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Edited Transcript of TPX earnings conference call or presentation 31-Oct-19 12:00pm GMT

Q3 2019 Tempur Sealy International Inc Earnings Call

LEXINGTON Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Tempur Sealy International Inc earnings conference call or presentation Thursday, October 31, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Aubrey Moore

Tempur Sealy International, Inc. - Director of IR

* Bhaskar Rao

Tempur Sealy International, Inc. - Executive VP & CFO

* Scott L. Thompson

Tempur Sealy International, Inc. - Chairman of the Board, CEO & President

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Conference Call Participants

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* Atul Maheswari

UBS Investment Bank, Research Division - Associate

* Bradley Bingham Thomas

KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst

* Carla Casella

JP Morgan Chase & Co, Research Division - MD & Senior Analyst

* Curtis Smyser Nagle

BofA Merrill Lynch, Research Division - VP

* John Allen Baugh

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Judith Lynn Merrick

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Karru Martinson

Jefferies LLC, Research Division - Analyst

* Laura Allyson Champine

Loop Capital Markets LLC, Research Division - MD

* Robert Adam Friedner

Piper Jaffray Companies, Research Division - Research Analyst

* Robert Kenneth Griffin

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Robert Scott Drbul

Guggenheim Securities, LLC, Research Division - Senior MD

* William Michael Reuter

BofA Merrill Lynch, Research Division - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to Tempur Sealy Third Quarter 2019 Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Aubrey Moore with Investor Relations. Please go ahead, ma'am.

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Aubrey Moore, Tempur Sealy International, Inc. - Director of IR [2]

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Thank you, operator. Good morning, everyone, and thank you for participating in today's call. Joining me in our Lexington headquarters are Scott Thompson, Chairman, President and CEO; and Bhaskar Rao, 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 these forward-looking statements, including the company's expectations regarding sales, earnings, net income and adjusted EBITDA and anticipated performance for 2019 and subsequent periods 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, 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, an annual report on Form 10-K and the company's quarterly reports on Form 10-Q 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.

This morning's commentary will include non-GAAP financial information. The press release contains reconciliations of this non-GAAP financial information to the most directly comparable GAAP information, except otherwise discussed in the press release, as well as information regarding the methodology used in our constant currency presentations.

We have posted the press release on the company's investor website at investor.tempursealy.com and have also filed it with the SEC. Our comments will supplement the detailed information provided in the press release.

And now, with that introduction, it's my pleasure to turn the call over to Scott.

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [3]

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Thank you, Aubrey. Good morning, and thank you for joining us on our 2019 third quarter earnings call. I'll start with comments on the quarter's operating performance, then Bhaskar will review our financial performance in detail. Finally, I will conclude with an overview of our long-term corporate initiatives and some thoughts on capital allocation and current trends.

The third quarter of 2019 was outstanding with growth across all 3 of our regions: North America, Europe and Asia Pacific. In fact, this quarter was the best quarter in the company's history. We are pleased to report as compared to last year, sales and earnings grew double digit. Our leverage growth declined, and we repurchased 50 million of common stock during the quarter. We had a strong conversion to cash, and there were no onetime adjustments in EBITDA.

Turning to the reported results for the quarter. Net sales increased 13%, adjusted EBITDA increased 17% and adjusted EPS increased a very robust 28%. This marks the sixth consecutive quarter of adjusted EPS growth. Deposit results were broad-based from a brand, channel and geographic perspective, demonstrating the strength of the company's competitive position around the world. The last few quarters demonstrate our ability to navigate regional economic uncertainty and take advantage of a changing bedding market.

In North America, we're excited to start our new relationship with Big Lots and Mattress Firm. During this quarter, we completed the rollout of Sealy products at Big Lots and subsequent to the end of the quarter, we began shipping products to Mattress Firm.

During the third quarter, these accounts did not contribute to earnings. And in fact, we experienced $5 million of inefficiencies as we ramped up staffing for our new business and expanded our quality control procedures. Both new accounts are expected to positively impact our operations starting in the fourth quarter of 2019.

