Good day, ladies and gentlemen, and welcome to the Tempur Sealy Second 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 your host for today, Aubrey Moore with Investor Relations. 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 CFO. After prepared remarks, we will open the call for Q&A.Forward-looking statements that we make during this call are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that these forward-looking statements, including the company's expectations regarding sales, earnings, net income and adjusted EBITDA and anticipated performance for 2019 and subsequent periods, involve uncertainties. Actual results may differ due to a variety of factors that could adversely affect the company's business. The factors that could cause actual results to differ materially from those identified include economic, regulatory, competitive, operating and other factors discussed in the press release issued today. These factors are also discussed in the company's SEC filings, including, but not limited to, annual reports on Form 10-K and the company's quarterly reports on Form 10-Q under the heading Special Note Regarding Forward-Looking Statements and/or Risk Factors. Any forward-looking statement speaks only as of the date on which it is made. The company undertakes no obligation to update any forward-looking statement.This morning's commentary will include non-GAAP financial information. The press release contains reconciliations of this non-GAAP financial information to the most directly comparable GAAP information, except as otherwise discussed in the press release as well as information regarding the methodology used in our constant currency presentations. We have posted the press release on the company's investor website at investor.tempursealy.com and have also filed it with the SEC. Our comments will supplement the detailed information provided in the press release.And now with that introduction, it is my pleasure to turn the call over to Scott.

Thank you, Aubrey. Good morning, and thank you for joining us on our 2019 second quarter earnings call. I'll start with comments on the quarter's operating performance, then Bhaskar will review our financial performance with you in more detail. Finally, I'll wrap up with an overview of our long-term corporate initiatives.A strong momentum from earlier this year continued into the second quarter and beyond. In fact, from adjusted EBITDA perspective, the second quarter was just short of our best second quarter in the company's history. For the second quarter 2019, net sales increased double-digit.Adjusted EBITDA grew 21% and adjusted EPS was $0.79 a share, a robust increase of 39%. The adjusted EPS growth was driven by growth in operations not share repurchase. Our results have been propelled. Our premium brands in our industry-leading product quality and services combined with our powerful worldwide omni-channel platform.Now some highlights. First, we grew our relationships with existing third-party retailers in North America. During the quarter, we grew North America wholesale channel by 7%, including significant growth from our Tempur-Pedic brand, which was benefited from the strength of our new TEMPUR-Breeze products.As a reminder this is the first quarter that our full lineup of the new Tempur-Pedic products were in market. These new products continue to receive rave reviews on the basis of their innovation and product quality. Total North American Tempur-Pedic sales grew 17% in the quarter and excluding floor models grew 30%. Clearly, we're expanding the high-end mattress market and taking a good bit of market share.Sealy, including Stearns & Foster, continued to outperform our expectations during the quarter, growing 7% versus the second quarter last year. We were particularly pleased that the Sealy growth was broad-based across all price points. The Sealy Hybrid continues to perform exceptionally well, even against very difficult…

Before going into the details, a few highlights from the second quarter. Global net sales were $723 million, an increase of 10%. Gross margin was 43.4%. Adjusted operating margin improved 200 basis points to 11.6%. Adjusted EBITDA increased 21% to $113 million and adjusted earnings per share for the quarter was $0.79, an increase of 39%.Turning to North America. First, I would like to discuss some financial reporting items. As previously announced, we've acquired Sleep Outfitters which was fully integrated into North American direct channel beginning in the second quarter. Sleep Outfitters had historically been one of our -- part of our wholesale channel since they were previously a third-party retailer. Accordingly, this impacts our growth rates within both channels.In addition, our GAAP operating income in North America was impacted by changes from post-acquisition restructuring activities and professional fees. We do not expect further pro forma charges related to Sleep Outfitters. North American net sales increased 11%. On a reported basis, the North American wholesale channel increased 7% and the direct channel increased 78%. Excluding sleep outfitters, the wholesale channel increased 10%.North American gross profit margin improved 230 basis points to 40.8% as compared to the prior year. This was primarily driven by favorable brand and Tempur merchandising mix, pricing benefits and decreased floor model expenses. This was partially offset by incremental over time at our plants due to the higher-than-expected demand for Sealy products.Going forward, we expect Tempur merchandising mix to continue to be favorable, marking the end of negative mix, which we had experienced in 2018 due to the space launch. North American adjusted operating margin improved 170 basis points to 13.9% as compared to the prior year. This was primarily driven by improved gross margin and slightly deleverage to operating expenses from the integration of Sleep Outfitters.Turning…

Thank you, Bhaskar. Great job. Turning to our long-term corporate initiatives. First, developing the most innovative bedding products in all the markets we serve. In the second quarter, as I mentioned, we finished the North American launch with our all new Tempur-Pedic Breeze line up. This completed the largest Tempur-Pedic rollout in the company's history.With industry-leading technology from core to cover, the new formulation of these mattresses provide the ultimate Tempur-Pedic sleep experience. Most importantly, the new Breeze is positioned to accelerate ASP growth and drive improved product mix for both third-party retailers and our direct-to-consumer business. So far the Breeze products are doing what we thought they would do, improving Tempur product mix.As an example, Breeze represents almost 40% of the mattress units sold in our Tempur-Pedic retail stores. This is helping drive same-store sales growth of 29% for the quarter. Last quarter we introduced three new innovative products that are being tested in the market. First, the cutting-edge sleep tracker and monitoring solution. Second, an all-new innovative Tempur-Pedic mattress in a box product. And finally, the most premium Tempur-Pedic mattress in history, featuring state-of-the-art active cooling technology. These opportunities complement our existing product lines.Although we do not expect them to be meaningful -- meaningfully benefit the sales or EBITDA in 2019, they ensure our brands continue to be most highly desired in the industry and they are expected to contribute in 2020. All three products are in market with limited distribution for continued evaluation throughout the year.Now turning to our second long-term initiative. To invest significant marketing dollars to promote our worldwide brands. We continue to make progress in reaching customers more efficiently across media channels wherever they wish to engage. We're complimenting our mass media tactics with improved digital media programs that allow more unique one-on-one interactions.…

Thank you. [Operator Instructions] first question comes from Seth Basham of Wedbush Securities. Your line is now open.

