Good day, ladies and gentlemen, and welcome to the Tempur Sealy Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Ms. Aubrey Moore with Investor Relations. Ma'am, you may begin.

Thank you, operator. Good morning, everyone, and thank you for participating in today's call. Joining me in our Lexington headquarters are Scott Thompson, Chairman, President and CEO; and Bhaskar Rao, Executive Vice President and Chief Financial Officer. After prepared remarks, we will open the call for Q&A. Forward-looking statements that we make during this call are made pursuant to the Safe Harbor provisions of the Private Securities and Litigation Reform Act of 1995. Investors are cautioned that these forward-looking statements, including the expectations regarding sales, earnings, net income, and adjusted EBITDA, and anticipated performance for 2018 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, the company's Quarterly Reports on 10-Q under headings 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. The company's commentary will include non-GAAP financial information. The press release contains reconciliations of these 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 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, Aubrey. Good morning and thank you for joining us on our 2018 second quarter earnings call. I will start with some comments regarding our progress in resetting the foundation of our company and positioning us for long-term earnings growth. Then Bhaskar will review our quarterly financial performance with you in detail. Finally, I'll wrap up with our review of our long-term corporate initiatives. Our overall results for the quarter fell short of our expectations. We continue to progress on positioning the company to create shareholder value over the long-term. In North America, I'm especially proud of our performance of our new Sealy Hybrid and Tempur product lines. Our gross margin and the continued build out of our direct channel, all of which I'll discuss in more detail. First, our initial round of our new products in North America are now mostly rolled out and are performing significantly above our expectation. The first phase of our Tempur-Pedic launch includes six new Adapt and ProAdapt mattresses, all in our entry-level price band of $2,000 to $3,000. This is a large segment in the bedding market and we have not performed well in recent years. Following the launch of our new products, we believe we're gaining significant market share in this price range. In fact, to give you perspective, in June, we sold almost as many Tempur units this year as in June 2016, we had Mattress Firm as a customer. That is nearly a 100% recapture on a unit basis. On the Sealy side, our Hybrid products were launched in the first quarter and continue to perform well in the marketplace. In fact, it is a bestselling Hybrid in Sealy's history and is growing our Sealy's share in the above $1000 price band. Our retail partners understand that providing customers…

Thank you, Scott. Before going into the details, a few key financial highlights from the second quarter. Global net sales were $670 million, an increase of $10 million versus the prior year. Gross margin improved 50 basis points to 41.2%, adjusted operating margin improved 70 basis points to 9.3% of net sales, adjusted EBITDA increased $5 million to $91 million, and adjusted earnings per share for the quarter was $0.52. On a segment basis, sales in North America increased slightly with Tempur increasing 9% and Sealy being down 5%. Our North American wholesale channel was consistent with the prior year and the direct channel increased 14% in the quarter. North American gross margin improved 60 basis points to 38.5% as compared to the prior year. This was driven by operational improvements, pricing, and positive brand mix as Tempur grew faster than Sealy. This was partially offset by large commodity increases and incremental cost from our product launches. As a reminder in response to significant commodity inflation, we announced our first price increase in the fourth quarter of 2017 that went into effect in mid-March. As commodity prices continue to rise this year, we announced a second price increase, which will go into effect in the fourth quarter. In addition, due to the robust demand for our new Tempur products, we recently announced a price increase specific to these mattresses that will go into effect in the fourth quarter of 2018. If the fourth quarter price increases had been in fact, we estimate we would have realized an incremental $10 million of EBITDA in the quarter. This demonstrates our pricing power can offset the commodity inflation we are currently absorbing. North American operating margins improved 160 basis points to 12.2% as compared to the prior year. This was driven by operating…