I'd like to highlight 3 items from our third quarter results. First, as I mentioned, global net sales grew 13% for the third quarter versus the prior period, with broad-based increases in demand above our expectations for both Tempur-Pedic and Sealy all around the world. Looking internationally, net sales grew 8% on a constant currency basis. We experienced a degree of market uncertainty in the U.K., France, Hong Kong and China, which created choppy business conditions. Despite these country-specific issues, the international team delivered a solid performance.

In North America, we grew sales a robust 15% in the quarter, with both Tempur-Pedic and Sealy growing double digits. As a reminder, this quarter had no new products and no significant changes in distribution for the Tempur-Pedic brand. The rollout of the new Tempur-Pedic product lines were complete in the second quarter and new significant distribution gains for Tempur-Pedic start shipping in the fourth quarter of 2019. We believe Tempur-Pedic continues to take market share in the premium price band. I should also note that we improved our product mix as our high-end Tempur Breeze products continue to gain momentum.

Turning to Sealy's performance in North America. We are very pleased to see continued sales momentum, while at the same time, we also successfully expanded our distribution. The combination resulted in outstanding sales growth in the quarter. Our focus on internal initiatives to deliver the highest quality product and the highest level of manufacturing, reliability and customer service continues to be the reason that existing retailers lean into our portfolio of products. We also believe the recently enacted anti-dumping case duties against China manufacturing benefit all U.S. bedding manufacturers.

Our North America operations team has evaluated our near- and long-term opportunities with Sealy and Stearns & Foster, the results of which are that we expect to open 1 new state-of-the-art Sealy plant in Texas in late 2020. Although we currently have adequate capacity to serve the market, we believe we have long-term upside in these brands, and this plant will support our higher volume of units we expect across the U.S. network.

The second highlight from the quarter was the over 60% growth in our global direct channel. International Direct grew 21% on a constant currency basis, with growth both in e-commerce business and our company-owned stores. In North America, the direct channel almost doubled year-over-year and grew over 30% excluding the acquired Sleep Outfitters stores. We opened our 50th Tempur-Pedic retail store during the quarter, and we expect to open a handful more by the end of the year.

As we said previously, we can see the Tempur-Pedic retail stores over the long term being a 125- to 150-store opportunity. Stores opened more than a year had very strong same-store sales at over 20%. It's worth noting that same-store sales growth does not include our e-commerce channel. Our direct-to-consumer online channel also had solid double-digit growth. It is clear that our direct-to-consumer business is significantly outperforming the average disruptor brand in the U.S. market, both in sales growth and more importantly, in real sustainable profits and cash flow.

The third highlight for the quarter is that we reported the highest quarterly gross profit in the company's history at $361 million. The cumulative growth from our direct channel, a higher product mix due to the success of our premium priced Tempur-Pedic and Stearns & Foster products and unit volume increases resulted in gross margin leverage. This quarter's reported gross profit is greater than the gross profit we generated back in 2016 when we had higher total sales and our bedding products were sold through a greater number of third-party retail doors, including Mattress Firm.

Over the past few years, we've developed new innovative products, invested in our operations and diversified our go-to-market strategy, all to deliver healthy gross margin expansion and broad-based sales growth. Our competitive position has never been stronger.

On top of this momentum, we are thrilled to have improved our wholesale distribution in North America by recently entering into a new win-win supply agreement with Mattress Firm, which we believe will benefit both companies and the U.S. bedding business as a whole.

Before turning the call over to Bhaskar, I want to mention that 2 members of our executive team will be taking on new reduced roles starting in 2020 as a transition towards retirement: Rick Anderson, EVP, President of North America; and Carmen Dabiero, SVP of Human Resource. I want to thank them for their many years of contribution to Tempur Sealy. We've been preparing for these transitions for several years, and I'm very confident in our succession plan. Both executives have built a strong team and internal leadership is in place to ensure continued performance.

With that, I'll turn the call over to Bhaskar to walk you through the financial results in more detail.

