Tempur Sealy International, Inc. (TPX)

TPX 
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Industry: Consumer Durables
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Tempur Pedic International (TPX)

Q2 2011 Earnings Call

July 26, 2011 5:00 pm ET

Executives

Dale Williams - Chief Financial Officer and Executive Vice President

Barry Hytinen - Senior Vice President of Financial Planning & Analysis, Investor & Media Relations & Competitive Intelligence

Mark Sarvary - Chief Executive Officer, President and Director

Analysts

Robert Drbul - Barclays Capital

Mark Rupe - Longbow Research LLC

Joan Storms - Wedbush Securities Inc.

Eric Hollowaty - Stephens Inc.

Joseph Altobello - Oppenheimer & Co. Inc.

Chad Bolen - Raymond James

Bradley Thomas - KeyBanc Capital Markets Inc.

Robert Straus - Gilford Securities Inc.

Jon Andersen - William Blair & Company L.L.C.

Keith Hughes - SunTrust Robinson Humphrey, Inc.

Joshua Pollard - Goldman Sachs Group Inc.

John Baugh - Stifel, Nicolaus & Co., Inc.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Tempur-Pedic Second Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. And now I'll turn the conference over to Barry Hytinen. Please begin.

Barry Hytinen

Thanks, Tyrone, and thank you, everyone, for participating in today's call. Joining me in our Lexington headquarters are Mark Sarvary, President and CFO; and Dale Williams, Executive Vice President and Chief Financial Officer. 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 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 with that introduction, it's my pleasure to turn the call over to Mark.

Mark Sarvary

Thanks, Barry. Good evening, everyone, and thanks for joining us. Today, I'll provide an overview of our performance in the second quarter and an update on our strategic focus areas. Dale will then provide a detailed review of financial results, as well as our updated financial guidance.

We are pleased with our second quarter performance, both in the U.S. and internationally. Sales are up 30% from last year and earnings per share were up 65%. In the U.S. and in all the countries where we have reliable data, TEMPUR outgrew the industry. Our market share is growing globally.

Gross margin improved by over 400 basis points year-over-year, the result of favorable mix and continued focus on productivity programs and fixed cost leverage. The gross margin improvement allowed us to maintain our commitment to significant investment in marketing, while still expanding operating margin to 24%. As a result of our strong performance in the first half of 2011 and our expectations for the remainder of the year, we are increasing our financial guidance, and Dale will provide details later.

Now, I'd like to provide updates on our strategic initiatives. First, the progress that we've made to ensure there's a TEMPUR mattress and pillow that appeals to everyone. In our international markets, the Cloud launch is progressing nicely throughout much of Europe and is beginning in Asia, and we are receiving very positive feedback both from retailers and consumers. In the U.S., we're seeing positive trends in the early days of the Contour rollout, which began distribution in June.

Contour is a newly designed line that replaces our TEMPUR Collection for those consumers who prefer the traditional TEMPUR feel. The Contour is planned to roll out quickly, likely complete in advance of the Labor Day shopping period. Also, late in the year, we will be increasing the prices of the Contour and the Contour Select.

Also in North America, the Cloud Luxe completed its initial distribution and continues to perform very well.

Beyond mattresses, we're excited about the potential for our pillow business. We have integrated the findings of new consumer research into our pillow development. And at the Las Vegas Bedding Show next week, we will introduce a range of new pillows and the redesign of the existing line. The redesigned products maintain what consumers have always loved about our pillows, but improved upon them. And our new pillows provide a more traditional look and feel, and will be available in varying degrees of softness.

I'd also like to comment on our mattress product development pipeline, details of which are obviously confidential, so I won't a lot of detail. But I would like to read a brief update to our investors.

Through our ongoing consumer research, we've identified several large market segments where our existing product lines does not fully address certain consumer needs and wants. And we focus our R&D team against these opportunities.

Across a range of different initiatives, product development is in varying stages, with some efforts well developed and in the final stages of consumer testing and commercialization and some still in the laboratory phase. As we look into 2012 and beyond, we expect to introduce several new concepts to drive considerable growth and market share gains.

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