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Edited Transcript of TPX earnings conference call or presentation 25-Jul-19 12:00pm GMT

Q2 2019 Tempur Sealy International Inc Earnings Call

LEXINGTON Jul 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Tempur Sealy International Inc earnings conference call or presentation Thursday, July 25, 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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* 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

* Karru Martinson

Jefferies LLC, Research Division - Analyst

* Laura Allyson Champine

Loop Capital Markets LLC, Research Division - MD

* Michael Lasser

UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines

* Peter Jacob Keith

Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst

* Robert Kenneth Griffin

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

* Seth Mckain Basham

Wedbush Securities Inc., Research Division - MD Of Equity Research

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Tempur Sealy Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference maybe recorded.

I would now like to turn the conference over to your host for today, Aubrey Moore with Investor Relations. You may begin.

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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 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 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, annual reports 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 as 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 is 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 second quarter earnings call. I'll start with comments on the quarter's operating performance, then Bhaskar will review our financial performance with you in more detail. Finally, I'll wrap up with our overview of our long-term corporate initiatives.

A strong momentum from earlier this year continued into the second quarter and beyond. In fact, from an adjusted EBITDA perspective, the second quarter was just short of our best second quarter in the company's history. For the second quarter 2019, net sales increased double digits, adjusted EBITDA grew 21% and adjusted EPS was $0.79 a share, a robust increase of 39%. The adjusted EPS growth was driven by growth in operations, not share repurchase. Our results have been propelled by our premium brands in our industry-leading product quality and services combined with our powerful worldwide omni-channel platform.

Now some highlights. First, we grew our relationships with existing third-party retailers in North America. During the quarter, we grew North America wholesale channel by 7%, including significant growth from our Tempur-Pedic brand, which was benefited from the strength of our new TEMPUR-Breeze products. As a reminder, this is the first quarter that our full lineup of the new Tempur-Pedic products were in market. These new products continue to receive rave reviews on the basis of their innovation and product quality.

Total North American Tempur-Pedic sales grew 17% in the quarter, and excluding floor models, grew 30%. Clearly, we're expanding the high-end mattress market and taking a good bit of market share. Sealy, including Stearns & Foster, continued to outperform our expectations during the quarter, growing 7% versus the second quarter last year.

We're particularly pleased that the Sealy growth was broad-based across all price points. The Sealy Hybrid continues to perform exceptionally well even against very difficult comps. And our new Stearns & Foster line has exceeded our expectation and has been successful in driving average retail sales price.

Perhaps the biggest positive inflection this quarter was Sealy's return to growth within the challenging sub-$1,000 price point. I believe Sealy's performance was driven by internal initiatives targeting new channels of distribution, market-leading product quality and the recent favorable tariff rulings. We believe this momentum will continue.

The second highlight is our global direct channel, which grew a robust 55% in the second quarter. In North America, our direct channel grew 78%, which was above our expectation. Excluding the recently acquired Sleep Outfitters business, North America direct channel grew a very robust 37% in the quarter. This was driven by strong growth in both our e-commerce business and our company-owned stores.

During the quarter, we opened 3 new Tempur-Pedic stores, bringing our total to 47, and we expect to be approximately 60 by year-end. In terms of our recent acquisition of Sleep Outfitters, I'm pleased to report the integration is complete and the turnaround of that business is running a good bit ahead of plan.

In addition to driving sales growth, our North America direct consumer web team has continued to focus on marketing efficiencies, keeping our customer acquisition cost low, resulting in a very profitable business. This is the second quarter in a row we have experienced declining customer acquisition cost and expanding profit margins.

The third and last highlight I'd like to discuss is our record second quarter gross profit margin. Our gross margin expanded over 200 basis points versus the same period last year. After several quarters of ongoing efforts to offset significant headwinds from commodities, launch cost and unfavorable merchandising mix, we are now reporting the positive impact of our efforts. Drivers of margin expansion are the completion of our Tempur-Pedic product launch, all our price actions implemented in 2018 being fully set to market, our continued efficiency efforts and our expansion of our direct channel.

One area that was a bit of a challenge during the quarter was International. Although we experienced 7% net sales growth on a constant-currency basis, this was slightly below our expectations. Our internal operations dealt with an unprecedented heatwave in Europe, uncertainty of Brexit, unrest in France and a slowing Asia business. I think all these items are industry- or country-specific issues. I believe our International team is performing well considering the environment. This quarter points out one of our strengths, diversity of operation, which mitigates regional issues and makes Tempur Sealy a stronger enterprise.