Thanks a lot and good morning.

Good morning.

Congrats on a good quarter. My question is on the outlook. You guys raised the EBITDA outlook for the year. I’m just hoping to understand a little bit more some of the moving pieces in the back half of year. First is related to Sealy, do you expect the strength to continue or deceleration. Second as it relates to some of the cost associated with Big Lots and Mattress Firm. You mentioned a $5 million headwind. What’s the gross number you’re expecting in incremental cost for the back half of the year. Thank you.

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

Correct.

And I think as I said in the call, it is continued and we would expect that momentum to continue for a good while.

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

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

Thank you. [Operator Instructions] Our next question comes from Curtis Nagle of Bank of America Merrill Lynch. Your line is now open.

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

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

Thank you. And our next question comes from Bobby Griffin of Raymond James. Your line is now open.

Good morning and thank you for taking my questions. Congrats on another good quarter.

Thank you.

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

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

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

Thank you. And our next question comes from Michael Lasser of UBS. Your line is now open.

Good morning. Thanks a lot for taking my questions. What do you think drove your improvement in return on advertising and your lower customer acquisition costs? Is it possible because Mattress Firm is going through this transition that they’re just being aggressive and it's allowing you to take share, particularly at a time where -- when your big competitor is going through some of its own dynamics?

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

Thank you. And our next question comes from John Baugh of Stifel. Your line is now open.

Good morning. Thanks for taking my question. I was curious guys, too early in the Breeze launch to look at the mix of which you’re selling and you commented about it for your stores, but I was thinking about overall including wholesale. Has there been enough time to get a sense for North America Tempur-Pedic brand only have a mix compares today, say, to pre the initial launch of ProAdapt. Is it time, better or worse, any trends there? Thank you.

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

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

Thanks for taking my question. The gross margin beat was particularly impressive, and I am wondering if you got any help, any material help from input costs and what the trend is in the current quarter?

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

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

Correct.

… of benefit.

Thank you. And our next question comes from Peter Keith of Piper Jaffray. Your line is now open.

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

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

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

Thanks. Good morning. Great quarter, great results and looking forward to seeing new products next week. My question is around capital allocation, I mean, you’re pretty exclusive today with what your plans are. So I guess, Scott and Bhaskar, I was hoping for a little bit more thinking on -- why not be a little bit more aggressive today with share purchase, given the strong cash flow outlook and strong EBITDA outlook?

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

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

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

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

Thank you. And our next question comes from Karru Martinson of Jefferies. Your line is now open.

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

I don’t know. I’m going to say, you’re seeing several things. One is, I think that we’re tapping a market that’s not well served right now, which I’m just going to call high-end bedding in North America. And our Tempur-Pedic flagship stores are designed for high-end customers and I think that's an underserved market. So I think that would be the first driver. I think the second driver, it's clearly a lot of disruption in the traditional distribution model. Some large customers have gotten into financial trouble and their share of the market has declined, so there's quite a bit of what a bedding is kind of open for good retail performers. And we're seeing some of our strong retail performers who are really good taking significant share themselves. So I think there's some bedding, it's up for grab in the in the marketplace. And then I think, third, it's really kind of the points you probably raised, is there certainly a significant deceleration, what I will call the traditional BedInABox brand in the marketplace. But having said that, some people get confused. That doesn't mean that there's a decline in compressed bedding. If we look at our compressed bedding offerings, in total, they grew 40% in the second quarter. And most people haven't really focused on we’ve got a total compressed bed offering starting with Sealy Conform, which is -- starts at $399, which is very competitive in the marketplace. Then we kind of have our middle market compressed bed Cocoon, which is like a $799 product, which is doing very well. And in fact, since we’ve changed the marketing strategies to go kind of directly after, the disruptors hits at 250%. And then we have our in test, our TEMPUR-Cloud product, which is a premium product that starts at $1,799. And you compare that premium product with what some of the BedInABox guys are try and do in the premium area. You would see that it's a relative value. So when you look across our offering in the -- in that area, because we're vertically integrated in our scale, we can produce a higher quality bed for a lower cost and make money. The part that we needed to learn over the last couple of years was really marketing and how to market online. And I think our performance recently shows that we’ve learned a lot in that area in a very competitive.

Thank you. And we do have a follow-up question from Michael Lasser of UBS. Your line is now open.

Thanks a lot for taking my follow-up. Can you give us more detail on the break down between units and price for the Tempur line? And on the Sealy business, how much of the improvement is coming on a same-store basis versus expanded relationship?

Sealy is easy, because that's all on same-stores effectively.

Sure.

We haven't picked up anything of the new business yet on Sealy.

Right. And more broadly the nicety about Sealy is that we’re seeing growth in all the price points. We were challenged from legacy standpoint and that's sub $1,000 business. So what we've seen in the second quarter is remaining growing in the above $1,000 and a good opportunity there in the below $1,000. As it relates to the Tempur side is that we have seen a growth in units. The momentum that we saw in the first quarter that continues in the second quarter. And with the launching of the Breeze in the high-end, our ASP continues to improve.

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 our call today, operator. Thank you.

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