Good day, ladies and gentlemen, and welcome to the Tempur Sealy First Quarter 2019 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference may be recorded. I would now like to turn the conference over to Aubrey Moore, Investor Relations. You may begin.

Thank you, Operator. Good morning, everyone, and thank you for joining in today's call. Joining me in Lexington headquarters are Scott Thompson, Chairman, President and CEO; and Bhaskar Rao, Executive Vice President and Chief Financial Officer. After prepared remarks, we will open the call for Q&A. Forward-looking statements that we make during this call are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that these forward-looking statements, including the company's expectations regarding sales, earnings, net income and adjusted EBITDA and anticipated performance for 2019 and subsequent periods, involve uncertainties. Actual results may differ due to a variety of factors that could adversely affect the company's business. The factors that could cause actual results to differ materially from those identified include economic, regulatory, competitive, operating and other factors discussed in the press release issued today. These factors are also discussed in the company's SEC filings, including, but not limited to, 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 statement. This morning's commentary will include non-GAAP financial information. The press release contains reconciliations of the 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 it over to Scott.

Thank you, Aubrey. Good morning, and thank you for joining us on our 2019 first quarter earnings call. I'll start with some comments on the quarter's operating performance, then Bhaskar will review the quarterly financial performance with you in detail. Finally, I'll wrap up with an overview of our long-term corporate initiatives. The year started off well. For the first quarter 2019, net sales were $691 million, an increase of 8%. Adjusted EBITDA was $93 million, up 8%. And adjusted EPS was $0.54 a share, a robust increase of 17%. This double-digit growth was driven by strong operating performance. I'm pleased with the overall performance of the team this quarter as the results were driven by their efforts across several different aspects of our business. This highlights one of the core strengths of the company, the diverse nature of our business platform. Now some highlights. First, we continue to see strong demand for our U.S. Tempur-Pedic products with sales growth of 38% and mattress unit growth of 50% during the quarter. We're just now completing our largest Tempur-Pedic rollout in the company's history, which we staggered over multiple quarters due to its size and complexity. In the first quarter of 2019, we introduced the highest price point product of Tempur-Pedic lineup, the TEMPUR-Breeze. With industry-leading technology from cover to core, the new formulation of these mattresses provide the ultimate Tempur-Pedic sleep experience for people who sleep warm or hot. Most importantly, we believe the new Breeze is positioned to accelerate ASP growth, mitigating the unfavorable merchandising mix that we've been experiencing since the widely successful launch of our entry-level Adapt and ProAdapt models last year. As you know, these products pressured our average selling price. We expect to complete the Breeze rollout by Memorial Day. Where these products have already…

Thank you, Scott. Before going into the details, a few highlights from the first quarter. Global net sales were $691 million, an increase of 8.4%, and we grew double digits on a constant currency basis. Gross margin was 40.8%. Adjusted operating margin improved 50 basis points to 9.2% of net sales. Adjusted EBITDA increased to $93 million, and adjusted earnings per share for the quarter was $0.54. Turning to North America. On a segment basis, sales increased 12%. The wholesale channel increased a solid 11%, and the direct channel increased a robust 36%. At a brand level, Tempur sales grew 37%, and Sealy was slightly down in the quarter. As Scott mentioned, U.S. Sealy bedding, which excludes our accessory business, grew 2% in the quarter, which is an improvement from prior quarters. As a reminder, our best-selling Sealy Hybrid launched in the first quarter last year. So we're pleased to report that against a difficult comp, premium Sealy products continue to perform well. North America gross margin was 37.6%, slightly unfavorable to prior year. The largest headwinds to gross margin included continued commodity pressure, floor model expenses and negative merchandising mix within the Tempur portfolio. While still negative year-over-year, Tempur's merchandising mix improved sequentially from the prior quarter due to the launch of a new high-end models. We expect this particular headwind to dissipate in the back half of 2019. These headwinds were partially offset by favorable brand mix as Tempur grew faster than Sealy and pricing. North America adjusted operating margin improved 70 basis points to 11.8% as compared to prior year. This was primarily driven by improved operating expense leverage as we phased our advertising to support to be later this year, following the completion of our product launches. Before turning to International, I would like to talk…