Let me save someone a question regarding current trends. Third quarter, from a sales perspective, overall has started off well, with growth rates in North America being similar to the second quarter and International, a bit slower, but in line with expectations. We're very pleased with our market position and our recent financial performance. It is interesting that this quarter is just short of our best second quarter in the company's history with or without Mattress Firm as a customer. As you know, we are now working on rolling out our full array of brands to Mattress Firm, and expect to ship in the fourth quarter of 2019 through the first quarter of 2020. We expect this incremental volume will fund increased advertising, improve operating leverage and enhance our relationship with our component suppliers all over the world.

Now I'll turn the call over to Bhaskar to review our financial results with you in more detail.

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

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Before going into the details, a few highlights from the second quarter. Global net sales were $723 million, an increase of 10%. Gross margin was 43.4%, adjusted operating margin improved 200 basis points to 11.6%, adjusted EBITDA increased 21% to $113 million and adjusted earnings per share for the quarter was $0.79, an increase of 39%.

Turning to North America. First, I would like to discuss some financial reporting items. As previously announced, we have acquired Sleep Outfitters, which was fully integrated into North American direct channel beginning in the second quarter.

Sleep Outfitters had historically been one of our -- part of our wholesale channel, since they were previously a third-party retailer. Accordingly, this impacts our growth rates within both channels. In addition, our GAAP operating income in North America was impacted by changes from post-acquisition restructuring activities and professional fees. We do not expect further pro forma charges related to Sleep Outfitters. North American net sales increased 11%. On a reported basis, the North American wholesale channel increased 7% and the direct channel increased 78%.

Excluding Sleep Outfitters, the wholesale channel increased 10%. North American gross profit margin improved 230 basis points to 40.8% as compared to the prior year. This was primarily driven by a favorable brand and Tempur merchandising mix, pricing benefits and decreased floor model expenses. This was partially offset by incremental overtime at our plants due to the higher than expended demand for Sealy products. Going forward, we expect Tempur merchandising mix to continue to be favorable, marking the end of negative mix which we had experienced in 2018 during the phased launch.

North American adjusted operating margin improved 170 basis points to 13.9% as compared to the prior year. This was primarily driven by improved gross margin and slight deleverage to operating expenses from the integration of Sleep Outfitters.

Turning to International. Net sales increased 2% on a reported basis. On a constant-currency basis, International net sales increased 7%. The direct channel increased a robust 32% and the wholesale channel increased slightly. As Scott previously mentioned, we faced a challenging environment across the handful of countries during the second quarter. We anticipate these headwinds will continue into the back half of the year.

Our International gross margin improved 200 basis points to 54.5% as compared to the prior year. This was primarily driven by a foreign exchange country mix. International operating margin improved 190 basis points to 20.3%. This was principally driven by improvement in gross margin and advertising expense leverage.

Turning to our company's global performance. Adjusted operating margin was $84 million and adjusted EBITDA was $113 million, up $20 million from last year. The increase in adjusted EBITDA was primarily driven by pricing benefit, higher volume, favorable floor model expenses and product mix. This was partially offset by higher variable compensation, innovation investments and headwinds as we turnaround the Sleep Outfitters business. The adjusted tax rate was 28%, interest expense was $23 million and adjusted EPS for the quarter was $0.79.

Now moving to the balance sheet and cash flow items. We generated operating cash flow from continuing operations of $41 million in the second quarter. The cash cycle was unfavorable by 7 days compared to the second quarter of 2018. This was principally driven by the timing of cash payments. At the end of the second quarter, net debt was $1.6 billion, down slightly from the first quarter of 2019. Our leverage ratio was 3.65x down versus the prior quarter.

Turning now to our annual adjusted EBITDA guidance. We have raised our adjusted EBITDA guidance to be between $450 million and $480 million. This narrows the range around the midpoint of $465 million. The increase of the midpoint is primarily driven by our overperformance of the North American Sealy bedding products and our direct business to date, both have been above our expectations.

This is slightly offset by increases to variable compensation and softness internationally. As previously announced, we recently signed supply agreements with 2 new retail accounts, Mattress Firm and Big Lots. We will be bringing on significantly higher volume into our North American operations. We anticipate some investments during these launches. We will hire new personnel and our focus will remain on producing quality products and continue to provide great customer service to our existing third-party retailers.

