Tempur Sealy International, Inc. (TPX)

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Tempur-Pedic International Inc, (TPX)

Q2 2010 Earnings Call

July 20, 2010 5:00 pm ET

Executives

Barry Hytinen - Senior Vice President, Investor Relations

Mark A. Sarvary - President and CEO

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

Analysts

Mark Rupe - Longbow Research

Chad Bolen - Raymond James

John Baugh - Stifel Nicolaus

Joseph Altobello – Oppenheimer

Brad Thomas - Keybanc Capital Markets

Jack Murphy - William Blair

Unidentified Analyst : Barclays Capital

Keith Hughes - SunTrust

Presentation

Operator

Good day, everyone and welcome to the Tempur-Pedic's Second 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. 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 measure 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 A. Sarvary

Thanks Barry and good evening everybody. Thanks for joining us tonight. Today, I'll provide a brief overview of our performance in the second quarter, an update on some of our strategic focus areas and a commentary on our outlook. Dale will then provide a detailed review of the second quarter financial results and will discuss our revised guidance.

We're very pleased with the continued substantial growth in our North American business and we are also pleased with the improved performance of our international business, particularly on a local currency basis.

Sales are up 42% from last year and earnings per share were up 109%. Our focus on improving gross margins and operating costs also continues to be effective. Fixed cost leverage and our productivity program helped to increase gross margin by over 200 basis points year-over-year to 48.7%, and we were able to increase our operating margin by 480 basis points year-over-year to 20.5%.

These results build on our first quarter results and so, overall, we've had a strong first half of the year.

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

We are doing this in an environment that is still quite unpredictable, and we hear from many of our retailers that consumer traffic is still not back to normal. But we believe the seasonality is returning and that our share gains in the first half will be sustained in the second half.

Now, I'll provide an 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.

As we've discussed before, our softer line of mattresses the ‘Cloud’ Collection was designed to broaden our appeal. The Cloud Supreme continues to sell quite well, and we expanded the rollout of the TEMPUR-Cloud, the entry level price point mattress in the softer collection.

In the third quarter, we will begin distribution of our hand soft mattress, the TEMPUR-Cloud Luxe, and we're very pleased with the incremental flow, space and sales from this collection.

Internationally, we recently completed consumer research to size the market for a softer TEMPUR line in Europe. While those markets generally skew firmer than the U.S., our research suggests that significant opportunity exists.

We're commercializing our line of softer mattress for sale in Europe and anticipate the initial rollout will begin early next year.

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 53% to nearly $24 million, driven by the ramping of our ‘Ask Me’ marketing campaign in the U.S. This campaign focuses on one of the brands greatest assets, the extremely positive referrals we get from existing owners. We also continue to work with many of our retail partners to incorporate our marketing message directly into their ad campaign.

The ‘Ask Me’ campaign has had an exceptional return on investment. Perhaps, the best example of this is the sales performance of our firmer products.

Seasonally, our industry is normally down from first quarter to second quarter so while we hope the Cloud line would grow sequentially from the first quarter based on distribution gains, we did not expect this from our more established models. Yet many of our firmer mattress models experienced substantial growth on a sequential basis, which we attribute largely to our allocation of resources, the sales and marketing initiatives and especially the ‘Ask Me’ campaign. Following these compelling results, we will expand our investment in marketing during the second half, which we anticipate would help fuel our growth in the new year.

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