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 2018, we kicked off the launch of our most comprehensive and integrated product offering in Tempur-Pedic's history. This customer-focused portfolio allowed us to streamline our architecture with fewer SKUs organized in clear families based on key consumer benefits that provide strong differentiation and step-up stories. In North America, our Adapt and ProAdapt mattress line gained significant market share at a price point where we were previously underpenetrated. LuxeAdapt and our all new TEMPUR-Breeze models complete the Tempur-Pedic suite of products that are positioned to drive improved product mix for both third-party retailers and our direct-to-consumer business. We showcased a lot of innovation at the Las Vegas market in January with the launch of our Tempur-Pedic Breeze collection as well as our fully revamped Stearns & Foster suite of products. Both lines were met with great reviews. But we're not taking our foot off the innovation accelerator. Last quarter, we mentioned the sizable investments that we are making to develop and test new product opportunities that will complement our existing product lines, ensure that our brands continue to be the most highly desired in the industry. As you know, we are constantly pursuing new areas of consumer interest, and we balance these new ideas against each of our long-term initiatives. We're excited to disclose that we'll be in market testing three new innovative products: First, a cutting-edge, sleep tracker and monitoring solution; second, the most premium Tempur-Pedic mattress in history, featuring state-of-the-art active cooling technology; and finally, an all-new innovative Tempur-Pedic mattress in a box product. I'm confident that each of these new innovations will extend our leadership position by providing the most innovative bedding solutions…

[Operator Instructions]. Our first question comes from Bobby Griffin of Raymond James.

Congrats on a good start to the year. Clearly, a lot of costs flown to the P&L here with the incremental R&D investments and some of the new product launch costs. Bhaskar, can you maybe just help size some of the headwinds in North America gross margin for us where we can get a better and clear picture of the core operating performance?

Sure. Absolutely. Let's start off with the innovation investments first. As we pointed out, we're anticipating about $15 million for the full year. And the way think about that is we saw $1 million or $2 million in the first quarter. And how I think about the balance of that is pro rata for the full year - for the rest of the year. As I think about floor models, we did incur the - as we indicated on an overall basis, we would anticipate floor models to be flat on a year-over-year basis. However, when you think about our rollout last year, which is predominantly in the second and fourth quarter, is that floor models were a drag this year or a drag in the quarter. And if I think about from an order of magnitude, we had commodities which will be the biggest drag and then floor models would come in slightly after that.

And our next question comes from Michael Lasser of UBS.

Can you give us a little more detail on the Tempur and Sealy units in North America during the quarter?

Sure. As we indicated is that on the Tempur side, we saw growth on the Tempur brand revenue about 40%. However, on the unit basis, we feel good about what we're seeing is about 50% on unit. Sealy, overall, from a bedding perspective, we saw Sealy bedding grow on a dollar basis about 2%.

And our next question comes from Seth Basham of Wedbush Securities.

My question is around the new product that you mentioned, Scott, the Tempur-Pedic BedInABox product. Can you give us a little bit more color as to the price point of that? And how you expect to roll it out without risking cannibalization?

Sure. I mean, step back a second, we have quite a few BedInABox products within the family already. Obviously, we got Sealy to go, which is the low end. Then we got Cocoon, which is kind of the middle market. And what we're announcing today is TEMPUR-Cloud. We've been working on this for a couple of years. Anybody can make a bed in the box. It's taken us quite a while to make sure that we could make it a Tempur. And I think that's the highlight here is this is a Tempur that happens to be in a box. And I think when we see the product and test the product, you will conclude also that this truly is a Tempur bed. From an ASP standpoint, it will be in $1,799. You asked about cannibalization. This product won't have any cannibalization going through the direct channel. So we don't think we're going to have a merchandising mix issue. It's been tested in Seattle. And over time, we'll roll it out to some other high-density locations, major cities. I still believe that the bed in the box industry is generally a niche market, but there is quite a few units out there. There's some people who try to move upscale. And what we always said is we want a product and participate wherever the customers want to be, and this TEMPUR-Cloud products gives us that product in what I'll call the high-end compressed bedding industry.

And our next question comes from Keith Hughes of SunTrust.

Questions on the advertising. You guys characterize it's going to be back half of the year. Can you just talk what was the advertising year-over-year in the first? And then what it will look like once the year is fully completed?

Sure. The way I think about that is what we wanted to do was phase our advertising with the rollout of our new product. So on a year-over-year basis, advertising overall was essentially flat. And as I think about the balance of the year, we indicated that advertising would be up on a rate and dollar basis. So you should think about that as we think about the balance of the year.

And our next question comes from John Baugh of Stifel.

I was curious on the merchandising mix margin pressure that you, of course, have experienced for several quarters running and you mentioned that the participate has begun into the back half. Wouldn't it be a significant tailwind in the back half? And if not, why?

Yes. That's absolutely fair. So just a bit of color on that. What we did indicate is as the new products start rolling out, the high-end products start rolling out, we would see the merchandising mix starting to mitigate. We did see that in the fourth quarter, and we feel good about what we've seen in the first quarter. So you are absolutely correct that as we get in the back half, the tailwind - sorry, the headwind that we saw last year will be favorable as we get there.

