Good day ladies and gentlemen and thank you for standing by. And welcome to the Tempur Sealy's Third Quarter 2016 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. It is now my pleasure to hand the conference over to Barry Hytinen, Chief Financial Officer. Sir, the floor is yours.

Thanks Brian. 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 performance for 2016 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 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. 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 for constant currency presentation. 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 is my pleasure to turn the call over to Scott.

Thank you, Barry. Good morning everyone and thank you for joining us on our call this morning. I'd like to use our time today to take you through the highlights of our record third-quarter. How we are progressing against our goals, contest around our goals, including our competitive position and the overall health of the marketplace. Then Barry will take you to the details of the financial statement and through our revised 2016 guidance which we provided last month. Overall, I'm pleased with our continued progress in achieving profit margin expansion and EPS growth. This quarter's unadjusted results show our operating margins increased a robust 160 basis points. EBITDA increased 9% and EPS increased 19% compared to last year's adjusted results. The entire organization is focused on a handful of key initiatives that are designed to drive margin expansion and earnings growth over the long-term. These key initiatives include first, develop the best bedding products in all the markets we serve worldwide. Second, invest significant marketing dollars to promote our brands. Third, expand our North American margins while maintaining market share. Fourth, grow our market share outside of North America. And lastly, optimize a worldwide distribution to make sure our products are properly represented in all channels. I'm very proud of our team's progress against each of these initiatives year-to-date and especially during the soft retail environment we experienced this quarter. Now I'd like to call out few specific items in the quarter. The third quarter sales were down 4.6% year-on-year on a constant currency basis versus the third quarter last year. This was below our expectations. The sales shortfall was largely due to 5.8% decline in the North America segment. I'd like to take a minute and talk about the factors impacting our topline results in North America. Coming…

Thank you, Scott. As a Scott mentioned, net sales for the third quarter was $832.4 million, down by .4% versus the third quarter last year and on a constant currency basis, they were down -- improved 200 basis points to 33.5% and operating margin improved 160 basis points to 15.7% as compared to adjusted gross margin and adjusted operating margin in the prior year. Please note most of my commentary will be comparing this year's results which have no adjustments to last year's adjusted results. Now, on a segment basis, North America net sales decreased 5.8%. Sales in Canada were up 1%. North America bedding product sales decreased 3.4% with bedding units down 8%, partially offset by price and mix. The weakness in sales was primarily driven by her Tempur predict brand business as well as value priced Sealy products in our U.S. joint venture. This was partially offset by significantly higher sales of high-end products like the TEMPUR-Breeze, Sealy positively and Stearns of foster bedding products. Year-over-year average selling price was positively impacted by pricing actions taken earlier this year and positive merchandising mix. Like-for-like rice increases contributed approximately 100 basis points in the quarter. North American other channel decreased 6.6% in the quarter. A sale from our select business were up, but was offset by a decline in sales to hospitality which is principally timing because that business is always lumpy. Other product sales were down in the quarter, as Scott mentioned this was driven by decrease sales of accessories through our joint ventures and lower pillow volumes. North American gross margin improved 240 basis points to 41.5% as compared to adjusted gross margin in the prior-year. This is the highest gross margin the company has realized since the Sealy merger. The primary drivers of improvement were operational…

Thank you, Barry. Take you back a moment. This quarter represents the sixth consecutive quarter of year-over-year increases in both EBITDA and operating margin. The entire Tempur Sealy team is committed to improving these metrics to consistent execution quarter-after-quarter, year-after-year. Everyone on the team knows there's a lot of work to do and in order to achieve our goals, we must find problems, communicate problems and jointly fixed problems as quickly as possible. As we look forward to key remains laser focused of our 2016 project 650 aspirational target. But we're not providing guidance on 2017 today. The team is making progress on numerous opportunities to improve operations and deliver on each growth. With that operator, would you please open the call for questions?

[Operator Instructions] . Our first question will come from line of Brad Thomas with KeyBanc Capital Markets. Your question please.

