Welcome to the Tempur Sealy First Quarter 2016 Earnings Conference Call. [Operator Instructions]. I would now like to introduce your host for today's conference, Mr. Barry Hytinen, CFO. Please go ahead.

Thanks, Blaire. Good morning, everyone, and thank you for participating in today's call. Joining me in our Lexington headquarters is Scott Thompson, Chairman, President and CEO. After prepared remarks, we will open the call for Q&A. Forward-looking statements that we make during this call are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements, including the company's expectations regarding sales, earnings, adjusted EBITDA or net income and anticipated 2016 performance 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 10-Q under the headings Special Note Regarding Forward-looking Statements and/or Risk Factors, as well as the company's press releases. Any forward-looking statement speaks only as of the date on which it is made and the company undertakes no obligation to update any forward-looking statements. This morning's commentary will include non-GAAP financial measures. The press release contains reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures as well as information regarding the methodology used for constant currency presentations. We have posted the press release on the company's website at 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.

Thank you, Barry. Overall I'm pleased with our continued progress in achieving consistent earnings growth and profit margin expansion. This quarter adjusted EBITDA increased 15%, adjusted EPS grew 24%, and adjusted operating margins expanded a robust 200 basis points. I'm pleased to see the entire organization has been laser focused on handful with key initiatives that are designed to drive consistent earnings and margin expansion over the long term. These initiatives include, first, develop the best bedding products in all the markets we serve. Second, invest significant marketing dollars to promote our brand. Third, expand our North American margins while maintaining market share. Fourth, grow market share outside of North America. Lastly, optimize our worldwide distribution to make sure our products are properly represented in all channels. Because of the team's hard work we were able to demonstrate progress against each of these initiatives in the first quarter. Now I would like to call out a few specific things in the first quarter. First quarter sales declined 2.5%, and I want to make a couple observations on the sales results. Barry will have more to say in his section. First, based on our conversation with industry participants, we are hearing that the softness was broad based through the North American mattress industry. With January sales being robust, then February and March being soft. While it's unclear why the industry experienced this pattern in the first quarter, we believe that Tempur Sealy at a minimum maintained market share in the quarter in North America. You should also note as we move into the second quarter, sales trends have improved with April being strong for both Tempur and Sealy in North America. Second, currency headwinds reduced reported sales by almost $20 million while international sales reported on a reported basis was down…

Thanks, Scott. As Scott mentioned consolidated net sales for the first quarter were $721 million, down 2.5% versus the first quarter last year and on a constant currency basis they were flat. Adjusted gross margin improved 190 basis point to 40.4%, and adjusted operating margin improved 200 basis points to 11.2%. On a segment basis, North America net sales decreased 2.4%, and were down 1.6% in constant currency. Our Tempur U.S. business was slight up and our Sealy U.S. business was down low single digits. In Canada, our first quarter net sales decreased 7.5%, but increased 3% on a constant currency basis. North America bedding product sales declined 1% with a 5% unit increase. Year-over-year, average selling price was negatively impacted by mix of lower sales of high end Sealy brand products, increased floor models, and foreign exchange. Partially offsetting these factors were the pricing actions we've taken since last year. Our Tempur-Flex and Sealy Posturpedic products produced strong growth. Now, a quick technical call out for those of you who track ISPA. The ISPA reports don't distinguish between regular mattress sales and floor sample sales, so among other things, so under the ISPA method we would be at a mid-single digit sales growth for the first quarter. Other product sales were down $10 million, primarily driven by a decline at our joint venture that is focused on value accessories. Orders from that business can be lumpy and we expect to see growth in the second quarter. North America adjusted gross margin improved 190 basis points to 37%. Tempur-Pedic U.S. gross margin drove a considerable amount of this improvement as we saw improved efficiency in our operations, including lower sourcing costs, pricing, and commodity tailwinds. This was partially offset by the rollout of our news Breeze products as we shipped…