This will result in some inefficiencies of about $5 million in the third quarter, which will not be offset by incremental revenues. We continue to expect that these new accounts will be immaterial to EBITDA in total for 2019, but significant contributors in 2020 and beyond.

I would like to flag a few items for modeling purposes. For the full year 2019, we currently expect D&A to be between $115 million and $120 million. Total CapEx to be between $70 million and $75 million, which includes maintenance CapEx of $50 million, interest expense of $90 million to $95 million, a tax rate of 27% to 28% and a diluted share count of 56 million to 57 million shares.

Please note, the above items consider the impact of our new share repurchase plan. With that, I will 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. Turning to our long-term corporate initiatives. First, developing the most innovative bedding products in all the markets we serve. In the second quarter, as I mentioned, we finished the North American launch with our all new Tempur-Pedic Breeze line up. This completed the largest Tempur-Pedic rollout in the company's history.

With industry-leading technology from core to cover, the new formulation of these mattresses provide the ultimate Tempur-Pedic sleep experience. Most importantly, the new Breeze is positioned to accelerated ASP growth and drive improved product mix for both third-party retailers and our direct-to-consumer business.

So far, the Breeze products are doing what we thought they would do, improving Tempur product mix. As an example, Breeze represents almost 40% of the mattress units sold in our Tempur-Pedic retail stores. This is helping drive same-store sales growth of 29% for the quarter.

Last quarter, we introduced 3 new innovative products that are being tested in the market. First, a cutting-edge sleep tracker and monitoring solution. Second, an all-new innovative Tempur-Pedic mattress-in-a-box product. And finally, the most premium Tempur-Pedic mattress in history, featuring state-of-the-art active cooling technology.

These opportunities complement our existing product lines. Although we do not expect them to meaningfully benefit the sales or EBITDA in 2019, they ensure our brands continue to be most highly desired in the industry and they are expected to contribute in 2020. All 3 products and in market with limited distribution for continued evaluation throughout the year.

Now turning to our second long-term initiative, to invest significant marketing dollars to promote our worldwide brands. We continue to make progress in reaching customers more efficiently across media channels, wherever they wish to engage. We're complementing our mass media tactics with improved digital media programs that allow more unique one-on-one interactions. This allows us to unlock new efficiencies in our advertising spend. And as I mentioned previously, the combination of new products and new media mix has allowed improved return on advertising spend. Our brands are stronger than ever and we will continue to support them to drive more customers to seek out our products.

The third long-term initiative is to optimize worldwide distribution to make sure our products are properly represented in all channels. During the quarter, we made significant strides by expanding our global third-party retailer network. As previously announced, we have recently expanded our long-term supply agreement with Big Lots and entered into a new agreement with Mattress Firm. These wins are testament to our premium brands, innovative products and best-in-class service.

While the most important aspect of our worldwide omni-channel distribution strategy is third-party retail, our direct-to-consumer business continues to grow, representing 13% of our global sales in the quarter. We continue to operate this portion of our business in a very profitable manner, keeping our customer acquisition costs low, while matching high-end customers with high-end products. These extensions and further diversification of our worldwide distribution network strengthen our operating model and allow us to reach even more customers around the world.

Our last initiative is to drive EBITDA. Our business generates significant profit and cash flow. We're committed to invest capital on opportunities with the highest return on invested capital, while balancing our leverage target of between 3 and 4x net debt-to-adjusted-EBITDA.

We anticipate EBITDA to grow, which will organically lower our leverage over time. Additionally, we expect to generate cash in excess of our business needs. Based on current circumstances, we anticipate accelerating our share repurchase program. We will manage share buyback based on current and expected cash flows, share price and alternative investment opportunities.

In the near term, we expect to deploy excess cash flow to repurchase shares. For modeling purposes, we are estimating $50 million of share repurchase a quarter going forward. As a reminder of our history, before we paused our share repurchase program in 2017, our robust cash flow allowed us to repurchase almost 50% of our outstanding shares over the preceding 12 years.

We expect our expanding adjusted EBITDA, combined with our share repurchase, will drive EPS and shareholder value. In summary, we expect strong momentum going forward with growth across all of our brands: Tempur-Pedic, Sealy and Stearns & Foster. Looking past 2019, the progress we are making on our long-term initiative has 2020 poised to be the best year in the company's history. Operator, will you 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 comes from Seth Basham of Wedbush Securities.