Yes, thank you for taking my question. My first question will be on distribution in really two parts. I was hoping you could talk a little bit more about transition, re-branding that's underway at mattress firm and maybe give a little more color around how much of an issue may be at the sleepy's stores that are being re-branded and how much floor base is changing are you gaining shares as they re-brand the stores maybe what that the immediate term outlook is there? And then part two would be kind of longer-term, how you think of the opportunity with Mattress Firm, particularly as they are now under new ownership.

Thank you. First of all, let me say that I normally would never even talk about an individual customer on the phone but the FCC requires us to have some financial disclosure of that concentration so Thomas it’s impossible not to and you will see some of that disclosure in the queue that we will be following. The first thing I would say is what we think it will be very successful, the transition of the stores. It's a – it's a fluid process. We're not going to talk about their gain plan because that's confidential but I can tell you where they have made the transition in re-branding. The stores have done well and Tempur Sealy's sales have increased from about compare to standpoint. I think I can say that clearly. As far as new ownership look we were – organization worldwide in general we find them to be outstanding and our balance of share is increased generally worldwide in markets that we have worked with them. And we are well of the optimistic about the future for both the Mattress Firm team and Tempur Sealy.

Thank you. Our next question comes from the line of William Reuter with Bank of America. Your question please.

Hi, I wondered you talked a little bit about better results in those products were you had spent more advertising in terms of the TEMPUR-Breeze and then some softer results in some of your legacy products, can you talk about the magnitude of some of those differences?

Yeah. I would say they were big. What we're talking about is, we had a general focus on the high end of our products portfolio. And we had good growth in the high end of the Tempur products, in particular the breeze line and we have declined in the lower dollar value of the Tempur products.

Thank you. Our next question comes from the line of Mark Rupe from Longbow Research. Your question please.

Good morning Scott and Barry. You mentioned units were down 8% in North America. Just curious, I assume value price Sealy products assuming they are lower priced which is probably a little bit worse than that. And the fact that I don't believe they are two heavily penetrated into the customer market. Just wondering what you might be thinking is going on with the product line.

Mark, I would say first off, in total, our Sealy total brand of Sealy Posturepedic Sterne and the value was down but less than the total as you would guess in light of earlier comments. Tempur was down considerably more. As it relates to the value-oriented line, that line is been out there for some time and we feel very good about upcoming launches and what's coming to market. So we feel good about the value-oriented business in the future.

Thank you. Our next question comes from the line of Budd Bugatch with Raymond James. Your question please.

Good morning, Scott and Barry. This is Bobby filling in for Bud. I appreciate you guys taking my question.

Good morning.

This is Scott.

Scott, can you maybe update us on your promo on advertising plans for the fourth quarter. And as a second part, Barry can you give us the outlook for the next six months, particularly steel and the phone right costs.

Yeah. If you'll promise me that I don't have any competitors listening in on the conference call, I'd be more than happy to walk you through my promos in detail. But in general, what I would tell you is I've called out some mistakes that I think we made in Labor Day. The teams worked very well together to come up with some corrections in those areas. And so I think what you'll see is a little different promotional activity. But at the same time, being very prudent, being very ROIC focused. I think a lot of where we can make improvements, actually is going to cost us very much money but the execution will be better. So I think that's all I'd like to see in detail. I'd be more than happy to update you when we poured in the fourth quarter with changes in detail. Barry, do you want to talk about commodities?

Yeah. From a commodity standpoint raw material, as I noted in the third quarter we had about a $3 million benefit from those that was completely offset by the FX headwinds. As we look forward into the fourth quarter in consistent with what we been thinking throughout most of the year the fourth quarter benefit would be minor maybe $1 million to $2 million. Incidentally as you look at FX rates equally with what's gone on the pound I would expect the FX would once again offset that benefit with the one or $2 million FX hit. And as I lookout beyond look we are not here to date to guidance for next year. We will speak about that on the next call. But to help you a little bit, from a planning posture, we'd always probably be a little bit conservative. If I had to do a budget today, I'd probably expected to be a little bit of a commodity headwind next year, but we've got a few months before that were in the early stages of our budgeting process.