Thank you, Barry. Great job. Before opening it up for Q&A I want to make a couple comments on three issues. Product roll out, direct initiatives and capital allocation. First, on the new product front, we're in the amidst of rolling out two major products in North America and the early signs are very encouraging. Our totally redesigned Stearns & Foster line has recently begun shipping, consistent with our initial reactions at the Vegas Bedding Show, dealer interest has been strong and we expect when the phase launch is completed to have more Stearns & Foster slots, particularly above 2000, which should help average sales price. The timing of the launch will be phased in over the next four months and supported by national advertising, television advertising. The first for the brand, you may have already seen this as we’ve begun the television campaign in the last few days. Our new Tempur-Breeze collection has begun shipping and we expect it to be about 80% complete with the rollout by Memorial Day. We’ve experienced higher than expected estimated demand for floor models, and as a result we have some back order on Breeze. Our manufacturing team is working hard to meet this demand. We are pleased with the early report of sales velocity which is up from prior line. We plan to supplement this early momentum with our new Breeze advertising campaign. For those of you who are curious you can check out both the Breeze and the Stearns & Foster television campaigns on YouTube, and see for yourself why these ads have scored so high with test audiences. In addition to the North American launches, we are very active internationally. Our international launches for both Tempur and Sealy have begun, and are progressing on schedule. The Tempur-Hybrid, our international version…

[Operator Instructions]. Your first question comes from the line of Brad Thomas from KeyBanc Capital Markets. Your line is open.

My question was around sales and you know with the revenue decline that you posted in the quarter, obviously there are questions around how consumer spending is holding up right now within the industry, what changes are unfolding from a competitive standpoint and so I guess the real question would be, you know, how are you thinking about those aspects of sales and as you reiterate your revenue guidance for the year, you know, what gives you confidence to do so, considering that does imply that you probably need to drive high single digit, maybe even double-digit revenue growth, later this year? Thank you.

Sure. I can't say that was an unanticipated question at all and I certainly appreciate it. First of all let me just give you just some color outside of the script on -- I'm going to start with North American sales. I think if you -- the way we see North America economy in the first quarter, we think GDP will be relatively weak, call it 0.7 or something. We believe consumer spending numbers when they're finally come in will be slightly weak. Durables are certainly going to weak. So first of all I would say from first quarter standpoint from the macro standpoint, it wasn't robust. Then in our channel check as you might guess when the sales slowed down in February and March we certainly reached out and touched a lot of people in the industry, talking to them about the furniture demand, what some of our suppliers were seeing, and I think there is no question from our perspective and our research that the industry in general was also not very robust, not just mattresses but just consumer spending. That's our read. It's a little early and we'll get data obviously over the next three weeks as everyone else reports. I think the other thing that when you look at our revenues you have to be careful of, and it took us a little while to really understand what was going on, is the floor model discounts and Barry talked about it in his prepared remarks, but let me make sure we understand what we've experienced is the Breeze launch is larger than the Flex launch, and on the Tempur side that means that we're going to have more floor models, which is going to be a headwind for revenue. Also, and this was the part that…

The next question comes from the line of John Baugh from Stifel. Your line is open.

I'm going to pivot from the obvious domestic revenue questions and ask a couple international and maybe interest expense. On the interest expense and the new credit facility, I guess a few things. Where we pencil out Barry, interest expense for the year how does that sort of flow? And then I think you mentioned the restricted basket on the 2020. Does that mean that you can only do a 100 million more in repurchase between now and calling those bonds or help me understand that, and then I'll follow up with an international. Thank you.

John, I would say that when you look through the new credit facility you find the interest rates are a little bit improved as Scott mentioned on the call, the economics of it. If you just kind of -- if you didn't assume any additional repurchase and you're just working down debt, then you probably have interest expense, kind of in this number on a quarterly basis. And around what we saw in the first quarter and tapering. If you had cash flow going to debt reduction. As relates to the second part of your question, so that basket under the 2020 senior note today is little over $100 million as I mentioned that grows about 50% of GAAP net income through the year. So if you work through our guidance, I think you would find that that would get by the end of the year to somewhere in the vicinity of $100 million of availability.

And then on the international, Scott, you mentioned launch product launches there. And you mentioned I think that Sealy was on track. I was just wondering if you could give a little more color, particularly about Europe, what you're seeing in terms of revenue and then maybe go into a little bit the drivers to the gross margin improvement that you're seeing in the international business. Thank you.

