Ladies and gentlemen, thank you for standing by. And welcome to the Tempur Sealy Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions]I would now like to hand the conference over to your speaker today, Aubrey Moore of Investor Relations. Thank you. 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 the 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 2020 and subsequent periods, involve uncertainties. Actual results may differ due to a variety of factors that could adversely affect the Company's business. These 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 fourth quarter and full-year earnings call. I will start with comments on the quarter's record operating performance, then Bhaskar will review our quarterly and full-year financial performance with you in more detail. Finally, I will conclude with an overview of our long-term corporate initiatives and our update on current trends.The fourth quarter of 2019 was outstanding, the best fourth quarter in the Company's history. It was a record fourth quarter for sales, adjusted EBITDA and free cash flow. As compared to last year both sales and pro forma earnings grew double-digit and our leverage ratio declined by one full turn to 2.9 times.Simultaneously we have been repurchasing 50 million of common stock each quarter starting with the third quarter of last year. Both our North America and international segments grew constant currency sales across both wholesale and direct-to-consumer channels. As you can clearly see we are reporting a broad based performance.Turning to the reported results for the quarter, net sales increased 29%, adjusted EBITDA increased 29% and adjusted EPS increased a robust 52%, this marks the seventh consecutive quarter of adjusted EPS growth.I would like to highlight four items from the fourth quarter results. First our record fourth quarter global net sales, net sales increased 29% for the quarter and North American net sales grew 36% versus prior year.We experienced strong growth rates for both Tempur-Pedic and Sealy in North America and across both wholesale and the direct channel. In fact, not only are we growing faster than most of the digital native direct-to-consumer matches perhaps, but we are doing it profitably.I should also point out that our customer acquisition cost in direct-to-consumer declined again this quarter and thus our profit margin expanded again. This in…

Thank you, Scott. Before going into the details for quarter, I would like to call out a few financial highlights. As compared to the prior year, adjusted gross margin improved 190 basis points to 44.3%. Adjusted operating margin improved 80 basis points to 14.2%.Adjusted EBITDA increased 29% to $152 million and adjusted earnings per share for the quarter was $1.37, an increase of 52% versus the prior year. This was driven almost entirely from operating performance versus share buybacks.There are few items, I want to call out before turning to the results. First, during the fourth quarter, we took a charge of $30 million in connection with the customer bankruptcy. They represented less than 1% of our global net sales and their bankruptcy did not have a material impact our 2020 outlook. Going forward, we did not expect further charges related to this customer.Second, we made a special contribution of 100,000 shares of common stock to certain public charities including Tempur Sealy Foundation. These shares have a market value of approximately $9 million and represent the largest single contribution in the Company's history. Our North American GAAP fourth quarter results were impacted by these non-cash one-time charges.As previously announced, our acquisition of Sleep Outfitters was fully integrated into our North American direct channel during the second quarter. Sleep Outfitters had historically been part of the wholesale channel since they were previously a third-party retailer. Accordingly, this impacts our growth rates within both channels. I should mention that Sleep Outfitters outperformed its 2019 budget and we are very happy with the acquisition.Turning to North American results. North American net sales increased 36% in the fourth quarter. On a reported basis, the North American wholesale channel increased 32% and the direct channel increased 94%.Excluding Sleep Outfitters, the direct channel increased almost 30%.…