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Bhaskar Rao, Tempur Sealy International, Inc. - Executive VP & CFO [4]

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Thank you, Scott. Before going into the details of the quarter, I would like to call out a few highlights outside of those previously mentioned. As compared to the prior year, adjusted gross margin increased 160 basis points to 43.9%. Adjusted operating margin improved 130 basis points to 14.7%. Adjusted EBITDA increased 17% to $150 million and adjusted earnings per share for the quarter was $1.30, an increase of 28% versus the prior year. This was driven entirely from operating performance versus share buybacks.

Turning to North America. First, I would like to discuss some financial reporting reclassifications. As previously announced, we have acquired Sleep Outfitters, which was fully integrated into our North American direct channel during the second quarter. Sleep Outfitters had historically been part of our wholesale channel since they were previously a third-party retailer. Accordingly, this impacts our growth rates within both channels.

North America net sales increased 15%. On a reported basis, the North American wholesale channel increased 9%, and the direct channel increased 89%. Excluding Sleep Outfitters, the wholesale channel increased 11% and the direct channel increased 37%. The sell-in of Big Lots contributed several points of growth to our Sealy business in the quarter.

North American gross profit margin improved 220 basis points to 42.1% as compared to the prior year. This was primarily driven by improved Tempur merchandising mix, pricing benefits and favorable commodities. As expected, our gross profit margin was impacted during the quarter. We took incremental steps to ensure the highest product quality and great customer service to all ahead of the expected higher volumes from the new distribution. And as Scott mentioned, this resulted in inefficiencies of about $5 million in the third quarter and was not treated as an adjustment to our reported results. North American operating margin improved 170 basis points to 17.6% as compared to adjusted operating margin in the prior year. This was primarily driven by improved gross margins, partially offset by higher variable compensation.

Turning to International. Net sales increased 4% on a reported basis. On a constant currency basis, International net sales increased 8%, the direct channel increased a robust 21% and the wholesale channel increased slightly. As Scott noted earlier, we experienced a degree of market uncertainty in specific geographies, and thus, we expect sales growth to decelerate in the fourth quarter. As compared to the prior year, our International gross margin improved 10 basis points to 53.1%, and operating margin was stable to prior year at 19.6%.

Turning to the company's global performance. Operating income was $121 million, and adjusted EBITDA was $150 million, up $22 million from last year. The increase in EBITDA was primarily driven by pricing benefits, higher volume and favorable commodities. This was partially offset by higher variable compensation as we are performing a good bit over target, inefficiencies as we ramp up the new distribution and innovation investments.

Regarding commodities, input costs were in line with expectations for the third quarter. However, we have seen those trends improve and now stabilize. We now expect a few million dollars of incremental benefit in the fourth quarter.

The tax rate was 26%, down from 28% in the prior year, and interest expense was $21 million, also down from the prior year. All of this resulted in adjusted EPS for the quarter of $1.30, up 28%.

Now moving to the balance sheet and cash flow items. We generated record operating cash flows from continuing operations of $156 million in the third quarter. Cash cycle was unfavorable by 11 days compared to the third quarter of '18. This was principally driven by higher inventory levels to support our launch with new distribution.

I'm pleased to highlight that we recently completed the amendment of our credit facilities. This refinancing reflects our success in strengthening our global competitive position, our successful expansion into direct-to-consumer business and recent market share gains in North America. This transaction increases our operating flexibility, extends our debt maturities and represents the lowest interest rate spread on a like-for-like basis in the company's history. This is a direct reflection of our powerful omnichannel strategy and our disciplined capital allocation approach.

At the end of the third quarter, net debt was $1.5 billion, down from the second quarter of '19. Our leverage ratio under our new facilities came in at 3.2x, down from 4x reported for the third quarter of last year. I'm pleased to highlight that we lowered our financial leverage a good bit, while also buying back stock.

Turning to guidance. We have raised our 2019 guidance. We now estimate our adjusted EBITDA to be between $485 million and $500 million. This raises the midpoint by $28 million. This increase of the midpoint is driven by the overperformance of our North American business during the third quarter and the more favorable outlook and the timing of our launch and back stock sell-in with Mattress Firm. This will be partially offset by increases in variable compensation.

The launch with Mattress Firm is ahead of our initial expectations and is expected to result in a sales lift in the fourth quarter, partly from discounted floor models. In the first quarter of 2020, we anticipate seeing initial signs of what the steady-state business would look like related to volume and product mix.