I think on a constant currency basis, somebody correct me if I'm wrong, I think we're up 6% in revenue on constant currency. As you probably know we got quite a bit going on internationally. We're launching our Hybrid, which is the Flex in my terminology across many nations over there. We're in the early stages, but I can tell you is that the reception has been good. Slots are increasing but I can't tell you it's been there long enough that we have a lot of data on velocity but we feel pretty good about it. I don't really have a good feel for what I'll call the European consumer and there are market share so small over there that we're clearly growing and taking share and so you don't feel consumer sentiment quite the same as you do when we have large market shares. But in general, I would say we're doing well over there. We're going to have some margin pressure as the Sealy brand rolls out, right, Barry because of just merchandise mix but will certainly be accretive to EBITDA and growth from an EBITDA standpoint.

John, I would just add that what you saw in our constant currency result is improving pricing as the -- even the Sealy launches that we're doing this year are at higher prices than they were last year, so we got Posturepedic and Stearns rolling out which helped average price internationally. And I guess just one technical element that I'll add to my prior response on your 2020 question is that that's based on after we file the Q. So if you think about it it's this quarter we'll grow after we file the next Q, and then you would have the second and the third quarter. So by the end of the year as you're thinking through your numbers the fourth quarter adjusted net income would be accessible in the next year, which is baked into my rough $200 million number. But also add that our joint venture in Asia is doing really well. Double-digit growth, and we're feeling very good about how that business is setting up. It's been a tremendous asset to the company over the long term and we see it continuing to grow in markets such as China and throughout Greater Asia.

[Operator Instructions]. The next question comes from the line of Mark Rupe from Longbow Research. Your line is open.

Did I hear you say that North American bedding units were up 5%, was that correct?

Yes.

So from a pricing standpoint, Tempur and Sealy pricing, how do you expect that to play out over the next few quarters? Will there be a reversal in the Stearns & Foster pricing impact?

So we certainly experienced negative headwinds on pricing from the high end Sealy brands, Stearns & Foster and Optimum being down, and as we moved through the launches of Stearns & Foster through into the second quarter and even little bit into July, we would certainly expect that to start ramping and be less of an effect if not even a benefit as we move through the year as Scott kind of alluded to in his prepared remarks.

The next question comes from the line of Budd Bugatch from Raymond James. Your line is open.

This is Bobby fillings in for Budd. I was hoping I could get a little bit more detail on the Sealy margin improvement and maybe kind of what actions took place during the quarter over the last couple of quarters to improve 12 out of the 15 plant, and then maybe add sneak one more in there what is the commodity outlook going forward now given that we've seen an uptick in commodity costs here recently?

I'm going to let Barry do the commodities because that's too complicated for me. But I can certainly talk about Sealy plants and Sealy transformation. I'm going to be a little evasive because I'm guessing my competition is probably listening in on the phone call so I'm not going to tell them exactly what we've done. But I would tell you that starting in the third quarter, we defined Sealy manufacturing as critical to the company's long-term success that we determined that we were a bedding manufacturing company, and we got all of the departments within North America to work on the issue. That included, HR, I.T., accounting, not just the -- what I'll call the great men and women that just normally work in operations and began to work as a team to improve what we believed was a problem. It took a little while. As I said on the call, we were down a 100 basis points in the third quarter. We were flat in the fourth quarter and we are up 100 basis points this quarter, and that's X commodity, X merchandising mix, what I kind of define as the four walls. How well we actually making in manufacturing beds, but it's about people and you know, we really got focused on the people. We cleaned up some of the plants, redid some bathrooms, some meeting areas, started giving people awards, started recognizing outstanding performance, started benchmarking the manufacturing facilities against each other. But you know, mostly you know, we really just got -- we got focused on it and the great thing is I think I've been to six of the facilities. You feel it. I think people are feeling much better about the operations. When I go look at not just the EBITDA margin but the things that are also really important like safety, safety has improved. Turnover has declined. On time deliveries gotten a lot better. I just got to tell you that I'm really proud of everybody's work in that area. Do you want to do commodity?

