Ladies and gentlemen, thank you for standing by. And welcome to the Tempur Sealy Third Quarter 2019 Earnings Conference Call. [Operator Instructions].I would now like to hand the conference over to your speaker today, Aubrey Moore with Investor Relations. Please go ahead, Ma’am.

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 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 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 third quarter earnings call. I'll start with comments on the quarter's operating performance, then Bhaskar will review our financial performance in detail. Finally, I will conclude with an overview of our long-term corporate initiatives and some thoughts on capital allocation and current trends.The third quarter of 2019 was outstanding, with growth across all three of our regions. North America, Europe and Asia-Pacific. In fact, this quarter was the best quarter in the company’s history.We're pleased to report as compared to last year, sales and earnings grew double-digit. Our leverage growth declined, and we repurchased 50 million of common stock during the quarter. We had a strong conversion to cash and there were no one-time adjustments in EBITDA.Turning to the reported results for the quarter. Net sales increased 13%, adjusted EBITDA increased 17% and adjusted EPS increased a very robust 28%. This marks the sixth consecutive quarter of adjusted EPS growth. The positive results were broad based, with brand, channel and geographic perspective demonstrating the strength of the company's competitive position around the world.The last few quarters demonstrate our ability to navigate regional economic uncertainty and take advantage of the changing bedding market. In North America, we are excited to start our new relationship with Big Lots and Mattress Firm. During this quarter, we completed the rollout of Sealy products at Big Lots and subsequent to the end of the quarter we began shipping products to Mattress Firm.During the third quarter, these accounts did not contribute to earnings, and in fact we experienced 5 million of inefficiencies as we ramped up staffing for our new business and expanded our quality control procedures, both new accounts are expected to positively impact our operations starting in the fourth quarter…

Thank you, Scott. Before going into the details of the quarter, I would like to call out a few highlights outside of those previously mentioned. As compared to the prior year, adjusted gross margin increased 160 basis points to 43.9%. Adjusted operating margin improved 130 basis points to 14.7%. Adjusted EBITDA increased 17% to $150 million, and adjusted earnings per share for the quarter was $1.30 an increase of 28% versus the prior year. This was driven entirely from operating performance versus share buybacks.Turning to North America, First I would like to discuss some financial reporting reclassification. As previously announced, we have acquired Sleep Outfitters, which was fully integrated into our North American direct channel during the second quarter. Sleep Outfitters had historically been part of our wholesale channel, since they were previously a third party retailer.Accordingly, this impacts our growth rates within both channels. North American net sales increased 15%. On a reported basis, the North American wholesale channel increased 9% and the direct channel increased 89%. Excluding sleep outfitters, the wholesale channel increased 11% and the direct channel increased 37%. The sell in a big loss contributed several points of growth to our Sealy business in the quarter.North American gross profit margin improved 220 basis points to 42.1% as compared to the prior year. This was primarily driven by improved, temporary merchandising mix, pricing benefit and favorable commodities. As expected, our gross profit margin was impacted during the quarter. We took incremental steps to ensure the highest product quality and great customer service to all, ahead of the expected higher volumes from the new distribution.And as Scott mentioned, this resulted in inefficiencies of about $5 million in the third quarter, and was not treated as an adjustment to our reported results. North American operating margin improved 170 basis…

Thank you, Bhaskar. Great job. Now turning to the company's long term initiatives. I'll start with optimizing our powerful omni distribution platform to be where customers want to shop. Earlier this year, we announced two material wins in distribution with Big Lots and a new agreement, the Mattress Firm. The third quarter was the largest expansion of doors in a single quarter in the company's history, which we expect to top with even more stores during the fourth quarter with the launch of Mattress Firm.The integration and coordination with both of these organizations people has been phenomenal. As we look forward, we continue to expect these expansions in distribution to generate in excess of $400 million in incremental sales, and $75 million to $100 million in incremental EBITDA. As a complement to our material wins in our wholesale distribution, our direct channel continues to expand rapidly. We continue to see robust year-over-year sales growth through online sales growth, same-store sales growth and expansion of our company-owned stores [ph].Let me add a few comments about the online marketplace in general. We find that consumers are more digitally savvy than ever. While the majority of customers want to visit stores to touch and feel the product, they frequently start their shopping experience online before entering a retail store. We've made adjustments to our strategy and expanded our reach online in four ways to complement our presence in the market.First, is our own Tempur-Pedic.com side. We identify this as a strategic opportunity in 2016, which we then grew and expanded sales on Tempur-Pedic.com by over 300%. These sales have driven incremental profit and support material online advertising. The fact that more consumers are willing to purchase a bit online has been a positive trend for this segment of our business.Second, is our focus…

[Operator Instructions] Our first question is from Michael Lasser from UBS. Your line is now open.