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. As I mentioned previously, in North America, we launched our new TEMPUR-Adapt and TEMPUR-ProAdapt mattresses, pillows and bases. The new Tempur-Pedic products feature Tempur-APR, advanced pressure relief technology, a breakthrough formulation that delivers two-time the pressure relief benefits to ordinary memory foam, are also unlocking a broader range of feels for the customer. We've also launched our new Sealy Hybrid, which was precisely engineered to deliver the perfect balance of comfort and support, which has been extremely well-received by consumers and continues to take share in the marketplace. Later this year, we'll launch our new Tempur LuxeAdapt mattresses. Luxe offers the ultimate Tempur experience with maximum pressure relief power, superior motion cancellation so you can fall asleep faster, easier, deeper and a more enjoyable than ever sleep. At $3,909, the LuxeAdapt rounds out our Adapt collection of mattresses, which will be showcased next week in Las Vegas Furniture Mart. The Luxe is highly anticipated by retailers as a means to drive higher ASP in their stores and expect to build on the momentum we created with Adapt and ProAdapt models. Looking ahead to 2019, we're incredibly excited to launch the all new Tempur Breeze products, featuring the most innovative cooling system in the market. The market is in the final stages of development and we expect the new Breeze to be a big winner at retail and to drive our and the industry's ASP as Breeze is the highest-priced product point at most retailers. For all of our new Tempur and Sealy models, we've invested heavily in both from an R&D standpoint and in terms of higher quality components to deliver true value to the marketplace.…

Thank you. And our first question comes from Peter Keith with Piper Jaffray. Your line is now open. Peter Jacob Keith - Piper Jaffray & Co.: Hi. Thanks. Good morning, everyone. I wanted to ask about the sales trend during the quarter, because there was a pretty wide disparity between the Tempur growth up 9% and Sealy declined it of negative 5% in North America. So, just breaking those apart I'm curious if the Tempur sales, did you see acceleration as the quarter progressed with new products in the marketplace? And then on Sealy, was it weakness throughout the quarter, or did you see an isolate to some of the holiday periods? Thank you.

Good morning, and thank you for your question. Certainly, Tempur continues to perform very well and as the new products were rolled out showed strength. Sealy actually started the quarter above last year and then weakened during the quarter.

Thank you. And our next question comes from Curtis Nagle with Bank of America. Your line is now open.

Yeah, thanks very much for taking the question. Maybe I'll just piggyback off of Peter's question, but just a little more specifically on Sealy. I understand that the Hybrid is doing well and it's been very well received, but just kind of thinking about the other segments and how did they perform? I guess clearly the low end is doing poorly or at least soft due to some of the issues you called out, but Stearns & Foster is that still doing reasonably well and was Comfort Revolution an issue for sales this quarter as it was in, I think, the fourth quarter of last year?

Thank you for your question. Let me unpack Sealy a little bit for you. First of all, you're right from a price band standpoint, Sealy over $1,000 certainly did better than Sealy below $1,000. That's a trend we've talked about before and that trend continued. The other thing that we saw in the second quarter is as the Tempur product was rolled out certainly the Sealy Conform product took a significant downturn, so we had some we'll call it shift up into Tempur product from the Sealy Conform. That was a new trend that we had not experienced in the Sealy line really until the new Tempur rollout. We continue to feel a little bit of downward pressure from department stores, which we've talked about that before, this is probably the last quarter that that's should be a big compare because the compare from a department store standpoint gets easier when you get into the third quarter. On the positive side, the Sealy and you mentioned one of them Sealy Hybrid continues to do very well in the marketplace. Clearly, the best performing in Hybrid in Sealy's history. And as we also mentioned, we're working with the alternative channel area and we're seeing strong sales in alternative channel growing at 30% plus. So, we've got some puts and takes in the Sealy brand portfolio.

Thank you. And our next question comes from Bobby Griffin with Raymond James. Your line is now open. Bobby Griffin - Raymond James & Associates, Inc.: Good morning, everybody and thank you for taking my questions.

Good morning. Bobby Griffin - Raymond James & Associates, Inc.: Thank you. At the EBITDA guidance, it looks like it was reduced by about $25 million at the midpoint and commodities now are about $50 million of a headwind versus $45 million at the end of 1Q, is there anything else besides the competitive pressures that resulted in the kind of reduction at the midpoint, or is it solely just incremental discounting from Mattress Firm and the import headwinds that we've been hearing about for the last couple of months?

Sure, sure. Let me see, if I can help you with some of that. Clearly, commodities I think what you're asking is what's changed. Clearly, we had more commodity headwinds than we expected when reconciling between the guidance. Clearly, Sealy has performed less robustly than we expected. Its decline was a little bit greater than we expected. We called out in the script self-inflicted that our Tempur launch was slightly delayed and that costs us some sales. Anything else Bhaskar you can think of that we called out either in the prepared remarks or that you would kind of reconcile in the guidance.