Thank you. Our next question comes from Jessica Mace from Nomura. Your question please.

Hi. Good morning.

Good morning.

My question is on the kind of implied guidance for the fourth quarter or I think that you mentioned, you're expecting another sales decline to the five factors that you highlighted, in the third quarter, summer controllable and some are not. Can you just help us to think about what are the largest impacts that you are expecting in 4Q? Thank you very much.

Yeah I mean just kind of get everybody's level set. Our guidance for the full year is down 1% to 3% in sales. And if you squeeze the fourth quarter, I'm going to call the midpoint, wouldn't that be very, down 3.7. That would be the implied midpoint guidance. I think first thing to again, get of our base set on the same page, if you would ask me where we are today. And I don't normally do monthly sales trends, but I've always thought that when you have a trend change that it's worth talking about. Again, as we sit here today, the fourth quarter is running about flat from a sales standpoint. And that would be both a worldwide comment and eight U.S. comments. To be fair, if I take out floor models which are unique in the fourth quarter this year that Barry talked about we would be down 1% in North America as we sit here today. I think the other comment; I think I would say in the area to give everybody a full understanding is that when you talk about Tempur sales, Tempur sales are very volatile. And in a given week, Tempur sales could be up or down 20%, just to give you kind of a framework to think through. So, as far as estimating sales that makes it very difficult in a period where we've got a little bit of reluctant new finish going on in North America and we have our largest customer going to some transition. So that kind of gives you a framework. Then we just talk about the different factors look we think we have got promotional stuff knocked out. We did a deep dive, did some soul-searching. And I think we are much – we are much improved from a company, from that standpoint it will be spot on – on the promotions again that will be effective in the marketplace and certainly be supportive of other retailers. On the transition stuff -- transitional stuff, we are working closely with our largest accounts and will continue to work very closely with them and make the investments we need to in people and energy to make that transition successful. As to what is – what I'll call just the general strangeness of the third quarter and consumer durables which I called out which was not really just a mattress issue. I mean you can go listen to whirlpools appliance earnings call, automobile retailers; clearly the high-end consumer was nervous during the period. We are hoping that that gets better post-election and we hope that is more of an election issue rather than some kind of macroeconomic issue. So I guess the long answer to your question is the implied guidance at the midpoint is down 3.7% and we're running better than that. But it's highly volatile.

Thank you. Our next question comes from the line of Michael Lasser with UBS. Your question please.

Good morning, thanks for taking [ph] my question. Based on your comments Scott, it is the improvement thus far driven by some better results in the Tempur units? I think that better would now 8% in the area of focus. And my other question is, what you're overall view right now on customer acquisition costs and the direction that they are going advertising was up considerably between its -- not where you wanted them to be. You have to make adjustments over the next 12 to 18 months? Correct something like that.

First of all, your first question both Tempur and Sealy are performing better in the fourth quarter so far as compared to the third quarter. Having said that, Tempur is still slightly down to be fair. As far as advertising, certainly we had some deleveraging of advertising expenses during the quarter. Look, I think part of our job is to support our retailers and we will continue to be aggressive from an advertising standpoint, but certainly focused on our return on invested capital when it comes to advertising. But I don't see anything significantly changing from a business model standpoint on customer acquisition cost. I think we just have to be more effective with our message in the marketplace. Barry, do you disagree with any of that?

I think that's all, right on.

Thank you. Our next question comes from the line of Peter Keith with Piper Jaffray. Your question please.

Hi, thanks, good morning. I want to ask two questions just related to the Q2, Q3 sales weakness. Could you talk about the adjustable base business and if you are beginning to see any weakness with regard to the Tempur adjustable basis? And then secondarily given the success of the Stearns & Foster launch this year, have you contemplated that that might be cannibalizing your premium Tempur business?

Yes, and yes. Yes, the adjustable business, we are feeling some pressure in the adjustable business, and we are working on that. I expect we'll have some news for you over the next quarter or two from an adjustable standpoint. The other is some weakness in the adjustable business. As far as cannibalization, Stearns & Foster into Tempur, that's a hotly debated item internally. But look, I don't think there is any question that the high end of Stearns & foster and I would also say the high-end of Beautyrest Black business is probably cannibalizing and hurting a little bit of the lower end Tempur business.