And our next question comes from Curtis Nagle of Bank of America Merrill Lynch.

So just a real quick one on Sealy. I think you said now it's supposed to flat to up, which sounds like a step change to me from prior expectations. And if so, I guess, why is that? And just piggybacking on Keith's question on the merchandising mix, I think your prior expectations were basically flat, no tailwind in terms of the guidance. Is that still the case? Or kind of how you're thinking about how much mix could help you this year? And how much is in the guidance?

Yes. I'll start with it, and then I'll let Bhaskar fix it after I talk for a little while. First of all, on the Sealy, I think that's absolutely right. There is a small step change, and I think, on Sealy on growth this year. The reason why, look, our strategy on Sealy has been put the money in the product and make sure that we service our customers at a high level, and our service quality has been very good and our product quality has been very good, and it would appear that we're taking some share from our major competitor in that area in North America. On the merchandising mix, Bhaskar do you want to walk through that? I mean, which should point out that improved quite a bit during the first quarter...

Absolutely.

And we're starting to see more of that in the second quarter already. But go ahead.

Yes. Absolutely, too. Just buy back on things that we indicated prior is that the combination of pricing as well as merchandising mix, we did indicate would be favorable. If you were to unpack that and just look at merchandising mix in isolation, we would anticipate it being favorable in the current year.

And our next question comes from Matt McClintock of Barclays.

Scott, I'd like to focus on innovation because you really spent a good amount of time on - in the prepared remarks about that. Can you kind of give us a sense of the acceleration of innovation that's coming through the pipeline going forward? How to think about the cadence of innovation over the next several years? And then as you roll out these new beds and these new products, how do you think about the cost headwinds that we should expect? Are we going to get to a point where you're just constantly rolling out new products that we never - we're always comparing against cost. We don't ever get to really compare against costs. And then lastly, just the guardrails that you have, as you think about adjacencies that the consumer allows you to go into, how do you put those guardrails in place to make sure you don't overreach in terms of what the consumers is giving you credibility for?

You win the award for 45 questions in one, and Bhaskar is taking quick notes to see if we can remember what they were so we can try to answer them. We'll do the best we can. First of all, just talk about innovation. You got to start with the Tempur product, as you know, this was a complicated rollout over the last year. And we have successfully executed the North America Tempur rollout, which was complicated and successful. And the new Breeze product is really the final piece of that. And I think it will be very well in the marketplace. So it's - but that's obviously drove some of the quarter's performance. As you know, Tempur stays in the market for a while. So we're going to call that a major launch and usually good for four years. So you shouldn't expect that there's going to be another major launch for quite a while. On the Sealy side, we're on a normal rotation. The normal rotation now is three years rather than two. And I would highlight that this is the third year of Sealy, and we're seeing good performance. So that tells me that our strategy of kind of going to a three year launch. But when we do these launches make sure that they are innovative, and we got all the quality that we need in the product for to last three years is the right strategy. So they thought of having extra cost launch. Actually, I think, we're going by the way. We're actually reducing cost over a multi-year period, although certainly last couple of years we had quite a bit of launch cost. On the new innovation products that I mentioned in the prepared remarks, there won't be any significant launch costs relative to those products. Those are more niche products. Those are more halo products. And I don't see those as being major launch cost in 2020. We got a little bit of cost obviously this year to test these products because these are new products. So I think probably launch costs are probably going down as opposed to going up over the next 3 or 4 years is just kind of off the top of my head. What else was on his list, Bhaskar, that I might have missed? Guardrails, make sure that we don't overextend. Look, certainly, we look at that and we've got some small products outside of the main mattress setting business, but I think the group's pretty disciplined and I don't think we'll be chasing anything outside of our core competency.

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

Congrats on a great quarter here. Couple of housekeeping items, if I could here. For one, can you just give us an update on what inning you are in on the rollout of the Luxe and the Breeze where those stand? For two, could you talk a little bit about your current top line assumptions for North America and International as we think about this year? And then just kind of tying it altogether, given that you're still rolling out product and have a tailwind as it ramps, why couldn't North America further accelerate from the 12% that we just posted in 1Q? Any more context on how to think about top line would be great.

Okay. I'll do a little bit of that. First of all, since we haven't given revenue guidance, I don't think we said it couldn't accelerate from a top line standpoint. But from a rollout standpoint, the Stearns & Foster launch is on time, on budget. It's been a very smooth launch into the marketplace, and it's just been a great job by the team there, and we'll see the most benefit to that starting really in the second quarter. On the Tempur rollout of Breeze and the Luxe what you asked about specifically, Luxe has been rolled out. And that rollout is complete on time, on budget. And the Breeze rollout is going to be completed by Memorial Day. No issues on that rollout, and it's gone as scheduled. So we would expect those products. Breeze primarily will be the primary product to ramp up during the year.