I'd say Bobby, you've hit it with the – with what Scott has said, the Mattress Firm, the continuing of that relationship or that behavior and then the pressure on the low-end.

Yeah. The only other rock I can think of in that bridge would be the International group slightly underperformed. When you kind of dive into it that's really more of a Germany issue, and then if you go into that country, that's really more of a country specific issue as opposed to an execution issue, they're working through. That would be the only other – every other area performed well internationally, especially Asia and Asian joint venture.

Thank you. And our next question comes from Brad Thomas with KeyBanc Capital Markets. Your line is now open.

Thanks. Good morning. I wanted to zoom in on the Tempur North America business and hoping Scott, if you could talk a little more about the trends in terms of the units, the average selling price, how much pressure was there from some trade down to the new models? And then when we look forward, how should we think about the timing with which some of that trade down might start to reverse with the cadence of rollouts that you guys are looking ahead to?

Sure. Just to kind of ground set everybody, the ProAdapt and Adapt unit volume has exceeded our expectations by a good bit. Some of that is taking share and then some of that has been cannibalization. And although, we planned on cannibalization when we rolled the product out that cannibalization has been greater than we expected and that's hurt the Breeze and the Luxe line. That cannibalization is going to be in the marketplace as I've said as we expected until we get the full line rolled out. We have moved forward the Luxe launch some. And so, we're going to get that out in the fourth quarter. So, we'll pick up, part of the cannibalization will be fixed through that process and then Breeze will come out first quarter and then this issue would be behind us. We also have taken some other actions as we talked about in the prepared script. We've raised the prices, which is relatively unusual right after a launch, but the launch was so strong and the volumes were so strong that we moved the price up $200 unit both on Adapt and ProAdapt to help with the cannibalization and quite frankly to help the retailers with ASP problems that retailers are having, in general, in the industry.

Thank you. And our next question comes from Seth Basham with Wedbush Securities. Your line is now open.

Thanks a lot, and good morning.

Good morning.

My question is a follow-up on Brad's. Just trying to understand how much in terms of EBITDA, the cannibalization effect cost you this quarter? And what your anticipation is for the cost for the full year?

Seth, we don't have a detailed number for you. But I think I would characterize it as significant, Bhaskar. How would you – I characterize it significant. But I would tell you that the price increase mitigates that issue. And I should point out that that's the third price increase we've done this year, which continues to demonstrate our ability to pass on price, strength the brand, and pass on commodity cost in the industry. Two of those price increases have been followed by the other large manufacturer in North America. And our third one really just got out, so we'll see what happens in the future.

Thank you. And our next question comes from John Baugh with Stifel. Your line is now open. John Allen Baugh - Stifel, Nicolaus & Co., Inc.: Thank you. Good morning. I was curious on the International side, you touched on Germany, maybe you could go into that a little bit. And then, I think there was a reference to a mix shift negative in International, affecting margins. And then of course, I was saying on International, the EBIT, I guess, was down adjusting for the accounting of the royalties. Could you go into just a little more detail about precisely what's going on in the International EBIT, and what the prospects are for the remainder of this year and next year? Thank you.

Sure. I mean, first of all, obviously we're in lots of countries and that I have always talked about International is a little bit of a rock-and-roll and throughout the world, in general, International is performing very well with the exception of Germany. And then we're having some headwinds, and we got Latin America as we restructure and rethink about how our Latin American businesses should be run and then move those to a licensee format. So that's got a little indigestion. But that's going to work itself out here in the next quarter or two to a much better structure I think. Going back to Germany, Germany has become a more competitive market. There's been some international pricing in the marketplace and we're working through some new business plans in that area. Germany was a problem, I'm going to say a couple of years ago, that was a little bit self-inflicted. We got that business turned around and Germany was growing and performing, but here recently we've run into some other headwinds. And Bhaskar clean me up on this. But my recollection probably is some of the product issues really has to do more with Germany, because Germany is a high-profit country at high end and when you – we're a little weaker in Germany, you probably feel bad.

That's correct. It's country mix.

Thank you. And our next question comes from Bob Drbul with Guggenheim Securities. Your line is now open.

Hi. Good morning. Just a couple of questions, I think you mentioned a new retail relationship and I think, it was International, but can you expand upon either who that is or the sort of the demographic that you're targeting there? And are you seeing in terms of some of these pressures in the promotional environment and the dumping of Chinese product, are you seeing either of those really abate at this point in time?