Peter, I would just add that on the adjustable base business, if you look at it in total for Tempur and Sealy, we have seen nice progress, improving the Sealy adjustable tax rate and grown our business together with our retail partners . That's inclusive of some new products that launched earlier this year that are doing really well. And on the Tempur side, two things, one, adjustables are down and some of that obviously is just going to go with the decline in macros revenues. And then the attach rate as Scott referenced down some. Part of that could be the high end consumer being a little more challenged.

Thank you. Our next question comes from the line of Laura Champine with Roe. Your question please. Pardon me, Laura; please check your mute button.

Operator, we can go to the next question and she can jump back in the queue if she's available.

Our next question comes from the line of John Paul with Stifel. Your question please?

Thanks and good morning. Two questions quickly, one, with Mattress Firm or any other retailer for that matter, has there been any measurable change in your floor space? Could you give us an update on where the Stearns & Foster launches? And the second question is on the comment I think you made, Scott, around the guide lower a month ago. You spoke to being able to track promotional efforts with skewed performance within the Tempur line. I'm curious, with the changes you've already made in promotions, have you seen that gets less bad and I guess, would be the question.

Yeah, I think I hopefully I can remember all of those. Tempur Sealy -- Barry was writing them. From a floor space standpoint, there are floor space changes up and day up and down. Would say that my perspective is that we've had net increases in distribution from a floor space standpoint and would expect to continue to have increased distribution in the fourth quarter from what I've seen. On the Stearns & Foster, I think you asked about the status of the rollout. We've been building the last bit of the floor models with tran30.'s are rolling out currently. And by the end of the fourth quarter we will be fully rolled out in Stearns & Foster and most of those are going to our largest retailers stores. And as Barry said in his prepared remarks, it's unusual to have floor model expenses in the fourth quarter. So when you do a comparison, there is quite a bit of additional expense coming up in the fourth quarter for that, that we didn't have last year. Be careful with your EBITDA forecast just kind of a call out there. By the way, if you were to adjust our guidance in the fourth quarter, what I will call our squeezed fourth-quarter guidance, you would come up with what looks like a negative. And it is a negative, but what is in there and the reason its negativism the launch costs related to Stearns on foster. If you adjusted for that 13 million or so that Barry called out, you would find that our EBITDA growth rate is not dissimilar from what we experienced in the third quarter. And with that, Barry, I forgot the other five questions he asked?

Yeah, and John, hey, he stuck in a three-part question on our one question at a time. He asked about during the promotion period by SKU?

Oh yeah. I can do that even fab.

I mean couple of things, during the promotional period and the promotional period was about 30% of the quarter. But during that period, those 30 days, represented 60% of the decline that we are having to deal with in the third quarter. So first of all, let me point out it was during the promotional period where we really felt sales pressure. You asked about velocity of flat turns. No question, they've gotten better. By definition, when I tell you sales are running flat in the fourth quarter, although Tempur is down some and Sealy is up some, no question that it's improved.

I would agree with that. And John, the only other thing I would add is the next promotional period as we think about them is coming up soon. So we haven't had another promotional period. It's not a bit – it’s not every significant one in the scheme of things as compared to Labor Day but Veterans Day, Black Friday is coming up and those are the promotions that Scott was referencing that we've adjusted. And I guess the only other thing I'd add on to the first part of the question is, we have just been thrilled with how Stearns & Foster has been performing. It's up kind of double digits and that's despite much less distribution versus last year.

Thank you. Our next question is comes from the line of Curtis Nagle with Bank of America. Your question please?

Good morning. Thanks for taking my question. So Just a quick one on Sealy, Forgive me if this was address but what was your margin improvement there. And then I guess any updates you give on improving Sealy manufacturing base?