Yes. I think the only thing I would add would be a couple of things. As you think about, as Scott said, we don't give guidance from a sales perspective, but a couple of things to think about. I think, we did indicate that Tempur, we would expect it to grow. And what we'd anticipate is that the majority of that growth would come in the front half of the year. If you look at what happened in 2018 with the Adapt and ProAdapt rolling out, we saw very nice growth rates in the back half. So overall, we would anticipate growth for the year; however, with the majority of it coming in the first half. More broadly speaking, we also indicated that from a Sealy perspective is sitting here today and the strength that we have seen in the brand in the first quarter whereas we saw that being perhaps a headwind for us from a sales perspective isn't that we now anticipate that being flat to slightly up for the full year.

Now I would mitigate those comments just a tad because I think make sure everyone understands it. That's assuming there's no new distribution in North America, your comments on growth rates on Tempur.

[Operator Instructions]. Our next question comes from Peter Keith of Piper Jaffray.

It's actually Bobby Friedner in for Peter this morning. Just on Mattress Firm, so hypothetically, if Tempur and Mattress Firm were to start doing business again, can you help us think about the time lines? Or how long would it be to place product back in Mattress Firm stores from the time of an announcement? Would it be like three months, six months, longer than that? Any color you can provide there would be great.

Sure. I'll give you some color, but obviously, it's total hypothetical. So I'll do the best I can. Because when you talk about a rollout, usually, the biggest issue is what can the retailer do. And what velocity can the retailer floor the beds. So it's not generally all within the manufacturer's control. But in general, when you think about 2,500 stores, it would be a phased rollout, and it's going to take you probably - it depends on the timing year, seasonality and those kinds of things. And again, how the retailer is structured to perform rollout. That's probably going to take you six months from probably beginning to end would be my guess, but that gives you something to kind of work with.

And our next question comes from Carla Casella of JPMorgan.

I'm just wondering on the - given the changes you're making in terms of adding some new doors, changes in some of the buying, one retailer potentially going into Mattress Firm. If you just look at your overall wholesale retail balance today, where would you like that to be in few years?

Yes. Great question. I think we're at what 11% or so direct versus wholesale. I point out both wholesale and direct grew during the period. So I kind of define that a successful execution of an omnistrategy. I do think that direct business probably has more tailwinds behind it than the wholesale business. And I could see as going to 20% maybe worldwide direct versus wholesale, but clearly wholesale, we'll call it, say, target 80% is still going to be the largest share of the business.

And our next question comes from Karru Martinson of Jefferies.

Just in terms of the petition on the imports, can you walk us through what happened in terms of a preliminary decision? Whether it's in your favor or not? Does that get appealed? And does that affect the import cycle? And then when does it - if it goes through, when would tariffs be levied on or antidumping duties levied on to those products?

Yes, I'm not going to touch that one too far because it gets into a whole lot of the regulatory environment and the lawyers and quite frankly that's not my total expertise. I would point you towards maybe Leggett's call. I think, they're a little more granular on their disclosure. But my understanding is that we will expect the preliminary ruling in the second quarter. And if things went kind of as they would expect, we would expect some tariffs possibly in by the end of the year. And that's about as much detail as I'm capable of giving you on that topic.

And we do have a follow-up question from Seth Basham of Wedbush Securities.

Just following up on the 1Q revenue growth in Tempur as well as Sealy, could you give us a sense of how much of that revenue growth was driven by sell in as opposed to sell-through of product?

Sure. I believe you're speaking to floor models. What I would say is, is that both on the - let me answer like this. Overall, it cost us about 1% of growth. So with that, we'd put aside is Tempur still with very strong growth. And Sealy, where we were saying 2% on the bedding, it would be about 1%.

So what you're saying is you take floor models out of first quarter last year and take floor models out of first quarter this year. It cost us about 1% of the growth, right?

And we do have another follow-up question from Curtis Nagle of Bank of America Merrill Lynch.

So I guess, not to divulge too many secrets here, but what exactly does active cool mean? And do you guys expect to show the new bed in late July in Las Vegas?

Active means there is air blowing through the bed to create the cooling rather than passive, which does not have air blowing through the bed. The active Breeze product will be in the marketplace in the third quarter at select locations.

Thank you. 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.

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 leadership team and its Board of Directors. This ends the call of today. Thank you.

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