Sure. Great question, although not material, we did acquire some retail stores in Stockholm, it's an entity called SOVA. It is a high-end retailer. Clearly, a premium sales experience, premium bedding and we formed a joint venture with some – a very talented management team there that needed some capital. And I don't think it'll be material to the consolidated financials or the International group. But we're thrilled to be partners with them. We're thrilled to have some additional retail talent that knows how to retail beds at the high end. So that's the demographics and you might think about it a little bit like our Tempur flagship stores in North America, premium bedding, premium experience. And we continue to work in that area worldwide, because that's where we really think the Tempur brand belongs. When you go into the Chinese import issue, I think, if you go back a couple of years we were not very focused on the alternative channels. The Chinese imports, we're very focused in that area. We have refocused some of our sales team energy into the alternative channels. And as I mentioned to you in alternative channels, we grew north of 30%. So, I think we're in the game. I think that actually we'll make quite a bit of progress in that area over the next couple of years. The alternative channels are looking for alternative distribution, because they obviously have some country risk with their single sourcing from China. And I think we can be competitive in that marketplace. I should also mention that the alternate channels have reached out to us and they're very interested in branded products. So, we'll work through that, the margins in that channel are at fleet average. So, it's an interesting area for us, but we were late to the party in that channel and we're working hard to catch up.

Thank you. And our next question comes from Laura Champine with Loop Capital. Your line is now open.

Thanks for taking my question. Scott, I think you referenced three price increases already this year. What's your confidence that, that raising prices in this fashion won't lead to a deterioration in your mix that offsets the price increases you're trying to push through?

Yeah. I mean, yeah, great question. I mean when you look at our price increases, you obviously – you know we can't do it alone, you have to look and see what the industry is doing. Price increases have been aggressively followed by other large manufacturers, even in areas where you look at like bed-in-a-box, they clearly are feeling commodity pricing issues too and they've been trying to move price up. So, I think we feel pretty good about the ability to move up and what we've done so far. Also, if you really unpack it and you look at the price increase, what is it Bhaskar, 8% maybe.

That's right.

Maybe it's 8% on a bedding unit. It's really not material to our customer and we're not seeing – we don't think there's any deterioration of volume and the price increases are generally going across the entire line, so with the exception of what we just did in order to deal with cannibalization. So, I don't think we're expecting any mix issue. But all the furniture bedding people are dealing with commodity issues and have a history of being able to pass those costs through.

Thank you. Our next question comes from Michael Lasser with UBS. Your line is now open.

Good morning. Thanks a lot for taking my question. It's a multiparter. First, you discussed some of the aggressive promotional activity at Mattress Firm. What have you assumed about that activity continuing within your guidance. So, have you assumed that it will be less impactful over the next couple of quarters in order for you to get to the numbers that you put out there? Two, can you give us an update on the potential for a reconciliation with Mattress Firm, particularly because as you rightfully pointed out your products are still so much more profitable to your retail partners. And three, do you think, there's a point at which you can push price too high, and it would be more disruptive to the industry? Thank you.

I'm writing as fast as I can for your five questions into one. And I'll try to do the best I can on it. Look, first of all on guidance. Any time we do guidance we stress test a model with all kinds of different assumptions good, bad, ugly, trying to find what is a very appropriate and reasonable guidance range. And I would just tell you, in general, in setting guidance, we take current trends and environment into consideration, and unless we have a reason to believe that those current trends are going to change, we wouldn't change them in the model. I think that's probably the best way to answer that. And Bhaskar, you're going to have to help me with some of the questions see if I can remember them.

Sure.

The next question was the potential for a reconciliation with our friends at Mattress Firm. And look I think, I've been clear on this from the very beginning. We have a great relationship with Steinhoff worldwide. We do wonderful business with them all over the world. And I would tell you that those relationships outside of the United States are stronger today than they've probably been in the history of the company between Steinhoff and Tempur Sealy. So, first of all you have to kind of divorce the international piece and you just go back to Mattress Firm. Mattress Firm, they're a competitor. But at the same time, we said, look we're in the business of selling beds, that's our job. There's no scar tissue to the divorce and we would treat them like any other customer, who wants to sell our products and they would meet the same three criteria we put every customer through when they show up. One, can you pay me, because it doesn't do any good to sell beds to somebody who cannot pay you eventually. So, there's a financial test. The next thing you look at is strategy, and what are they going to do with your brand and does their long-term strategy align with your long-term strategy. You're not going to sell branded high-quality products into an environment, if all they're going to do is use the brands to pivot people to private label and low value products. So, we do that with every retailer that shows up, we make sure that their long-term strategy and our long-term strategies align up, we would put them through that filter. And the third one is, you look at the team and the management team. And then if you believe in those people and their ability…

Thank you. And our next question comes from Carla Casella with JPMorgan. Your line is now open.