Lastly, I would like to flag a few items for modeling purposes. For the full year '19, we currently expect D&A to be between $115 million and $120 million; total CapEx to be about $80 million, which includes maintenance CapEx of $60 million and investments in ERP upgrades; interest expense of $85 million to $90 million; a tax rate to be between 27% and 28%; and a diluted share count of 56 million. Please note, the above items consider the impact of our announced share repurchase plan.

With that, I'll turn the call back over to Scott.

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [5]

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Thank you, Bhaskar. Great job.

Now turning to the company's long-term initiatives. I'll start with optimizing our powerful omni-distribution platform to be where customers want to shop. Earlier this year, we announced 2 material wins in distribution with Big Lots and a new agreement with Mattress Firm. The third quarter was the largest expansion of doors in a single quarter in the company's history, which we expect to top with even more doors during the fourth quarter with the launch of Mattress Firm. The integration and coordination with both of these organizations' people has been phenomenal.

As we look forward, we continue to expect these expansions in distribution to generate in excess of $400 million in incremental sales and $75 million to $100 million in incremental EBITDA. As a complement to our material wins in our wholesale distribution, our direct channel continues to expand rapidly. We continue to see robust year-over-year sales growth through online sales growth, same-store sales growth and expansion of our company-owned doors.

Let me add a few comments about the online marketplace in general. We find that consumers are more digitally savvy than ever. While the majority of customers want to visit stores to touch and feel the product, they frequently start their shopping experience online before entering a retail store. We've made adjustments to our strategy and expanded our reach online in 4 ways to complement our presence in the market.

First is our own tempurpedic.com site. We identified this as a strategic opportunity in 2016, which we then grew and expanded sales on tempurpedic.com by over 300%. These sales have driven incremental profit and support material online advertising. The fact that more consumers are willing to purchase a bit online has been a positive trend for this segment of our business.

Second is our focus on our web-based third-party retailers. We have a dedicated sales team who focus on e-marketplace sales growth. While still in the very early stages, we've experienced significant growth while maintaining stable profit margins similar to the fleet average.

Third is helping our traditional third-party retailers expand their brand presence online. Our Retail Edge program has been a key initiative for our sales organization to connect the findings from millions of hours of consumer research into actionable insights for our dedicated retail partners. These investments are not insignificant and are consistent with our passion to help our third-party retailers be successful.

And finally, fourth, our expanded offerings that can be easily shipped and delivered to consumers' doors. No matter what price point or channel a customer wants to shop, we have a compressed product that meets their needs. We do not direct customers towards any particular channel. We just want to be wherever the customer wants to shop.

My last comment on our omnichannel approach relates to Sleep Outfitters. I'm pleased to report that Sleep Outfitters, which was acquired earlier this year, has made significant progress in revitalizing their business and are ahead of plan. In summary, our direct channel is outperforming in the market.

Now our next long-term initiative, develop the highest quality bedding product in all the markets we serve. Our premium products in North America have gone through a transformation over the last 2 years. We have new product lines in our Tempur-Pedic and our Stearns & Foster brands, which have significantly grown our market share in the most profitable segment of the industry. I'd like to highlight the breadth and depth of our worldwide research, development and quality testing departments. We have combined these assets with a modern insight department that mines consumer data to keep Tempur Sealy at the forefront of innovation.

Our commitment to relentless focusing on what matters the most to consumers has been recognized. As disclosed yesterday, Tempur-Pedic was awarded #1 in customer satisfaction retail mattress segment in J.D. Power's 2019 Mattress Satisfaction Report, evidencing the success of our products and delivery on our commitment of exceptional sleep.

Turning to our next initiative: promote our worldwide brands with compelling marketing. We invested significant marketing dollars in the third quarter as we supported our retailers and our new product portfolio. In 2020, we anticipate significantly increasing our advertising on a dollar basis. In fact, we expect a record amount of advertising spend for Tempur-Pedic and Stearns & Foster brands in 2020.