Yeah, I'll give overall and Barry will give you the details. I couldn't be happier with Sealy assembly. The margin is improving and it's got a lot of momentum and I think we've got a lot of upside going forward. So I don't think we're at the end of the journey on Sealy margins. When I look through the stats and I get them weekly, either it’s probably not a step – it’s not a step that I look at that isn't pointed in the right direction. That's turnover, that's quality, that's safety, that's margin, merchandising mix is better, labor cost are improved. So we got 160 or four-wall?

The four-wall contributed several million of the EBITDA up all over 100 basis points comparing significant improvement and continued opportunity going forward.

And the overall?

The overall, when you look at our total operations including the four-wall that contributed about call it $14, $15 million of incremental EBITDA year-on-year and that's excluding the benefit from commodities.

Yeah. I think one of the things for me that jumped out in the quarter, even though the sales were down and it was a sales decline, when you look at gross profit on a consolidated basis, our gross profit was actually up a little bit when we had declining sales, and realizing we had a unfavorable merchandising mix as Sealy did better than Tempur.

To add to that, our Sealy margin in the quarter was up in total inclusive of four wall operational improvements sourcing at better was up over 300 basis points year-on-year. And as I mentioned, we had a considerable advancement in EBITDA from operations. That includes great productivity out of our Tempur factories as well.

So I guess, I'm going to getting on that a little bit. So really think we did a great job from a manufacturing standpoint. When you realize that the sales decline that we experienced was unanticipated, and we were still able to right-size the operations so it didn't deteriorate from a margin standpoint. And I think the other part of your really gets to what we think about the future, and we haven't finished our 2017 budgeting and we're working through it. But as we sit here today, our expectation is that we've got more upside in gross margin in Sealy for sure, although, probably at a slower pace than we've experienced recently, and that we continue to have upside in gross margin at the Tempur operations also.

Thank you. Our next question comes from the line of Seth Basham with Wedbush. Your question, please.

Thanks and good morning. First a follow-up on an earlier response, specifically related to the spend for floor model reset and launch of $50 million for the fourth quarter. Is it appropriate to assume that if your launch timing was on schedule, your EBITDA would've been $50 million less in the third quarter? And then secondly, my question is around more color on the Tempur-Pedic North American unit performance. How much were they down and how much were the legacy units down relative to that number?

Let me take the first one and Barry, correct me if I'm wrong. I think there is -- the answer to that is yes, as far as your EBITDA in one of your other quarter would've been a little less. It probably would've been some in the second quarter and some in the third quarter. And so that I think that's true and fair. But I also think that because of the success of the product, the launch costs are much larger than we would have anticipated.

We are certainly getting more distribution.

Because it's more distribution and we really anticipated. So in total the launch costs are more than we anticipated.

And I would add that's not all Stearns & Foster As I mentioned , Seth, that's for rental distribution that we hadn't planned for Tempur predict as those store transitions, as Scott mentioned, as those stores transition to different flooring, we're seeing incremental Tempur distributional. From the last time talking to you all, we have more floor model discount plan than we had planned in the back half at setting up very nicely for 2017.

Yeah but from a timing standpoint that's part is fair, that's a fair callout.

Yes. I mean it's simple.

And what is the question?

On the units, look the Tempur units were, as I mentioned earlier down comparatively more. And our Sealy units are still down in aggregate, but less than the total.

Thank you. Our next question comes from the line of Carla Casella with JPMorgan. Your question please.

Hi this is Mei on for Carla. So, you were talking about extending your international presence. What do you see being your optimal geographic mix today? Today I think it's about 18% offhand. And just a another quick follow-up on that, do you still expect $75 million CapEx and picking up in the third quarter of 33 from run rate of about $20 million in tax.

Yeah you sound very sandbagging on CapEx. We'll talk about that in the second part. Internationally, when we talk about the mix, I assume you're talking more like a five-year timeframe. If you're talking like a time -- year timeframe, I expect international to grow more quickly than North America. So I would expect over time with international, EBITDA to be a greater percentage of the total pie over a period of time. But by definition with international I would also expected to be lumpy at times. What we actually have a lot of launch is going on internationally toward the end of the fourth quarter and the first quarter. So I really expect 2017 to be a year where we get probably more growth in the international sales line than we do in the North American sales line. And then Barry, do you want to talk about what your been spending in CapEx and what you been sandbagging?