Thank you Bhaskar. Great job. Now turning to the Company's long-term initiatives. First, develop the highest quality bedding products in all the markets we serve. Company has undergone several large successful new product launches for Sealy, Stearns and Foster and Tempur-Pedic over the past two years.Our consumer centric approach has led to the development of the best overall product portfolio in the market. Our products are innovative and features strong step up stories that are easy to understand for both consumers and retail sales associates making Tempur Sealy the most desired partner for retailers.This year we are launching two new products. First is the all new Tempur Ergo smart base collection with sleep tracker technology. Combined with the adaptive Tempur-Pedic mattress, the Tempur Ergo smart base creates a completely integrated sleep system that features automatic snore detection and responds personalized sleep analytics and coaching and smart home connectivity and voice control.This product was founded on more than a decade of advancements in sleep science. As more and more research shows the critical importance of a good night's sleep, rest for health, memory and concentration.Second, we have the all new Sealy Posturepedic Plus lines. This innovative collection of mattresses offer improved comfort, best-in-class cooling capabilities and increased support. We have paired the impressive all new Posturepedic technology with bold, entree anesthetics and the Sealy’s brand combined 136 years of heritage and trust.With this line up, we are offering a clear step up story above $990 with simplification of the shopping experience and offer increased in-store conversion opportunities with a goal of driving profitability and ASP for the retailer. Initial feedback on our new 2020 products has been strong and we are actively working with retailers to roll these products out into the market throughout this year.Turning to our second initiative, promote…

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

Good morning. This is Atul Maheshwari on for Michael Lasser. Thanks a lot for taking our question. How much of sales lift was received in the fourth quarter from store model sales and can you talk a little bit about sell through that you are seeing thus far at Mattress Firm at full price? And then along those lines, what is the thought process behind the light guidance range for 2020, what are some of the key unknowns and what would have to happen for you either to reach the lower end or the upper end of the range? Thank you.

This is Scott, I will try to answer the five questions, which means I will answer probably four of them and then pick the hard ones and push them over to Bhaskar. First of all, you asked about individual sale through at Mattress Firm and we are not going to talk about an individual customer.I think what all I will say is that we are very happy with our distribution both at big lots and Mattress Firm. And you can see from our comments about how the quarter started, then we said North America was slightly ahead of our expectations. So from that you can read through probably a pretty good answer.One of the other questions you embedded in there was the wide guidance range. I think we have about $75 million range this year, where normally we have been running about a $50 million range.We widened it out a little bit because there is a little bit more uncertainty and the uncertainty has to go with what we talked about last quarter, which would we need to see how this new distribution kind of feeds into the marketplace in North America.And we also need to see how that these two large new customers, what price points they sell beds at or have a merchandising issue within each of those companies and whether they sell towards the top end of the merchandising bracket or the lower end.Those two variability played primarily in widening out the range. And then quite frankly, there is obviously a little bit of drama going on in Asia. And we didn't really put it in the guidance, but it certainly gave us a little bit of a comfort to get a little bit wider range. What were the other questions?I think question about sales lift in the fourth quarter, what I would say is without disaggregating the revenue, the way to think about it is - if you think about the number of stores that the new distribution had, it was a sizable launch and not only was it the launch, then we have the full value is back stock to fill the inventory. That said, we did say as we thought about the fourth quarter that Tempur the underlying business, it did exceed our expectations.

And lastly I had to say, I wouldn’t expect we tighten up the range fairly quickly during the year as we learn more about the distribution.

Thank you.

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

Good margining, thank you. Two questions, one certainly -.

Breaking out, sorry, can't hear you. Can't hear the question broke up. Operator I think we have got to move to another question. We are not able to hear what he is asking us.

Our next question comes from Bobby Griffin with Raymond James. Your line is now open.

Good morning, thanks for taking my question. This is a two part question, Scott, your favorite, but I guess first can you help us isolate some of the incremental or kind of discrete items that hit the hit the P&L this quarter, like new product launch and incremental stock comp and quantify those. And then secondly, maybe to go off the first question, kind of look at it a little bit different way. But in context of the 400 million that you talked about for all the new expanded distributions, how much of that if you had to estimate shifted into the fourth quarter and then we can just adjust that in our models. Was it 50 million, 30 million or anything like that.

Yes. And Bhaskar can do that from a seasonality standpoint, you can adjust the 400, and the big rocks in the fourth quarter that affected would probably be the discount of four models. And then we had a very big hit in comp. These are the two things that jump out of my mind once we walk-in through those.

