Tempur Sealy International, Inc. (TPX)

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Tempur Pedic International (TPX)

Q3 2012 Earnings Call

October 23, 2012 5:00 pm ET

Executives

Mark Rupe

Mark A. Sarvary - Chief Executive Officer, President and Director

Dale E. Williams - Chief Financial Officer and Executive Vice President

Analysts

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Budd Bugatch - Raymond James & Associates, Inc., Research Division

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Jessica Schoen - Barclays Capital, Research Division

Joshua Borstein - Longbow Research LLC

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Peter J. Keith - Piper Jaffray Companies, Research Division

Jon Andersen - William Blair & Company L.L.C., Research Division

Eric Hollowaty - Stephens Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and thank you for standing by. And welcome to your Tempur-Pedic Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference may be recorded. It's now my pleasure to turn the floor over to Mark Rupe. Sir, the floor is yours.

Mark Rupe

Thanks, Huey. Thank you for participating in today's call. Joining me in our Lexington headquarters are Mark Sarvary, President and CEO; Dale Williams, EVP and CFO. After our 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, earnings or the proposed transaction with Sealy, 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 the actual results to differ materially from those identified include economic, regulatory, competitive, operating and other factors discussed in the press release issued today. These factors are also discussed in the company's SEC filings, including, but not limited to, annual reports on Form 10-K under the heading Special Note Regarding Forward-Looking Statements and/or Risk Factors. Any forward-looking statement speaks only as of the date on which it is made. The company undertakes no obligation to update any forward-looking statements. The press release, which contains the 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.

With that introduction, I will turn the call over to Mark Sarvary.

Mark A. Sarvary

Thanks, Mark. Good evening, everyone, and thanks for joining us. Before we get into the quarter, I want to make just a few comments about our proposed transaction with Sealy. We are very excited about the potential for the combined companies. Together, TEMPUR and Sealy will have a portfolio of highly complementary brands, products, technologies and geographic footprints that will provide a robust platform for growth. We have initiated a process and are working with Larry Rogers and the Sealy team to prepare for a very successful integration once the required regulatory approval is received. I have been very impressed with the Sealy individuals I have met in the short time since our announcement. Now I'm sure that you understand our constraints in discussing details regarding this transaction, so we'll focus tonight's call on our third quarter performance and the updated financial outlook for TEMPUR.

As I have said before, the competitive environment we are currently facing is very different than anything we previously experienced. I said that our competitive response would require a broad series of new initiatives, and that these would be implemented over a period of time. And their full impact would not be expected to be seen until early 2013. And our third quarter performance is consistent with this.

To summarize, our third quarter sales, overall, declined 9% and were down 7% on a constant currency basis. North American sales declined 14%, but were in line with our projection of slight sequential growth relative to the second quarter due to seasonality. International sales increased 3% and on a constant-currency basis, increased 11%. While our International business once again delivered a solid quarter in what many would consider to be a difficult economic environment, our International sales were below our expectations. We recorded a $0.03 loss per share on a GAAP basis. The loss reflects the provision for taxes that we recorded to reflect the anticipated repatriation of foreign earnings, together with transaction costs related to the proposed Sealy acquisition. Excluding these items, adjusted earnings per share were $0.70 in the third quarter, down 22%.

I'll provide an update on the progress of our new initiatives, and then I'll turn the call over to Dale for details of our third quarter results and the updated financial outlook. As we indicated on our July 24 second quarter call, and disclosed in an 8-K filing with the SEC on July 30, we launched a broad series of new initiatives at the Las Vegas Industry show. They included 6 new product introductions: 5 new mattresses and a new adjustable foundation, and the discontinuation and closeout of 2 U.S. mattress models; also, wholesale mattress price reductions on certain U.S. models to improve the margins of our U.S. retail customers; manufacturer suggested retail price reductions on 2 U.S. mattress models and warranty extension of all of our U.S. mattress models to 25 years to improve the competitiveness of our products in the marketplace; and various other initiatives, including customer program and integrated advertising adjustments to realign dealer incentives given our reduced financial year '12 outlook. These actions were well received by our retail customers, and believed by many to be the appropriate response.

While some of these initiatives were implemented during August, many more have just recently been launched. Only in September do we begin shipping all of our new mattress models. Retailer enthusiasm for these new products has been high, and our early read is that it appears we've gained some overall slots at our key retailers. It's still very early. The rollout of these products is less than 50% complete, but we are witnessing some promising initial signs. Demand for some of our new products has been greater than we expected. And as pleased as we are by this initial reception, we are equally disappointed that, as a result, many of our retail customers are facing order backlogs or allocations due to our supply constraints. And we have been moving as fast as we can to very quickly ramp up our supply lines to address this demand, and are now beginning to catch up on the backlog. And we anticipate that supply will be normalized within the next few weeks.

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