Tempur Sealy International, Inc. (TPX)

TPX 
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Tempur Pedic International (TPX)

Q1 2011 Earnings Call

April 21, 2011 8:00 am 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

John Baugh

Eric Hollowaty - Stephens Inc.

Joseph Altobello - Oppenheimer & Co. Inc.

Budd Bugatch - Raymond James & Associates, Inc.

Bradley Thomas - KeyBanc Capital Markets Inc.

Andrew White - Longbow Research LLC

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

Keith Hughes - SunTrust Robinson Humphrey, Inc.

Anthony Gikas - Piper Jaffray Companies

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Tempur-Pedic First Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Mr. Barry Hytinen, Senior Vice President. Please go ahead.

Barry Hytinen

Thanks, Ally, 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, Executive Vice President and 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 statements 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 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 it is filed with the SEC.

Now with that introduction, it's my pleasure to turn the call over to Mark.

Mark Sarvary

Thanks, Barry. Good morning, everybody, and thanks for joining us. Today, I'll provide a brief overview of our performance in the first quarter and then provide an update on our strategic focus areas for 2011. Dale will then provide a detailed review of the first quarter results and will discuss our financial guidance.

We're very pleased with the first quarter results. Sales and profits exceeded our prior expectations in both our North American and international segments. Sales were up 28% from last year and earnings per share were up 55% with operating margins at 23%, driven by our continued focus on productivity and fixed-cost leverage while making significant investments in marketing.

Our sales growth was significantly ahead of the industry in the U.S. and in many of our major overseas markets. So we continue to expand market share worldwide. We believe this outperformance was directly related to the implementation of our strategic initiatives. The first of these initiatives is to make sure that everyone knows that they would sleep better on TEMPUR. And during the quarter, we increased our investment in advertising by nearly 60% with considerable growth both in North America and in our key international markets.

While it is still early, all these marketing campaigns are showing positive results. And in particular, our brand awareness campaign in Europe is progressing well. For example, an important leading indicator of sales is website hits, and we have seen web traffic rise considerably in the U.S., but also in the U.K., France and Germany, all markets where we've increased our advertising. In the U.S. and in Europe, retailers report that consumers are volunteering that they've seen TEMPUR advertising and are asking specifically for our brand, and our measured brand awareness is tracking at record highs. In the second quarter and throughout the year, we will continue to test and evaluate ways to make our consumer communication even more effective.

The second strategic initiative that drove our growth this quarter was making sure there's a TEMPUR mattress and pillow for everyone. We continue to expand our product range, both in North America and internationally, as we work to ensure there is a product in our portfolio that appeals to everyone. In the U.S., the Cloud Luxe mattress continued its roll out, and we've been very pleased with its performance. Some of our retailers report that it's their best-selling mattress, which is striking for a $4,500 king set. Obviously, this is helping Tempur-Pedic and our retailers improve average ticket.

Another factor helping drive average selling price is our commitment to the TEMPUR Ergo Adjustable System. We began advertising Ergo for the first time earlier this year, combined with a nationwide promotion. And together with a focus on driving incremental distribution and retail training, we've seen our attach rates improve significantly, and we see a lot of opportunity for further attach rate improvement. This quarter, we will begin rolling out the Contour Collection, our newly designed traditional Tempur filling mattress line. We expect this to be a fast roll out into nearly all U.S. accounts within just a few months. And based on initial reactions, we are optimistic that we will gain incremental slots during the process.

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