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Seth Mckain Basham, Wedbush Securities Inc., Research Division - MD Of Equity Research [2]

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My question is on the outlook. Now you guys raised the EBITDA outlook for the year. I'm just hoping to understand a little bit more some of the drivers behind the moving pieces in the back of the year. First is related to Sealy, do you expect the strength to continue or do you expect acceleration? Second answer relates to some of the costs associated with Big Lots and Mattress Firm, you mentioned a $5 million headwind. What's the gross number you're expecting in incremental cost for the back half of the year?

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

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Great. Good questions. First of all, let me take Sealy, then we'll pass it on to Bhaskar for some of the details. Sealy has surprised us so far this year. The momentum was obviously strong in the second quarter at 7%, if I remember correctly, Bhaskar?

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

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Correct.

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

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And I think as I've said on the call, it has continued and we would expect that momentum to continue for a good while.

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Bhaskar Rao, Tempur Sealy International, Inc. - Executive VP & CFO [6]

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As it relates to the Mattress Firm and Big Lots costs, what we've estimate is during the third quarter is to make sure that our quality is where it needs to be, and then obviously, scaling for the launches that we have is that we would invest in incremental $5 million into the third quarter.

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [7]

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Yes. And I think we highlighted even on this past call that during this period where we're taking on large customers, the primary focus would be on quality of product and service. And we won't be shy about spending some money to get those businesses up and running correctly and continuing to support other third-party retailers.

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Operator [8]

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(Operator Instructions) Our next question comes from Curtis Nagle of Bank of America Merrill Lynch.

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Curtis Smyser Nagle, BofA Merrill Lynch, Research Division - VP [9]

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So kind of looking at the quarter, outstanding gross margin numbers, particularly in North America. Just kind of rolling through the next year -- or the rest of the year I should say, how should we think about rate growth in terms of things like commodities that continue to be pretty weak, product mix, mix within brands, DTC growing really well. Should we continue or expect to continue gross margin to grow on a rate basis at a very high rate, I guess?

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Bhaskar Rao, Tempur Sealy International, Inc. - Executive VP & CFO [10]

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Sure. Good question, Curt. So the way I would think about that is the underlying margin excluding the new business that we're adding, we would expect that the gross margin to grow on that. So as you mentioned is that we would anticipate getting continued improvement from a channel mix perspective as well as our outlook for commodities has slightly improved from where we were at the end of the first quarter. What I would want to call out is, is that at the end of the third quarter, we'll be selling in the Big Lots business, which is principally in that $1,000 and below. And in the fourth quarter, what we would have is the Mattress Firm sell in, which is going to be heavily weighted toward floor models, that -- which will be sold at a discount.

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Operator [11]

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And our next question comes from Bobby Griffin of Raymond James.

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Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [12]

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I think I want to talk a little bit about our advertising expense during the quarter and then kind of plans going forward and when we should expect kind of the uptick to involve Mattress Firm in the new and Big Lots as well? And what promotional activity or advertising we could expect from those 2 new relationships in the fourth quarter?

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

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Okay. Sure. First of all, advertising we think of as a core expense, but certainly there is some variability in it. And as you can see from the sales growth numbers, there was no reason to pull the advertising lever very hard during the quarter, but we certainly expect they will continue to spend approximately the same percentage of our sales number in advertising. There is no uptick in advertising expense as a ratio during the third and fourth quarter, but certainly, we would expect from a ratio standpoint for it to continue about the same, is that fair Bhaskar?

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Bhaskar Rao, Tempur Sealy International, Inc. - Executive VP & CFO [14]

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Sure. We would continue to on a -- if I just think about it on a full year basis is that we would continue to believe that our dollars would be up and our rate would be up on a year-over-year basis.

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Operator [15]

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And our next question comes from Michael Lasser of UBS.

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Michael Lasser, UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines [16]

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What do you think drove your improvement in return on advertising and your lower customer acquisition cost? Is it possible because Mattress Firm is going through this transition that they're just being less aggressive and it's allowing you to take share, particularly at a time where -- when you're big competitor is going through some of its own dynamic?