More important than the total spend, though, we continue to strive for efficiency in reaching customers with the right message at the right time and in the way they want to engage media. I'm sure I'll get a question on this, so let me go ahead and address it now. As previously announced, we extended our 2019 Labor Day promotion by 1 week. This extension enabled all mattress shoppers nationally take advantage of our promotion, but was targeted at those who are planning to purchase a mattress over the year's largest holiday weekend and were impacted by the weather challenges along a significant portion of East Coast preventing them from successfully shopping and benefiting from Labor Day promotion.

While the result of this extension was immaterial to our business, we were happy to successfully support retailers in this unique circumstance, a hurricane during the industry's largest promotional period of the year.

Our last long-term initiative is drive increased EBITDA. Over the past several years, we've been resetting the foundation of the company by investing in many areas of our business, including product, innovation, manufacturing, optimization, marketing, building our direct channel and most importantly, investing in our team. We're seeing the benefits of these efforts, which we believe will continue to deliver above-market performance.

Turning to capital allocation. We remain committed to investing capital and opportunities with the highest return on invested capital, while balancing our leverage ratio. Currently, we expect to generate cash in excess of our businesses' needs, and thus, we expect, based on current conditions, to repurchase approximately 50 million of our shares each quarter in the near term. Based on today's stock price, that is about a 4% return based on our market capitalization. Capital allocation is a topic at every Board meeting. We recognize we have the ability to repurchase stock at a more rapid pace, but currently believe our consistent measured repurchase pace is appropriate as we maintain future optionality. We expect to update you on our thinking during future calls.

Lastly, before opening the call up for questions, I'll turn to current trends. North America's current trends are in line with our expectation and guidance, with both brands expected to grow significantly during the fourth quarter. As a reminder, Tempur-Pedic U.S. sales had strong growth in the back half of 2018, so we have a difficult comp. But we expect to benefit from new distribution in both Tempur-Pedic and Sealy brands. We are in the process of flooring and selling-in back stock, both of which will impact the fourth quarter.

International has started the quarter in line with our expectations, although slightly less robust than the third quarter we're reporting today.

With that, operator, please open the call up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Michael Lasser from UBS.

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Atul Maheswari, UBS Investment Bank, Research Division - Associate [2]

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This is Atul Maheswari filling in for Michael Lasser. So you beat consensus EBITDA by $9 million in third quarter, but raised the full year guidance by $28 million. So is it fair to assume that the $20 million-or-so of delta is being driven entirely by favorable expectations on the Mattress Firm launch? And with regards to the timing of the launch, can you provide a sense of what's baked in the guidance -- what was baked into the guidance earlier versus what is baked into the guidance now?

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [3]

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Yes. This is Scott. Let me start, and then I'll pass it off to Bhaskar. No. To answer your first question, no, the raise in guidance has a lot more to do with the underlying demand that we're seeing in the core business. There is some change in the thinking of its launch timing, Mattress Firm, and that we're a little bit ahead of our expectations originally. But the majority of the raise has to do with the broad-based improvement we're seeing in the business, primarily in the U.S. And as we mentioned before, we've got double-digit growth in Tempur, double-digit growth in Sealy. And we're doing well in wholesale and we're doing well in direct. He had some other questions on guidance?

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Bhaskar Rao, Tempur Sealy International, Inc. - Executive VP & CFO [4]

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Sure. That is a fair way to think about it, Scott. Just reiterating some of those. Yes, underlying business, both Tempur and Sealy, very strong. Mattress Firm originally had contemplated 4 models. Now we see a bit of channel fill happening or back stock happening in the fourth quarter. And then we did call out that -- so those are the tailwinds that we're seeing. And then from a headwind standpoint is that we do have International and then some variable compensation.

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Operator [5]

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Our next question is from Bobby Griffin from Raymond James.

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Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [6]

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Congrats on good third quarter.

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Bhaskar Rao, Tempur Sealy International, Inc. - Executive VP & CFO [7]

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Thank you.

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Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [8]

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So my first question is just around North America gross margin, pretty impressive performance in the quarter, especially with light of the Big Lots rollout. Can you maybe just unpack a little bit of the drivers about what surprised you versus your original expectations? What drove the upside? And then how should we frame gross margin in the fourth quarter given the matches from rollout and some more sell-in at Big Lots.