Yes, absolutely. So, just circling back to those. When you think about what happened during the quarter, obviously we had a large expansion from a distribution standpoint. That was really few parts that came around slotting the new mattresses as well as the channel fill, and then the sell through. With the slotting new mattresses, you are going to have some floor models with that. And then we have been talking about the incremental stock comp, sorry, the variable compensation or the bonus plan that we took, and that was approximately for the quarter about $18 million. As it relates to how you think about the 400 million.

But 18 was the delta.

That is the delta. It was zero the prior year. As you think about the $400 million, is what we called out on a 12 month basis, and just think about starting that in the fourth quarter, and as you think about that is the $400 million included the channel sale and the floor models, et cetera. So, think about that as a sales surge in the fourth quarter and then as you get into the first quarter and through the rest of the year that would be ramping.

Next question.

Our next question comes from William Reuter with Bank of America. Your line is open.

Hi. Good morning. Just in terms of - you mentioned that there was one customer bankruptcy during the quarter. I was wondering whether, if there were any comments or thoughts on the health of the remainder of some of your smaller independent customers.

Sure. Great question. The first thing I would say is, managing our credit portfolio is part of what we do every day. What I would like to highlight is, on a year-over-year basis, our agents have improved materially and as it relates to the Mat One is, we have taken all associated charges with that particular customer.

And you don't believe it will impact revenues going forward.

That is correct.

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

Hi, good morning. Congrats on the nice momentum. If I can squeeze in a [indiscernible] myself here. A question that we get a lot is, about how to think about the growth potential for the business as we get passed all of this incremental distribution. So, I guess Scott was hoping for your latest thoughts on maybe how to think about what the revenue gross rate of the business should be as we look to 2021, 2022? Is that mid single-digit? Is that high single-digit? And then if we could just get a little more color on how you all were thinking about advertising this year, potentially given the momentum in the business right now and the prospect of ad costs maybe going up as we get closer to the election? Thanks.

Okay. let me work on that a little bit. I mean, first of all, let's just kind of de-aggregate some of the things in the quarter. Don't miss that we had growth internationally, okay. It had nothing to do with new distribution in North America.Certainly we have growth in DTC, which of course has nothing to do with new distribution. If you look at the base business, we had growth in the base business in North America, ex the new distribution. So, there is quite a bit of underlying growth top of the distribution.When I think about it, I have tendency to kind of back up a little bit and just look at where we are from a competitive standpoint and look at our competitive advantages in each market and I got to tell you when I look at our competitive advantages and the improvements we have made over the last three or four years, we are very optimistic that our competitive position in all of the markets that we are in has been strengthened. And in some markets has been strengthened significantly.So when you get to underlying growth rate, which you end up with is okay, what is the economy in, what is going on in that particular market? And I don't have a growth projection, but I think what I would tell you and I think I could support pretty aggressively is that our competitive position in the bedding market in the world has never been better, never been stronger and we have never been more in control of our destiny.As it relates to advertising what we did call out of the prepared material is that 2020 would represent a record advertising year for us and a couple of things are helping us with that. It is obviously with the new distribution, it allows us to invest in some share of voice as well as the overall growth of the business.

Thank you. Our next question comes from Seth Basham with Wedbush. Your line is open.

Thanks a lot and good morning. Congrats on great quarter My question is regarding the upside to your sales expectations in the fourth quarter. You know, I don't know if you can quantify it, but directionally, how much of it was from your base business versus, being from new relationships and as a follow-up, as you think about 2020, do you expect that base business in the wholesale North America segment to grow as much as it did in the fourth quarter of 2019?

Yes, the upside surprise within the base business in the fourth quarter, as you remember we have talked about before how new distribution feeds into the market. Whether there is any cannibalization.And if you look at my prepared remarks closely, there is a sentence in there, it says, you know, basically it is early, but based on early indications, we are not seeing any cannibalization and the Tempur brand. And in fact one plus one might be slightly more than two.On the Sealy side, we aren't seeing any cannibalization, but it is not as clear, because there is more factors that impact mid price points, but we are not seeing anything that looks like cannibalization in either brand.So a base business grew in the fourth quarter, expectations during the year. I would expect the base business is going to continue to do relatively well. We are not feeling any pressure as far as slot counts.And I would expect that we will continue to have some wins with new clients going forward, although certainly not very compared to what we did last year. There is just not that large customers out there, but I would expect the, we will have more wins for sure in the coming year.