Sure. On commodities it was largely as we expected, as you recall on the last time we talked about this we said you know commodities probably would be about $20 million for the full year as a benefit and with more of that in the first half, we saw about $6 million of benefit in the quarter. That was as I said right in line with expectations, foam and steel and some of our other commodity inputs were favorable but I will note there were some things that were inflationary, packaging and some of the other components such as gel. To put that in perspective, floor model discounts was more in that number and FX was a couple of million dollars a hit. So when you think about the things that are either more macro oriented or onetime in nature, I would say it was kind of a negative actually in total. And then you know as it relates to going forward kind of expect the year to play out largely as we thought at the beginning of the year, kind of a long year, but had some benefit in the first quarter, think it will be less of a benefit as we move through the year as investors will recall that it was an increasing benefit through last year. So pretty much as expected.

I think Barry made an outstanding point that I would like to make sure everybody heard. When you look at the company and say is it over earning because of commodities? When you look at the quarter we did get -- we got a tail wind of $6 million, but we had a headwind of FX of a couple of million dollars and then had excess floor plan models of $7 million. So when I look at it and I ask Barry the question, are we overearning, is there anything unusual in the numbers that I need to really think about, I think he said it right. It was either call it flat to slight headwind on what I call uncontrollable or special items.

And the headwind that we experienced from product mix, the Stearns and high end Sealy products that we mentioned was even larger than the floor model discount. To put that in perspective, as we moved through the Stearns launch we feel good about moving that number in the right direction.

The next question comes from the line of Peter Keith from Piper Jaffray. Your line is open.

Just a follow up on the last comment regarding the floor model impact and maybe some of the inventory liquidation, do you think that $7 million headwind from floor model shipments will be bigger in Q2? I'm presuming it will and then on the inventory liquidations from your retail partners, is that also going to be a bigger headwind in Q2 compared to Q1?

I guess to answer the simple one, which is the second part. I think the inventory issue is behind us. I don't expect that we're going to have an inventory liquidation issue in the second quarter.

Yes, I think that's largely correct. When you think about what's gone on in the first quarter, we had Stearns and that was quite an impact and we're well into the launch now and ramping and then as it relates to Breeze, that was the more significant impact there Peter. When you look at that $7 million that we were talking about, it was on the Tempur side vastly. So from standpoint of our expectation going forward, you know, there will be more Stearns & Foster floor models rolling out and there be definitely be some more Tempur with Breeze and some other floor models that are going but as a comparable I would say you know there still be headwind but by the back half it will be behind us.

And actually when I looked at it, it obviously the extra floor models is a negative to the quarterly earnings. The way I think about it it's great. It really foreshadows very strong back half of the year.

Your next question comes from the line of Jessica Mace from Nomura Securities. Your line is open.

My question is on the international product mix. You mentioned that the increase of Sealy products is having a drag on gross margin. I was wondering if you could give us some color on what that balance is and how long we should expect continued pressure from an increase in Sealy products relative to Tempur. Thank you.

Well, on a constant currency basis, Jessica, Tempur all in grew kind of a mid-single digit, low mid-single, and Sealy was double-digit. So as we move forward through the year, as Scott mentioned we got our Tempur-Hybrid collection continuing to roll out. We roll out market by market, so our roll out internationally tend to be more extended than [Technical Difficulty] and so that has the effect of ramping on itself. And so we would expect the Tempur numbers to improve. And I would note that we continue to see weakness in Central Europe, Germany, and some of the other markets which are frankly high profit pools for us and -- so but we feel good I'll let Scott speak to that in more detail about what we're doing there and so we would expect that to be improving the rate of growth from Tempur. Sealy on the other hand is growing nicely double digits. And I think that has the opportunity to continue to grow because frankly over the long-term we see our Sealy business internationally being driving incremental market share.

I think look, the growth in Sealy would put some pressure on margins, but I don't consider that a problem I expect that good because the price point at Sealy internationally that’s a much bigger pool and has great opportunities over the long run. Although it does mix us down a little bit from merchandising, it gives us another customer that we haven't been servicing and it gives us great leverage on our overhead internationally. So we're very focused on driving Sealy.