Good morning. This is [Indiscernible] filling in for Michael Lasser. Thanks a lot for taking our questions. So you beat consensus EBITDA by $9 million in the third quarter, but raised the full year guidance by $28 million. So is it fair to assume that the $20 million or so of Delta is being driven entirely by favorable expectations on the macros from launch, and with production to the timing of the launch, can you provide a sense of what's baked in the guidance? What was baked into the guidance earlier versus what is baked into the guidance now? Thank you.

Yes, this is Scott. Let me start, then I'll pass it off to Bhaskar. No. The answer to your first question, no. The raising guidance has a lot more to do with the underlying demand that we're seeing in the core business. There is some change in the thinking of the launch timing Mattress Firm and that we are a little bit ahead of our expectations originally. But the majority of the raise has to do with the broad base improvement we're seen in the-- in the business primarily in the U.S. And as we mentioned before, we've got double-digit growth in Tempur, double-digit growth in Sealy. And we're doing well in wholesale, and we're doing well in direct. You had some other questions.

Sure, that's, that's that that is a fair way to think about it Scott. Just reiterating some of those. Yes, underlying business both Tempur and Sealy very strong. Mattress Firm originally had contemplated four models. Now we see a bit of channel fill happening or back stock happening in the fourth quarter. And then we did call out that, so those are the tailwinds that we're seeing. And then from a headwind standpoint is that we do have international, and then some variable compensation.

Thank you. Our next question is from Bobby Griffin from Raymond James. Your line is now open.

Good morning, everybody. I appreciate you taking my questions, and congrats on good third quarter.

Thank you.

So my first question is just around North America gross margin pretty, pretty impressive performance in the quarter especially with light of the Big Lots rollout. Can you maybe just unpack a little bit of the drivers about what surprised you versus your original expectations? What drove the upside? And then how should we frame gross margin in the fourth quarter given the Mattress rollout and some more selling in a big launch?

Great question. So if I deal with the third quarter initially is, from the upside standpoint as the volumes came in, both on Tempur and Sealy ahead of our expectations. So when we do get more units going through each of those plants, we do leverage our fixed costs and we get more productive etcetera. So that would be the primary driver. As we mentioned is that, we continue to see product mix favorability, pricing, we continue to see commodities were in line with our expectations, and then that was offset by the investment that we made to ensure good customer service.As I think about the fourth quarter, if I put it all together, the way I think about it, is those trends that we saw in the third, they should continue. Just unpacking that though a bit, is we do have as Mattress Firm four models were going in. Those will come at a discounted rate. We did also call out the fact that we will have some commodities favorability, a few million versus where we were previously thinking about, and good call out Bobby is that, we will have the big -- big lots coming in which will be at a lower margin. But if you put all that together, what you'll see is consistent with the third quarter.

You probably also, because I know we talked about earlier, this is Bhaskar. It's probably one of the toughest quarters to estimate the gross margin because you've got so many moving parts and a lot of that has to do with also the product mix that we don't have good numbers yet on product mix for Mattress Firm, and we're still working through exactly how big lots works through the system. So it is -- it's a difficult estimate, but well done.

Thank you. Our next question is from William Reuter from Bank of America. Your line is now open.

Hi. I just had a question are around the turnaround of Sleep Outfitters, it sounds like that's doing better. I guess, is your plan there to ultimately sell that business and I guess, so what would you do with the proceeds or do you want to continue to operate it yourself.

Yes. First of all you're right. The turnaround at a Sleep Outfitters has gone better than we originally estimated. In fact, they are approximately breakeven in the third quarter. Our strategy with that particular entity has not changed, which was we're going to turn it around, look at the operations, and then figure out what the long term plan is for the company. We -- we may keep it. You know we may do something else with it, but right now the most important thing is to get it turned around and the team over there is doing a great job.

Thank you. Our next question is from Brad Thomas from KeyBanc Capital Markets. Your line is now open.