Hi. Did you say that the China that you mentioned some low cost, low priced product being dumped from China? Is that – Have you seen that abate at all? And do you think that tariffs have, do they have a greater impact on you and others as domestic manufacturers versus those goods coming in from China?

Well, I will say some people say they are dumping products. I'm not – I don't have enough evidence to know that, but certainly there's some indication that there is dumping, so let me clean that up just a little bit. We have not seen any abatement of the issue to answer that question directly. And when you look at tariffs worldwide. And obviously, it's a changing environment and you know one tweet could change whatever I'm fixing to say but based on what we know today and based on the most recent tweets as I understand them, I don't think tariffs are going to be a significant issue for Tempur Sealy on a worldwide consolidated basis. But let me unpack that a little bit for you. In Canada, we will have some minor negative impact on tariffs as we do import some Tempur beds, but you're talking a few million, not anything material. When you look at the Chinese import issue, we should be benefited, we should benefit from tariffs on bedding coming out of China in general, probably in the Sealy brand, I would guess, hard to believe but that would be a net positive. And then, I'm going to call I think the net neutral, we do import some adjustable bases from China, which would get caught up in some tariffs but if I look at the adjustable base business, the lion's share is probably north of 75% of adjustable bases come out of China. So, I imagine the industry will just pass on the tariff cost on adjustable base that's kind of how we see the tariffs today. So, I'm going to say net neutral to maybe a slight positive depending on how the Chinese foam issue to the extent that there is any anti-dumping activity. I think that's a different issue than tariffs and I'm not in a position to comment on it or really fully analyze that at this point.

Thank you. And our next question is a follow-up from Peter Keith with Piper Jaffray. Your line is now open. Peter Jacob Keith - Piper Jaffray & Co.: Hi. Thanks. Hello, again. So, maybe for Bhaskar just two clean-up questions with some numbers for our model. At the beginning of the year, you had a $10 million – up to $10 million EBITDA shift out of Q1 into Q2. I wonder if you could frame up exactly how big it was at this point? And then secondarily, $12 million of incremental launch costs with Q2 and Q4, how can we break that apart between the two quarters looking back and what you saw in Q2? Thanks a lot.

Sure, sure. As I think about launch cost for the full-year is we're still looking at about $12 million for the full-year. And the way I think about it is that we've got a little bit more in half that we've seen so far and in conjunction with the launch of our next phase, which will be the Luxe in the fourth quarter, I would anticipate the balance of the launch cost to be incurred. Moving on to that transition item, you are correct, 2018 as we pointed out was going to be a very, very noisy year with floor models coming in and out and as our retailers are transitioning the floor. What I will say is that we saw the transition and what I'm pleased to say is that we're very happy with the performance of our Tempur with growing in the U.S. at 10% and as Scott said, the majority of that launch is behind us. So, we're looking at that in the rear-view mirror.

Thank you. And ladies and gentlemen this concludes our question-and-answer session for today's call. I would now like to turn the call back over to Scott Thompson for any closing remarks.

Thank you, operator. Look, we're really excited about the quarter's performance. We've demonstrated our pricing power. We see the new volume of our new Tempur products are doing very well. We've got the pillow business turned around, we've got the base business turned around, the management team at the plants that – and logistics did an outstanding job of protecting our margins, during an interesting quarter. We successfully implemented ERP system in Canada and not very many companies get that done successfully. Our retail stores are continuing to perform above our expectations and we're making significant organizational changes internationally to drive long-term growth. So overall, we feel very good about the report. So, thank you. With almost 7,000 employees worldwide for everything you do to make this company successful. Thank you to our retail partners for your outstanding representation of our brands, to our shareholders and lenders. Thank you for your confidence in Tempur Sealy's Management and Board. This ends the call today. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone, have a wonderful day.