Ladies and gentlemen, thank you for standing by and welcome to the Tempur Sealy Second Quarter 2020 Earnings Conference Call. At this time, all participants’ lines are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to your speaker today, Ms. Aubrey Moore, 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 2020 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 the Form 10-K and the company's quarterly reports on Form 10-Q under the heading Special Notes Regarding the Forward-Looking Statements and/or Risk Factors. Any forward-looking statement speaks only as of the day on which it was made. The company undertakes no obligations to update any forward-looking statements. 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, I will turn the call over to Scott.

Thank you, Aubrey. Good morning and thank you for joining us on our 2020 second quarter earnings call. Our thoughts continue to be with all the people around the world whose lives have been impacted by the global health crisis. I'll begin with providing an overview on how we’ve strengthened our competitive position. Then Bhaskar will review in detail our quarterly financial performance, discuss several second quarter highlights and review the balance sheet and liquidity. Finally, I'll conclude with some thoughts about our long-term business outlook. Our second quarter global operations were dramatically affected by COVID-19. The board of directors and I, are proud of the company's swift response to the unprecedented challenges that the worldwide health crisis has presented. We focused on the safety of our employees who are working tirelessly to continue delivering on our commitments to our retailers and supplier partners. It was definitely a quarter of lows and highs, ending clearly on a high note. Despite the remarkable amount of volatility and transformation within our industry, we're reporting a second quarter net sales decrease of only 8%. In fact, U.S. sales grew 2%. We're pleased to report adjusted EBITDA for our credit facility decreased only 3% compared to prior years. Our leverage ratio improved to a record low of 2.8 times adjusted EBITDA, down significantly from 3.7 times as of June 30, 2019. And short-term liquidity expanded to over $600 million. I want to spend some time discussing how we've strengthened our competitive position in the marketplace, and how we see the opportunity to continue our momentum in future periods. Over the last five years, we've focused on finding problems and addressing them with an eye to creating long term value. This has kept us nimble and guided our decisions in making our investments in people,…

Thank you, Scott. Before going into the detail, I would like to briefly expand on the trends we experienced through the quarter. We exited the first quarter with accelerating negative trends, as COVID began impacting our North American market. In early April, the trends reached the worst, at down 80% during a few days. We then saw sales trends improve throughout the remainder of the month, and we ended April down 55% as compared to the prior [inaudible]. We anticipated that the April trends would continue to modestly improve throughout the remainder of the quarter. However, business conditions improved quicker than we anticipated in the U.S. and by Memorial Day, we began to experience positive year-over-year trends in the U.S. The reopening of brick-and-mortar stores, the acceleration of our e-commerce business, and the improving global trends, drove the sequential improvements from April to May to June. The inability to foresee this rapid change of volume has caused some inefficiencies in labor and shipping costs, thus pressuring gross margin. We are still experiencing these costs as we ramp up. We have and will continue to spend whatever money we need to service our customers. Turning to the financial results, please note that we have adjusted $25 million of charges during the quarter. These charges were in accordance with our senior secured credit facility and the subsequent financial details have been adjusted for these items. I want to call out that $8 million of those charges were in operating margins from COVID costs associated with temporarily closed company-owned retail stores and sales force retention costs. Of those $8 million in charges, $6 million were in North America, and $2 million were international. The impact on EPS for the second quarter was $0.11 per share. Before going into the segment details, I would…

Thank you, Bhaskar. Great job. Tempur Sealy is a market leading, vertically integrated, omni- channel global company with solid fundamentals in a growing category. We believe we're well positioned to deliver above market performance, as we focus and are passionate on our long-term initiatives. Our four key long-term corporate initiatives include: first, develop the highest quality bedding products in all the markets we serve; two, promote worldwide brands with compelling marketing; three, optimize our powerful omni-channel distribution platform; and fourth, drive increased EBITDA. These long-term initiatives helped us weather one of the greatest challenges industry has ever faced and positioned the company not just to deal with the crisis, but to emerge even stronger on the other side. I would be remiss, if I did not thank our world-class workforce and upstanding third-party retailers, suppliers, licensees, and joint venture partners, all of who have made Tempur Sealy resilient and successful. There are few items in particular that give me confidence about the future. First, our go-to-market approach around the world is diversify and has proven to follow the customer wherever and however they want to shop. Second, our pivot into compressed products, has been promising, realizing solid growth both with TEMPUR-Cloud and Cocoon by Sealy. These products have been highly successful, driving additional direct channel growth and generating interest in Tempur Sealy products within a new segment of consumers. We continue to invest in this growing portion of the market and have purchased over 25 compression machines for our network to assist us in providing the most convenient and highest quality product to the consumer. Three, Sealy has become the number one brand in the U.S., which speaks to market share gains, a high level of quality and value in the industry. Our new Sealy plant in Dallas, Texas is…

[Operator Instructions] Our first question comes from the line of Curtis Nagle with Bank of America. Your line is open.

