at this moment in the final stage of commercializing a Cloud line of mattresses to be launched in our international geographies and we’ll begin distribution early next year. And similar to our kick-off events in the US, we will be focusing a lot of attention on the Cloud as it begins its international distribution.

The second strategic focus area that I want to discuss is our commitment to ensuring that everyone knows that they would sleep better on a TEMPUR mattress and pillow.

This quarter, we increased our total advertising investments to 37% above last year to $25 million, primarily by ramping of our “Ask Me” marketing campaign in the US. We believe awareness of our brand is a key component of market share and top line performance in every geography where we can be.

During the quarter, we also launched a new much enhanced website. If you haven’t seen it, I encourage you to visit tempurpedic.com. The site does a much better job communicating our product architecture and allows us to more effectively link our direct activities with our retailer networks distribution. It’s also designed to be much easier for the consumer to use.

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