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

Hi thanks, good morning and great results guys. May I ask two parts but related questions. So the last couple of years we have had a launch cost headwind. Just looks like there is fewer products rolling out this year. So could you maybe give us the launch costs benefits in 2020 and then directionally Bhaskar how should margins flow through the year, based on its year-over-year trend. It seems like it maybe a little bit stronger in the first half and some moderation in the back half.

Great question, let me take that. And Scott, you can clean me up. As it relates to margin expectations. If I were to step back on a full-year basis, I would expect margins to be up on a year-on-year basis.And just when you think about sequencing a bit to get into that point is in the first quarter as we are launching the Sealy brand with our new distribution. So, though up on a year-over-year basis, it would be a bit pressured when you look at it sequentially versus the versus the fourth quarter.So overall got a lot of nice tailwinds that are heading into 2020. That is going to help us from a gross margin expansion standpoint. Part of that benefit is launch cost, that is correct. And when you think about it, you are correct, over the last couple of years we have had some launches and in 2020 they are very nominal. Next question.

Thank you. Our next question comes from Keith Hughes with SunTrust. Your line is open.

Thank you. Got a question on Mattress Firm as we head towards the holiday weekend coming up. Can you give us some sort of idea of how much of the launch is complete? I think this weekend, not training and stuff like that, just in terms of slots.

Sure. I mean, all the Tempur launch is complete. All of the Stearns & Foster launch is complete, and I would say the vast majority, more than half of the Sealy launch is complete. Now, when I say complete, that means the beds are on the floor. There might still be some POP bids in process.And certainly, there is a robust training process that starts once the bed hit the floor, and although RFAs have probably been trained some. Generally that takes to get them fully trained, that may be six to nine months of training. So, I expect that we will continue to ramp up, but early indications are all very positive, both for us and Mattress Firm.

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

Good morning. Thanks very much for taking the question. Just wondering if you guys could provide an update in terms of the initial EBITDA numbers for new distribution, which I believe were 75 to 100. I know it is still early days, but obviously things seem to be going pretty well. So, yes, any update on that?

I'm going to answer that, no. So, I didn’t give you a chance to ask another question, because I don't want to just disaggregate the business by customer.You got kicked off the line. But what I would say is that, 75 to 100 is the way that we originally thought about it and that is where we remained today. At the end of the second quarter, we will have their better visibility of what that may look like.The one thing I would want to point out is that 75 to 100 is on a rolling 12-month basis. So, that effectively started in the fourth quarter. So as you think about 2020, think about the fourth quarter comp.

Thank you. [Operator Instructions]. Our next question comes from Carla Casella with JP Morgan. Your line is open.

Hi. Thanks for taking the question. I wanted to dig in a little bit more deeper on China and any impact you are seeing with your own or other competitors from either shipping delays? Are you seeing, or hearing anything about out of stocks or out of stock floor sets, from any of the retailers? And then, should we fear that, after this is all over, we could see a step up in dumping because of the product that can't get out of China now.

Okay. Let me see if I can work on some of that. We have six plants in China. They run through the Asians joint venture, about 1,200 employees. Currently, all six plants are closed. We expect to open five of them here probably in the next week. That gives you just kind of some status on the current company.We are in very good shape from a product stand point, supply chain standpoint, we only really import adjustable basis, long lead time, got plenty of them and inventory, have plenty of them on the water. So we are not seeing any issues on being able to provide our customers the products.Other retailers who may be getting their products somewhere else, they may have different supply chains and might have different issues, but as far as Tempur Sealy goes, we are not seeing any issues in the supply chain right now. Obviously depending on how long the issue is outstanding, we could bump into something, but right now we feel very good about it.As far as how it might impact dumping, I don't see any impact on dumping the material pretty - China from that and anything that has been imported is generally coming from Vietnam or Mexico or Indonesia or somewhere else and give or take. I would say those imports were generally flat is probably the last few months worth of report.

