Tempur Sealy International, Inc. (TPX)

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Tempur Pedic International (TPX)

Q4 2010 Earnings Call

January 20, 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

Keith Hughes - SunTrust Robinson Humphrey Capital Markets

Mark Rupe - Longbow Research LLC

John Baugh

Robert Drbul - Barclays Capital

Joan Storms - Wedbush Securities Inc.

Eric Hollowaty - Stephens Inc.

Joseph Altobello - Oppenheimer & Co. Inc.

Bradley Thomas - KeyBanc Capital Markets Inc.

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

Budd Bugatch - Raymond James & Associates

Anthony Gikas - Piper Jaffray Companies

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Tempur-Pedic International Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] At this time, I would now like to turn the conference over to you host, Mr. Barry Hytinen. Sir, you may begin.

Barry Hytinen

Thanks, Joe, and thank you, everyone, for participating in today's call. Joining me here 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 with that introduction, it is my pleasure to turn the call over to Mark.

Mark Sarvary

Thanks, Barry, and good evening, everyone. Thanks for joining us tonight. Today, I'll provide a brief overview of our results in the fourth quarter, review performance against our 2010 strategic initiatives and then outline our strategic focus areas for 2011. Dale will then provide a detailed review of the fourth quarter and full-year financial results as well as our guidance for 2011.

We're pleased with the financial performance in 2010 and in the fourth quarter in particular. Sales were up 20%, significantly faster than the industry, and as a result, we grew market share. Earnings per share were up 74%, with gross margins at 52%, driven by our continued focus on productivity improvement and fixed cost leverage. The top line growth was achieved largely as a consequence of implementing our strategic initiatives of making sure that everyone knows that they would sleep better on a TEMPUR and making sure that there is a TEMPUR mattress and pillow for everyone.

We increased our advertising investments to nearly $100 million last year, primarily by ramping our Ask Me marketing campaign in the U.S. This campaign has driven TEMPUR brand awareness to record highs. And according to Gallup surveys, TEMPUR is today the most desired brand of mattress in the U.S. The Cloud line of products has been extremely successful and, by appealing to a different group of consumers than the original TEMPUR, has greatly increased our target market and thus has been a key driver of our market share growth.

Late in the year, we began shipping the high-end model, the Cloud Luxe. And while early in its distribution, it's performing better than we had originally expected, and it is still only partially rolled out. Also during 2010, we completed the rollout of the international Sensation mattress line. It is our most successful international product launched to date.

Our third strategic area is our commitment to ensure that TEMPUR is available to everyone, and here, too, we made good progress in 2010. We gained significant swap penetration with the Cloud Collection in the U.S. and with Sensation internationally. We added key new accounts in the U.S. and in Canada and in Europe. And we launched a new, much enhanced website in the U.S. The site does a much better job communicating our product architecture and allows us to more effectively link our direct activities with our retailer stores. We have seen web traffic increase dramatically over the course of 2010.

So now turning to 2011, we will implement the next phases of our plan to become the world's favorite mattress and pillow brand. We will continue to enhance our product range, both in the U.S. and internationally, increase our investment in consumer communication and broaden distribution in all geographies.

Firstly, to ensure everyone knows that they would sleep better on a TEMPUR, we will expand our commitment to marketing. As we have discussed before, our international brand awareness is low. And following a significant consumer research, we are introducing a brand marketing campaign in Europe, which will be the beginning of a multi-year effort. This campaign is already on air in our major European markets.

In North America, we will expand our Ask Me campaign, which will now highlight the high customer satisfaction with our TEMPUR Ergo adjustable base. And we are conducting consumer research to support increased marketing in Canada, where we believe our business has considerable growth prospects.

Secondly in 2011, we will have major product launches. Efforts aligned with our initiative to ensure that there is a TEMPUR mattress and pillow that appeals to everyone. Internationally, we're going to introduce the Cloud Collection. Our consumer testing suggests its appeal is broad across the world. This week, we unveiled the line at the major German trade show in Cologne, and we are very pleased with the extremely positive feedback that we got there from the retailers. The rollout will begin late in March and will continue for the next 18 months across Europe and Asia.

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