Yeah, okay, were talking. So we are thinking it's probably going to be more like $60 million or maybe even a little beyond $60 million. That's kind of our current view. As it over when I would look at CapEx as compared to the DNA that goes within it as being CapEx would be roughly equivalent it’s not even below that portion of the DNA – DNA.

So will be that be in dollars?

I think you are the planning for something in this vicinity on a 60, 65 kind of on an annual basis.

Thank you. Our next question is comes from the line of Keith Hughes with SunTrust. Your question please.

Thank you. You referred earlier to 300 basis point gain in the Sealy family of products. That's nice progress. Would that be something we would expect for the next several quarters assuming sales are within your plan?

300% improvement?

I think we heard 300 basis; is that correct, I heard 300 basis?

That's correct. You know this is the way I would think about it is, we certainly were lapping the last of the easier comps, if you will. We started to flatten out and grow margin in Sealy, not to suggest that we didn't see considerable opportunity as Scott reference. The rate of – the rate of increase is probably going to come down some, but with considerable incremental opportunity. Now look, the other thing I point out is the Stearns & Foster nixing to be more of the total segment business is a positive to gross margin. It would get an incremental merchandising mix. But I would expect the rate of improvement there may be Tempur Sealy.

Yeah, I would add on a little bit and that we've got fourth quarter should be -- we've got a pretty easy comp there to step over. And when we get into 2017, what Barry said was absolutely right. Was one other item which would be the '17 Sealy launch and the success of that product will certainly, if designed right, margin improvement. And that would be a big factor when we are talking about '17 and we are talking about Sealy margin how that – how those projects perform would be key early indications are that the Sealy '17 looks – look very good and we're actually very bullish on that product line.

Thank you. Our next question is comes from the line of Kevin [indiscernible] with Citi. Your question please.

Hi, good morning, thanks for taking my question. I guess I was curious about your commentary about the basket vast – the additional basket in your credit agreements to be able to go up to 4.5 times. I'm not sure if I heard you call that all. I'm just curious where your stock prices, if you're thinking about maybe accelerating our leverage targets to at least the 3.5 times or perhaps beyond?

Yeah, now don't over read this on calling out of the baskets work. The leverage target is 3.5 and I don't anticipated changing as far as a target. But when we set that target. But when we set that target, we were also very clear that declines will be below it and above it. And I think that's still the strategy. If we find compelling investments we may run a little harder than 3.5 % and at times like we are today were 3.2% or something like?

Correct.

Yes. But I don't see any fundamental change in taking the target up that we would stay in accelerated levels from a long-term standpoint.

Thank you. We have a follow-up question from line of Curtis Nagle, Bank of America. Your question please.

Just a quick one on inventory, it looks like it was trending ahead of top line. I'm just curious what's...

Curt, I would look at inventory and say that days are little bit up and that's partly, I mean that's exclusively driven by the sales were fall. If you look at the cadence of sales in the quarter, we were planning obviously for more and with our Tempur as well as work in process -- raw materials, et cetera we build in advance of that. So days were up -- four days and you should see improvements in those metrics going forward.

Thank you. We have a follow-up question from line of Carla Casella with JPMorgan. Your question please.

Hi this is – again on for Carla. I was wondering if you could clarify for us [indiscernible] and availability in the quarter?

Sure, I mean we basically were at -- just a second while I take a look at something – yeah we were un-drawn.

Thank you. Ladies and gentlemen this concludes are question-and-answer session for today. I would now like to hand the call back over to management for closing comments, remarks.

Thank you. To the 7000 plus employees worldwide, thank you for what you do every day to make the Company successful. So, our retail partners, thank you for your outstanding representation of our brand. To our shareholders and lenders, thank you for your confidence in Tempur Sealy leadership team and its Board of Directors. This ends our call today. Thank you operator.

Thank you. Ladies and gentlemen, this concludes today's program and you can all disconnect. Everybody have a wonderful day.