I guess I'll just add to that little bit, which is historically when people have looked at the margin differential, of Tempur versus Sealy in the U.S., and seen a fairly big spread, that while our Tempur margins internationally are historically higher than they are in the U.S. due to a variety of things that are fairly structural our Sealy margins internationally are also higher than the U.S. and the gap is nowhere near as wide as it is in the U.S. And that's principally because our Sealy launches are more at the high end of them. So we're introducing Stearns & Foster, Posturpedic at higher price points and seeing good uptick there. So the spread is as Scott mentioned not a big deal.

The next question comes from the line of Keith Hughes from SunTrust. Your line is open.

Two questions. First on April how strong, how big a rebound in sales did you see in April? And then question two, you had given us the unit number. I assume that was for all of North America. I guess the question would be how did units and dollars compare at Tempur-Pedic brand? Thank you.

I'll talk about April. Clearly we looked at April sales and they were strong. We're a little gun shy because quite frankly we looked at January sales and they were strong and we told you they were strong and then we hit a little bit of an air pocket. But I would tell you that the strength of April sales combined with the other factors we’ve talked about it was not at all hard to re-up on revenue targets. That was not a very hard conversation for us to have. We feel good about it.

And Keith, on the bedding units by North America, that was a total North America comment that I made on the 5%, that they were both Tempur and Sealy were up single digits, and the thing I would note here is we have seen other than the floor models, on Tempur which were the number that we called out was essentially all in Tempur, we have seen really no change in pricing of impact and mix, so it's been very favorable, no mix change. So we've seen improved average selling price due to pricing actions we've taken but we haven't seen a change in the rate of sale across our lines and then on our Sealy brand business we have seen the average price pressure related to the high-end elements that we talked about.

I think the only thing we should probably call out, I'm looking at my notes Barry, on sales we haven't really mentioned we should help people understand all the data we've seen. I would also tell you that when we look at our sales first quarter, that we saw more weakness in the national accounts than we did the other accounts. There was some delta between those two.

The next question comes from the line of Seth Basham from Wedbush. Your line is open.

Just to follow up on that last question if you could help us better understand what's happening within the Tempur-Pedic line how are the units trending in terms of growth and cloud in contour relative to the Flex in the first quarter?

I'm going to give you at least a thought. This is Scott. You know, it's taken me a little while to think through the products because our accounting brings the products up just like you talked about. There is cloud, there is contour and there is Breeze. But you know, when I really look at the products and I talk to retailers, I really think what we have is we have cloud, we have contour and then we have like an option almost like an accessory on a car that's called Breeze. It's almost like you take an attachment rate on a cloud, and get a cloud breeze. So he's going to give you kind of discussion but I think you have to be careful when you think about the product, because they really are just a couple products and then Breeze is an accessory on top of.

Yes. And just to add a little bit, we don't break out too much detail there for competitor reasons, certainly our competitors are listening. But as we mentioned Flex was strong and that somewhat makes sense because as we mentioned it was rolling out last year. But it's doing well. And the rest of our lines blended with the sort of industry backdrop that we talked about but on just to be clear here, Tempur units were up, and Tempur bedding sales was up despite the floor model discounts.

And the next question comes from the line of Curtis Nagle from Bank of America. Your line is open.

So just two very quick questions. One, on the 2020 notes, I guess would and can you call those notes early and then just secondly, Scott maybe could you talk about other distribution opportunities that you guys are looking outside of direct?

Well, on would or could, we could. There is a May call provision that provides for calling them earlier than the first call and that’s in the disclosures. Certainly we look at a lot of things. And as Scott mentioned, we are continuing to evaluate our capital structure and with an interest to really maximizing shareholder value. So while I won't comment beyond that I would say that yes, we could.

And you asked about other distribution opportunities, other than direct. So personally I will make a very clear comment, we think the lion's share of the business is third party retailers. We expect that to continue to be the lion's share of the business. And we're committed to our third party retailers. We're continuing to have talks with retailers. One of the most exciting areas is TSI only, or TSA dominant. And we're continuing to talk to some retailers about that particular opportunity which we think is a win-win for both the manufacturer and the retailer.

And I will now turn the call over to the presenters for closing remarks.

Thank you. Thank you operator. To the 7000 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 it's Board of Directors. This ends the call, Operator.

This conclude today's conference call. You may now disconnect.