Thanks. Good morning. Let me add my congratulations as well here on some nice trends. I wanted to ask about the outlook for North America. Maybe squeeze two pieces into my question, hoping we could address the outlook for North America for 4Q, obviously a more – comparison by the same token Mattress Firm obviously holds the potential to be a pretty significant driver of sales.So just how you're thinking about the outlook for North America and sort of the underlying trends in the industry ex some of these new partners if you could. And then if you step back, as we think about 2020, 2021. Scott, just maybe your latest thoughts on what the North America business should be growing at some of these big account wins?

Yes. I'll try to unpack some of that. I'm sure, I'll mess it up, and then let Bhaskar clean it up. I think, I think first of all, I tried to say it in the prepared remarks. The -- you know not exclude the new distribution wins, because that's actually the part of business that I'm watching. The fundamentals X the new distribution are very strong, and we would expect them to continue to be strong in the fourth quarter, and would expect them certainly to be positive next year.And I think that was kind of the first part of your question. As it relates to Mattress Firm, we're not going to do individual revenue guidance by customer we'll have a lot of comments on individual customers out of respect for private companies. Other than agree to you, look they are very large, and their performance will impact our performance.Right now, our team is just focused 100% on providing products forum and quality service. And I think over the next few quarters, we'll learn what the right product mix is in volume mix is, and it will blend into our numbers. But right now, we're just in the very early stages.As it relates to 2020, as I've said before, based on everything we see today, and what we know today, we would expect 2020 to clearly be the best financial performance in the company's history. We've got a lot of good tailwinds, whether it be new distribution, whether it be commodities, whether it be the performance of our direct. Quite frankly, our international team is dealing with some interesting market and doing very well. We just have a lot of momentum right now.

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

Thanks for taking my question. On the Mattress Firm transition, which is moving ahead faster than, than we and it sounds like you would have expected. What's driving that? How are you getting that business up in running faster than you had previously anticipated?

The Mattress Firm team is driving that. You know when it comes to launching product, obviously we've got to make the product, but who has the heavy lift is actually the retailer. And the Mattress team -- Mattress Firm team is performing very well. And quite frankly they've exceeded our expectations. And that's resulted in the timing of the products moving up some.

Thank you. Our next question is from Karru Martinson from Jefferies. Your line is now open.

Good morning. I realize that this doesn't really affect you guys on the high end, but what has been the impact on China imports with the anti-dumping duties in place. Are you seeing prices rising across the board?

Yes, it does affect -- it affects us. Although it's not a major driver to profitability. If you look at entry level pricing beds, the entry level, that pricing is up and continues to feel like it's firming up at the very low end, and that does help us at the low end, Sealy. If -- if I unpack the products by price band, and exclude new distribution, then we are -- we are feeling growth at Sealy below a thousand dollars, which we were before the tariffs. That was a pressure point for us.So we are we are gaining some volume. I think and it has to do with the tariffs. And as I said in my prepared remarks, I think all U.S. bedding manufacturers have been benefited some. But again, it's not a big profit driver fourth down at that price point.

The other side of that is we do have some of our product that comes in from overseas, which is subject to tariff. So you take that headwind against the tailwind that we get from the income from below a thousand, and I would think about it as a net neutral.

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

Good morning. Thanks for taking my question. Maybe a quick one on how feedback has been on the active Breeze? And I guess what's your expectation to roll that out to other distributors besides your own stores going forward?

Okay. Thank you. Obviously we got -- we've got two major product lines; passive Breeze which is distributed to all retailers. And then we've got an active Breeze product that is in limited distribution now only to our stores. Look, the sales have been good. The customer acceptance of the product has been outstanding, and we're continuing to study the product and we'll consider rolling it out more broadly in the future.But right now, that looks like a winning product from everything we see right now it’s kind of in test market.

Thank you. Our next question is from Peter Keith from Piper Jaffray. Your line is now open.

Hey good morning guys its Bobby Friedner on for Peter. Thanks for taking my question. Nice results. As about the direct business seems to be accelerating nicely, can you just give a little more color in terms of how much of that growth actually has come from new stores versus online. And then, related what's the balance between higher transactions and higher ASP Tempur mix continues to improve with more Breeze sales?

Okay. Let me work on some of that. The stores themselves, I think the first number that I think, I would, I would point you towards is as we mentioned in the prepared call, same-store sales. Stores opened more than a year were up 20% which is an outstanding performance and continues to confirm that concept has some legs. Without Sleep Outfitters, the business grew in excess of 30%, if I remember correctly. And the web itself grew double-digits. So, the direct business, broad based growth in the stores in the web business. On Sleep Outfitters, its’ sales, we’re less focused on the actual dollars on Sleep Outfitters sales, and more on driving profitability.So we will not want monitoring those as much on the same store sales, but the direct businesses is doing very well, and we continue to be very bullish on call it a 125 stores to 150 stores business model, ultimately.