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [17]

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No. I don't think our advertising efficiency has anything to do with anything with Mattress Firm. Although I think your theory is -- has some validity. I think it's more likely that the very aggressive BedInABox companies that their advertising budgets have been probably pulled back quite a bit as those companies continue to run at a deficit. I think probably that has helped us some. Also, I think, as a company, we continue to get better from an advertising standpoint and the new team is doing a great job focusing on efficiency. So I'm going to say, some less competitive market coming from the BedInABox guys as their volumes have in North America mattress is probably flat at best. And then our own efficiencies from internal initiatives.

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Operator [18]

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And our next question comes from John Baugh of Stifel.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [19]

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I was curious guys, too early in the Breeze launch to look at the mix of what you're selling and you commented about it for your stores, but I was thinking about overall, including wholesale. Has there been enough time to get a sense for North America Tempur-Pedic brand only? How the mix compares today, say, to pre the initial launch of PRO and Adapt. Is it same, better or worse? Any trends there?

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [20]

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Yes. Great question. Clearly, we called out some outstanding performance in our direct channel where we can control the process. When I look at the total Tempur launch in North America, I think we can clearly say that we have eliminated the negative mix that we've been working through. And when you look at the totality of the launch, the mix is where we expected it. We don't do expect mix issues in Tempur-Pedic going forward. Having said that, the mix is going to be slightly less rich than it was before, but that was planned. And so overall, the new launch was a big driver in the creation of EBITDA. And we again, don't expect any negative mix issues going forward out in Tempur product.

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Operator [21]

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And our next question comes from Laura Champine of Loop Capital.

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Laura Allyson Champine, Loop Capital Markets LLC, Research Division - MD [22]

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The gross margin beat was particularly impressive. And I'm wondering if you got any help -- any material help from input costs? And what the trend is in the current quarter?

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

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Sure. As it relates to the second quarter and what we saw from a gross margin standpoint, the outlook where we're sitting at today is slightly improved versus where we were in the second quarter. Some of that came to pass in the second quarter. However, what I would say is, is that from a overall perspective what we felt good about was our product mix, specifically as it related to what we've seen historically, which was the cannibalization. And we saw the beginning of that turning. As Scott mentioned, what we'd anticipate going forward is that, that would be fully offset.

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [24]

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And so when you look at the second quarter, it's driven basically on brand and then positive Tempur mix and then a very strong performance by direct, all of which should continue, and really no help from commodities to speak of in the second quarter, although going forward we'd expect it to be a little bit of benefit.

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Bhaskar Rao, Tempur Sealy International, Inc. - Executive VP & CFO [25]

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Correct.

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Operator [26]

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And our next question comes from Peter Keith of Piper Jaffray.

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Peter Jacob Keith, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [27]

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Just looking at the adjustment to the guidance, if you could tie in together, the midpoint implied a notable step down in the growth rate of EBITDA from first half second half. So I wonder if you could just give us some insight on what some of the changes and headwinds might be that are evolving?

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [28]

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Sure. We had a couple of things that we called out. So on the -- what we have working in our direction is the continuing momentum that we see on the Sealy side as well as what's happening from the direct. Direct has performed very well in the first half and we would expect that, that would continue. We did call out a couple of items that we have headwinds, principally it is the variable compensation. Just a little bit about that is, is that it does vary based on our expectations. In prior year, it was zeroed out based on our performance. And in the current year, we are achieving above our expectation, so it's a headwind as we think about the back half. And then finally, we did call out some softness internationally. And that helps us bridge from midpoint to midpoint.

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Operator [29]

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And our next question comes from Brad Thomas of KeyBanc Capital.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [30]

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My question is around capital allocation, I mean, you're pretty exclusive today with what your plans are. But I guess, Scott and Bhaskar, I was hoping for a little bit more thinking on why not be a little bit more aggressive today with share repurchase given the strong cash flow outlook and strong EBITDA outlook?