Correct.

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

Thank you. Apologies of the breakup, earlier, I will ask one question simply?

We really didn't want to answer. We were just pretending like we couldn't hear you.

Yes. A real curve ball. Is there an approximate call for the Tempur-Pedic stores in North America in 2019?

Is there a comp, I mean we had same-store sales increases on the stores, if that is what you are asking me, you are asking me if there is a comp of any other store or retail to look, absolutely not. It is a fairly unique retail format and is highly profitable.

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

Good morning. Thanks for taking my question. It is my understanding that even with your growth at Sealy and big lots and with the acquisition of Sherwood, you are still seeing AUR up, is that true? And if you could ballpark what you expect to be the lift in AUR in Q1 and for the full year for your business overall.

I got to go look at some numbers. Second mixture, average unit. Sure what I would say as they can speak into the fourth quarter is absolutely our average sales price did go up principally when you think about a Tempur with Stellar performance, uh, driven not only by the underlying base business that we did see growth in. Is that Mattress Firm that was the sell in. So our AUR was up.

Yes it was up primarily because of brand mix, because Tempur brand grew faster than Sealy even with the new distribution.

Correct.

Thank you. Our next question is a follow-up from Curtis Nagle with Bank of America. Your line is now open.

Great. Really appreciate you getting me back on. So two real quick ones. One just, I have heard perhaps it could be some motion in terms of any dumping activity on I guess non-China countries. And then just a quick one for you, Scott, in terms of just why lower the leverage targets? It sounds like just want to be in a - or maintain a strong capital position, but anything more you could say on that, that would be great.

Yes. I don't really have any comments on future anti-dumping actions. I'm not really the expert in that area. And there are others who are some, I will let you go to them. We continue to watch the situation closely. But that is about all I have got to say on, on the dumping issue.When it comes to capital allocation look, we looked at lots of different data and there is no question to us that when you look at data on stocks like TPX. We think there it is clear that the leverage ratio and the valuation multiple has had an inverse relationship. So, we believe overtime a lower leverage target is going to be a positive to stock valuation.Second, really, lower leverage provides us great strategic optionality. We might use that extra capacity at some point for opportunistic acquisitions like a Sherwood or upsize the stock buyback if there is a market disruption. But we also really like building in that additional strategic optionality.And I guess lastly, as we studied the industry, we have looked through some things. It is very clear to us that the industry worldwide is run on a very thin capital base and we see a strong balance sheet and cash flows as really a competitive advantage and it is a competitive advantage that, we would like to keep and we think ultimately will help to support a higher multiple for the stock.

Thank you. Our last question is a follow-up from Peter Case with Piper Sandler. Your line is open.

Hi. Thanks a lot. A actually this is a great follow-on question for Scott. So, on capital allocation. Any thought to initiating a dividend? I'm curious on the Board discussions there just because the cash flows are tremendous and as you point out the competitive positioning has never been better. So it seems like there is really good stability in the business looking forward.

Yes. We have talk about capital allocation as you would expect at every Board Meeting, robust discussion from Board members. Certainly dividend is always part of that conversation. As of today, there is no indication that we will be starting a dividend, but it is certainly always an option.But right now when we look at it, we think there are some reasonably priced acquisition opportunities, and we also think that our stock continues to be a very compelling investment. So, we will continue to have dividends on the agenda and as part of the discussions.

Thank you. And this concludes the question-and-answer session. I would now like to turn the call back over to Scott Thompson for closing remarks.

Thank you. To the over 7,000 employees around the world, 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 the Board of Directors. This ends the call today. Thank you, operator.

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