Thank you. Our next question is from John Baugh from Stifel. Your line is now open.

Thanks and congratulations. I'm just curious if you could comment around the advertising spend or marketing spend in 2020. Is that a record in terms of percentage as well as gross? And I think you were targeting the Stearns & Foster as well as Tempur brands. But the comment internationally as to what you may be doing with marketing in light of weak conditions? Thank you.

It’s definitely going to be a record in gross dollars. I probably have to do some homework on percentages, because I'd have to go back to the early Tempur days. And I don't know that off the top of my head, but on a gross dollar basis, it will be up significantly. We do expect some more support into the Sealy and primarily the Stearns & Foster brand, than we’ve brand and we've done historically. And then on an international basis, it really varies by market. There'll be some markets that we'll be leaning into heavily like, Japan. And there may be some other markets where you're a little more conservative. But it really varies by market.I think the key point is that you know we paused a little bit on advertising as we work through the – the disruption we had with the change in Mattress Firm until we were a little bit conservative. And I think that the message for you today is that we're back on with our foot on the accelerator and expect to increase the Tempur-Pedic and Stearns & Foster and Sealy share voice throughout all markets.

Thank you. Our next question is from Carla Casella from JPMorgan. Your line is now open.

Hi, I'm just wondering on the competitive front if you're seeing any change in either type of competition or online discounting, given all of the news and transitions at Casper? And I’m also wondering where that line crosses over, where you cross over most directly with Casper, and is that changing?

Yes. And pardon me if you hear some background noise. We’re kind of in the middle of a thunderstorm here in Lexington, so there's a little bit of thunderstorm coming through. You know first of all, let me point out that when we look at customer acquisition costs, our customer acquisition cost went down again this quarter. So that's either the efficiency of our advertising or a less competitive marketplace online. I'm not sure which it is, but again, we saw acquisition costs going down.Casper is really not a very big player in the marketplace. And so we don't really feel them anywhere. Obviously, we've bumped into him a little bit online, and they've got a few stores but they're relatively immaterial to our business. Our primary competitor is Serta Simmons in North America. And we see them everywhere we go.

Thank you. Our next question is from Bob Drbul from Guggenheim. Your line is now open.

Hi guys. Good morning. Just wondering as you roll out more stores, I think you used to give us a metric or you are given it at one point, just the productivity and profitability of your stores versus wholesale accounts like 30 wholesale accounts for one year. Could you give us an update on how that's trending for you?

Yes, I haven't run the number lately, but I remembered about 20 to one off the top of my head.

We're going to be in that range.

It’s probably better than that now.

Because the stores have outperformed from the time when we were kind of steady in it that way. More importantly, than the individual store economics, what we're watching closely is when we put a store to in the marketplace, what the whole marketplace is doing. And where we put stores and these are couple of stores in large cities, we are seeing that we're not taking business from our wholesalers, but in fact the wholesalers are at least doing as well or doing better than they were doing before we opened the stores.So we think we're raising the whole market, when we're just putting a couple of stores in the marketplace and these really are somewhat marketing assets and help drive the brand in the marketplace.

Thank you. Our next question is from Judy Merrick from SunTrust. Your line is now open.

Thanks. This is Judy in for Keith Hughes. Just quickly on international, you talked about all the top line environmental challenges going on different regions there. Is there anything else that you had to kind of flattish margins? Is there anything else going on with the margins or anything you can add on that?

No, I can’t think any of the margins.

No from a margin standpoint they're relatively stable. The big driver when you think about international is, is you do see some country mix from time to time, but when I think about international, broadly speaking is that there does remain an opportunity out there specifically in Asia Pacific whether that be through our own subsidiary or working through our Asian JV, but there are certain economies right now they're challenged, whether it be Hong Kong or what's happening from a Brexit standpoint?

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Scott Thompson for closing remarks.

Thank you. To the over 6000 employees worldwide. Thank you for what you do every day to make the company successful. To our retail partners, thank you for your outstanding representation of our brands. To our shareholders and lenders, thank you for your confidence in Tempur Sealy’s leadership team and its board of directors. This ends the call for today. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.