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Bhaskar Rao, Tempur Sealy International, Inc. - Executive VP & CFO [9]

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Great question. So if I deal with the third quarter initially is from the upside standpoint as the volumes came in, both on Tempur and Sealy, ahead of our expectations. So when we do get more units going through each of those plants, we do leverage our fixed costs and we get more productive, et cetera. So that would be the primary driver. As we mentioned, is that we continue to see product mix favorability; pricing, we continue to see; commodities were in line with our expectations; and then that was offset by the investment that we made to ensure good customer service.

As I think about the fourth quarter, if I put it all together, the way I think about it is those trends that we saw in the third, they should continue. Just unpacking that though a bit, is we do have -- there's Mattress Firm floor models are going in. Those will become at a discounted rate. We did also call out the fact that we will have some commodities favorability, a few million versus where we were previously thinking about. And good call out, Bobby, is that we will have the Big Lots coming in, which will be at a lower margin. But if you put all that together, what you'll see is consistent with the third quarter.

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [10]

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You probably also because I know we talked about it earlier, Bhaskar, it's probably one of the toughest quarters to estimate the gross margin because you've got so many moving parts, and a lot of that has to do with also the product mix that we don't have good numbers yet on product mix from Mattress Firm, and we're still working through exactly how Big Lots works through the system. So it's a difficult estimate, but well done.

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Operator [11]

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Our next question is from William Reuter from Bank of America.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [12]

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I just had a question around the turnaround of Sleep Outfitters. It sounds like that's doing better. I guess, is your plan there to ultimately sell that business? And I guess, what would you do with the proceeds? Or do you want to continue to operate it yourself?

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [13]

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Yes. First of all, you're right, the turnaround at Sleep Outfitters has gone better than we originally estimated. In fact, they're approximately breakeven in the third quarter. Our strategy with that particular entity has not changed, which was we're going to turn it around, look at the operations and then figure out what the long-term plan is for the company. We may keep it. We may do something else with it. But right now, the most important thing is to get it turned around. And the team over there is doing a great job.

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Operator [14]

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Our next question is from Brad Thomas from KeyBanc Capital Markets.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [15]

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Let me add my congratulations as well here on some nice trends. I wanted to ask about the outlook for North America, maybe squeeze 2 pieces into my question. Hoping we could address the outlook for North America. For Q4, obviously, a more -- or a difficult comparison. By the same token, Mattress Firm obviously holds the potential to be pretty significant driver of sales. So just how you're thinking about the outlook for North America? And sort of the underlying trends in the industry ex some of these new partners, if you could?

And then if you step back, as we think about 2020, 2021, Scott, just maybe your latest thoughts on what the North America business should be growing at ex some of these big account wins?

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [16]

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Yes. I'll try to unpack some of that. I'm sure I'll mess it up and then let Bhaskar clean it up. I think, first of all, I tried to say it in the prepared remarks, the -- not -- exclude the new distribution wins because that's actually the part of the business that I'm watching. The fundamentals, ex the new distribution, are very strong. And we would expect them to continue to be strong in the fourth quarter and would expect them certainly to be positive next year. And I think that was kind of the first part of your question.

As it relates to Mattress Firm, we're not going to do individual revenue guidance by customer or have a lot of comments on individual customers out of respect for private companies, other than agree to you, look, they're very large. And their performance will impact our performance. Right now, our team is just focused 100% on providing products for them and quality service. And I think over the next few quarters, we'll learn what the right product mix is and volume mix is, and it will blend into our numbers. But right now, we're just in the very early stages.

As it relates to 2020, as I've said before, based on everything we see today and what we know today, we would expect 2020 to clearly be the best financial performance in the company's history. We've got a lot of good tailwinds, whether it be new distribution, whether it be commodities, whether it be the performance of our direct. Quite frankly, our International team is dealing with some interesting markets and doing very well. We just have a lot of momentum right now.

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Operator [17]

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Our next question comes from Laura Champine from Loop Capital.

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Laura Allyson Champine, Loop Capital Markets LLC, Research Division - MD [18]

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On the Mattress Firm transition, which is moving ahead faster than we and it sounds like you would have expected, what's driving that? How are you getting that business up and running faster than you had previously anticipated?