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

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Yes. Good question. Obviously, capital allocation is a Board issue, so we get lots of input from investors, debtholders, Board members and everybody else and it's one of our core responsibilities. I mean, if you look at the history of the company, I mean it was -- in 2016, we bought back over $500 million worth of stock buyback. So from a strategy standpoint or an appetite standpoint, the company has had a history at times to be very aggressive. I think what we said today basically is, look, things look pretty good and we've given you some number that we've kind of budgeted for share repurchase. It could be more. We've given you some -- the way we look at it as far as our expectations of cash flow, stock price, alternative investments. But then at the same time, we said look, we would like the leverage ratio to come down a little bit from where we are, but still obviously within the range that we've said. But I'd look at the $50 million more as a minimum than a maximum. And we will continue to fine-tune the actual investment as we learn more about as the year goes forward, as Mattress Firm and Big Lots come onboard. But I wouldn't be surprised that -- if the company didn't become more aggressive in share buyback over the next couple of years when you look at the anticipated cash flows. Not just really for this year, but if you start looking at 2020, the flow-through and the cash flows are really impressive when you get to 2020. And I suspect a lot of that cash flow will end up in share repurchase.

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Operator [32]

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And our next question comes from Carla Casella of JPMorgan.

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Carla Casella, JP Morgan Chase & Co, Research Division - MD & Senior Analyst [33]

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On the other side of the capital allocation question, any thoughts on -- you've got one bond that's callable and that it continues to step down on call price, your thoughts on refinancing or cap structure in terms of loans versus bonds? Do you prefer to be -- to tap a certain market versus the other?

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

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Yes. Great question. And we do look on up in the capital structure, at the debt structure too and we will continue to study that. Obviously, the markets are very attractive. Obviously, our leverage profile is getting better and our outlook certainly looks rosy. So we'll continue to look at the debt structure. And I think that sometime in the future there is some opportunity to optimize in the debt structure also.

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Operator [35]

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And our next question comes from Karru Martinson of Jefferies.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [36]

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Given a little strong direct-to-consumer business that you had, are we seeing a shakeout in the BedInABox model here?

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

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I don't know. I'm going to say, you're seeing several things. One is, I think that we're tapping a market that's not well served right now, which I'm just going to call high-end bedding in North America. And our Tempur-Pedic flagship stores are designed for high-end customers. And I think there's an underserved market. So I think that would be the first driver. I think the second driver is clearly a lot of disruption in the traditional distribution model. Some large customers have gotten into financial trouble. And their share of the market has declined, so there's quite a bit of where bedding is kind of open for good retail performers. And we're seeing some of our strong retail performers doing really good, taking significant share themselves. So I think there is some bedding that's up for grab in the marketplace.

And then I think third is really kind of the points you probably raised is there's certainly a significant deceleration of what I'll call the traditional BedInABox brands in the marketplace. But having said that, some people get confused, that it doesn't mean that there is a decline in compressed bedding. If we look at our compressed bedding offerings, in total, they grew 40% in the second quarter.

And most people haven't really focused on we've got a total compressed bed offering starting with Sealy Conform, which is -- starts at $399, which is very competitive in the marketplace. Then we kind of have our middle market compressed bed, Cocoon, which is like a $799 product, which is doing very well. And in fact, since we've changed some marketing strategies to go kind of directly after the disruptors, it's up 250%.

And then we have our in test, our TEMPUR-Cloud product, which is a premium product that starts at $1,799, and you compare that premium product with what some of the BedInABox guys are trying to do in the premium area, you would see that it's a relative value.

So when you look across our offering in that area because we are vertically integrated in our scale, we can produce a higher-quality bed for a lower cost and make money. The part that we needed to learn over the last couple of years was really marketing and how to market online. And I think our performance recently shows that we've learned a lot in that area and are very competitive.

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Operator [38]

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And we do have a follow-up question from Michael Lasser of UBS.

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Michael Lasser, UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines [39]

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Can you give us more detail on the breakdown between units and price for the Tempur line? And on the Sealy business, how much of the improvement is coming on a same-store basis versus expanded relationship?

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

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Sealy is easy, because that's all on same-stores effectively. Sure, we haven't picked up anything of the new business yet on Sealy.

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

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Right. And more broadly, the nicety about Sealy is that we're seeing growth in all the price points. We were challenged from legacy standpoint in that sub-$1,000 business, so what we've seen in the second quarter is remaining growing in the above-$1,000 and a good opportunity there in the below-$1,000.

As it relates to the Tempur side is that we have seen a growth in units. The momentum that we saw in the first quarter that continues in the second quarter. And what the launching of the Breeze in the high-end, our ASP continues to improve.

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Operator [42]

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And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Scott Thompson for any closing remarks.

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Scott L. Thompson, Tempur Sealy International, Inc. - Chairman of the Board, CEO & President [43]

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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 our call today, operator. Thank you.

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Operator [44]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.