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [19]

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The Mattress Firm team is driving that. When it comes to launching product, obviously, we've got to make the product, but who has the heavy lift is actually the retailer. And the Mattress team -- Mattress Firm team is performing very well. And quite frankly, they've exceeded our expectations, and that's resulted in the timing of the products moving up some.

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Operator [20]

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Our next question is from Karru Martinson from Jefferies.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [21]

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I realize that this doesn't really affect you guys on the high end, but what has been the impact on China imports with the antidumping duties in place? Are you seeing prices rising across the board?

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [22]

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Yes, it does affect us, although it's not a major driver to profitability. If you look at entry-level pricing beds, the entry level, that pricing is up and continues to feel like it's firming up at the very low end, and that does help us at the low-end Sealy. If I unpack the products by price band and exclude new distribution, then we are feeling growth at Sealy below $1,000, which we were -- before the tariffs, that was a pressure point for us. So we are gaining some volume I think and it has to do with the tariffs. And as I said in my prepared remarks, I think all U.S. bedding manufacturers have benefited some. But again, it's not a big profit driver for us down at that price point.

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Bhaskar Rao, Tempur Sealy International, Inc. - Executive VP & CFO [23]

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The other side of that is we do have some of our product that comes in from overseas, which is subject to tariff. So you take that headwind against the tailwind that we get from the income from below $1,000, and I would think about it as a net neutral.

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Operator [24]

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(Operator Instructions) Our next question is from Curtis Nagle from Bank of America.

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Curtis Smyser Nagle, BofA Merrill Lynch, Research Division - VP [25]

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Just maybe a quick one on how feedback has been on the active Breeze? And I guess, what's the expectation to roll that out to other distributors besides your own stores going forward?

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [26]

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Okay. Thank you. Obviously, we've got 2 major product lines: passive Breeze, which is distributed to all retailers; and then we've got an active Breeze product that is in limited distribution now only to our stores. Look, the sales have been good. The customer acceptance of the product has been outstanding. And we're continuing to study the product, and we'll consider rolling it out more broadly in the future. But right now, that looks like a winning product from everything we see right now. It's kind of in test market.

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Operator [27]

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Our next question is from Peter Keith from Piper Jaffray.

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Robert Adam Friedner, Piper Jaffray Companies, Research Division - Research Analyst [28]

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It's Bobby Friedner on for Peter. Nice results. I just want to ask about the direct business. It's accelerating nicely. Can you just give a little more color in terms of how much of that growth ex Sleep Outfitters is coming from new stores versus online? And then related, what's the balance between higher transactions and higher ASP as Tempur mix continues to improve with more Breeze sales?

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [29]

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Okay. Let me work on some of that. The stores themselves, I think the first number that I think I would point you towards is that we mentioned in the prepared call, same-store sales, stores opened more than a year were up 20%, which is an outstanding performance and continues to confirm that concept has some legs. Without Sleep Outfitters, the business grew in excess of 30%, if I remember correctly.

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Bhaskar Rao, Tempur Sealy International, Inc. - Executive VP & CFO [30]

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Yes.

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [31]

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And the web itself grew double digits. So the direct business, broad-based growth in stores and the web business. On Sleep Outfitters, its sales -- we're less focused on the actual dollars on Sleep Outfitter sales and more on driving profitability. So we're not monitoring those as much on the same-store sales. But the direct business is doing very well, and we continue to be very bullish on, call it, 125- to 150-store business model ultimately.

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Operator [32]

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Our next question is from John Baugh from Stifel.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [33]

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Congratulations. I was curious if you could comment around the advertising spend or marketing spend in 2020. Is that a -- the record in terms of percentage as well as gross? And I think you were targeting the Stearns & Foster as well as Tempur brands. But the comment internationally is to what you may be doing with marketing in light of the weak conditions?

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [34]

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It's definitely going to be a record in gross dollars. I'd probably have to do some homework on percentages because I'd have to go back to the early Tempur days. And I don't know that off the top of my head. But on a gross dollar basis, it will be up significantly.

We do expect some more support into the Sealy and primarily the Stearns & Foster brand than we've done historically. And then on an International basis, it really varies by market. There will be some markets that we'll be leaning into heavily, like Japan, and there may be some other markets where we're a little more conservative, but it really varies by market.

I think the key point is that we paused a little bit on advertising as we worked through the disruption we had with the change in Mattress Firm, and so we were a little bit conservative. And I think that the message for you today is that we're back on with our foot on the accelerator and expect to increase the Tempur-Pedic and Stearns & Foster and Sealy share of voice throughout all markets.

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Operator [35]

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Our next question is from Carla Casella from JP Morgan.

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Carla Casella, JP Morgan Chase & Co, Research Division - MD & Senior Analyst [36]

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I'm just wondering on the competitive front, if you're seeing any change in either type of competition or online discounting, given all of the news and transitions at Casper? And I'm also wondering where that line crosses over -- where do you crossover most directly with Casper? And is that changing?

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [37]

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Yes, I'll try. And pardon me, if you hear some background noise. We're kind of in the middle of a thunderstorm here in Lexington, so there's a little bit of a thunderstorm coming through. First of all, let me point out that when we look at customer acquisition cost, our customer acquisition cost went down again this quarter, so that's either the efficiency of our advertising or a less competitive marketplace online. I'm not sure which it is. But again, we saw acquisition cost going down.

Casper is really not a very big player in the marketplace. And so we don't really feel them anywhere. Obviously, we've bumped into them a little bit online and they've got a few stores, but they're relatively immaterial to our business. Our primary competitor is Serta Simmons in North America, and we see them everywhere we go.

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Operator [38]

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Our next question is from Bob Drbul from Guggenheim.

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [39]

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Just wondering, as you roll out more stores, I think you used to give us some metric or you've given it at one point, just the productivity and profitability of your stores versus wholesale accounts, like 30 wholesale accounts for 1 store. Could you give us an update on how that's trending for you?

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [40]

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Yes. I haven't run the number lately, but I remember it at about 20:1 off the top of my head.

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Bhaskar Rao, Tempur Sealy International, Inc. - Executive VP & CFO [41]

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Still going to be in that range.

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [42]

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It's probably better than that now because the stores have outperformed for a time and we were kind of studying it that way. More importantly than the individual store economics, what we're watching closely is when we put a store or 2 in the marketplace, what the whole marketplace is doing. And where we put stores and these are a couple of stores in large cities, we are seeing that we're not taking business from our wholesalers, but in fact, the wholesalers are at least doing as well or doing better than they were doing before we opened the stores. So we think we're raising the whole market when we're just putting a couple of stores in the marketplace, and these really are somewhat marketing assets and help drive the brand in the marketplace.

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Operator [43]

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Our next question is from Judy Merrick from SunTrust.

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Judith Lynn Merrick, SunTrust Robinson Humphrey, Inc., Research Division - Associate [44]

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This is Judy in for Keith Hughes. Just quickly on International, you talked about all the top line kind of environmental challenges going on different regions there. Is there anything else -- you had kind of flattish margins, is there anything else going on with the margins? Or anything to kind of add on that?

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [45]

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No. I can't think of anything in the margins.

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Bhaskar Rao, Tempur Sealy International, Inc. - Executive VP & CFO [46]

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No, from a margin standpoint, they're relatively stable. The big driver when you think about International is, is you do see some country mix from time to time. But when I think about International, broadly speaking, is, is that there does remain an opportunity out there, specifically in Asia Pacific, whether that be through our own subsidiary or working through our Asian JV, but there are certain economies right now that are challenged, whether it be Hong Kong or what's happening from a Brexit standpoint.

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Operator [47]

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At this time, I'm showing no further questions. I would like to turn the call back over to Scott Thompson for closing remarks.

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [48]

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Thank you to the over 6,000 employees worldwide. Thank you for what you do every day to make the company successful. To our retail partners, thank you for your outstanding representation of our brands. To our shareholders and lenders, thank you for your confidence in Tempur Sealy's leadership team and its Board of Directors.

This ends the call for today. Thank you.

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Operator [49]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.