Good morning, guys. Thanks very much for taking my question. Yeah, so just wanted to quickly I guess, touch on next gen and gross margin in 3Q. So you'll have less capacity constraint in Tempur versus Sealy. Obviously, sales are going to be extremely strong and the quarter is pointing to that, more stores open, including your own. And so I guess why wouldn't we -- why shouldn't we expect a pretty decent improvement in North America gross margin due to these, you know, mix factors?

Curt, we would expect gross margin expansion in the third quarter, you hit it right on is that if compared to the first quarter, we should see improvement. And obviously on a year-over-year basis, just reiterating some of those things you said, is that we would anticipate product brand mix to dissipate as we get through the -- as we get through the third quarter as well as we will have a bit of a commodity tailwind for us and then some of that deleverage that we saw in the second quarter, that should dissipate as well. So you're spot on.

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

Good morning, everybody. Hope you're all doing well and staying safe. Congrats on managing through a difficult quarter.

Thank you for that.

I have one of your favorite two-part questions here. But, you know, I was just curious if you could expand a little bit on, as the business started to recover, what -- what kind of did you see in the wholesale trends by account size in the U.S.? And then maybe compare and contrast that to kind of the trends in international wholesale? I know there's some investor worry about just the different size and the fragmented nature of the bedding industry with small businesses and stuff.

Yeah. Thanks for your question. Let me see if I can kind of help you with that. In the U.S., in general, I would say the larger retailers came out of the box faster. They were a little bit quicker to lean into online. A little bit more aggressive in our advertising. And so we saw that the bigger retailers came out faster. And then probably I'm going to say 30 to 45 days later, we saw what I'll call the, all other, in our terminology. It's like someone turned a switch on almost, started coming out of the box. And by the time you got to the end of the quarter and into July, I would tell you that both the larger retailers and the all other were about equal as far as the strength at which they came out of this particular trough. Internationally, man it’s all over the board, by country. I don't think there's anything from an international standpoint, where there is any difference between the large retailers and the small retailers coming out of the box. Internationally, it is clearly by country and it all relates to the virus.

Thank you.

Your next question comes from the line of Atul Maheswari with UBS. Your line is open.

Good morning. Thanks. And thanks a lot for taking my question. Scott, at this point, what is giving you visibility with respect to sales over the balance of the third quarter? I understand that July is very strong, but what's giving you the confidence that this will continue in August and September? And then along those lines, is the continuation of July trends what’s speaks into your guidance of 25% sales growth or are you expecting trends to decelerate in August and September and still hit the 25% mark? Thank you.

All right. Thank you -- thank you for your question. You know, let me be first of all clear, as we sit here today, I mean, this is a very broad-based order trend that we're seeing. July to-date, we're experiencing order growth in every country in the world we operate. So I mean, it's not just U.S. stimulus checks or something like that. We are seeing order growth in every country in July. I think that's one of the -- one of the most important things that, I would tell you, that gives us confidence. Also, if we look outside of our category, and we look at furnish -- and home furnishings, look at home development, look at RV sales. I mean, there is clearly a huge wave of discretionary income that is moving between, I'll call it travel and entertainment, for lack of a better way to say it, into other categories and we're benefiting from that. We've got an extremely large backorder which is unusual for us. So we've got the orders in-house. We have literally turned down tens of millions of dollars of orders because we're capacity constrained. And I don't think we've ever turned down orders in our history. So we're turning down some orders in the U.S. primarily in the Sealy side of house. So when we look at things, we have pretty good visibility to the third quarter. And in the, I could call it guidance in 25%, give you some perspective. Most of the risk in that number has to do with capacity constraints, not demand. Demand feels very strong everywhere we look. Now, we don't have a long visibility, because I think obviously that's going to be dependent on some of the healthcare issues for a while. But we've got, what I call very strong visibility third quarter, which is why we felt comfortable giving you some perspective.

Atul, just to answer your second part of that question, what I would say is just as a reminder, we did start our new distribution in the back half of the third quarter, not going to necessarily parse up the quarter but just be mindful that it did start in 3Q of 2019.

Thank you. And our next question comes from the line of Peter Keith with Piper Sandler. Your line is open.

Hey, good morning, everyone. Congrats on the rapid recovery. I wanted to just maybe have a follow up question to the last comments about capacity constraints and your current approach to advertising. And Scott, I think you'd said you're playing more offense. Are you leaning into advertising as much as you want right now or are you #[inaudible] because of some of the supply constraints that you've talked about?

Now, we're playing a long game. I mean, you could make an argument that we could pull back on Tempur advertising, make a little bit more money in the third quarter and do that kind of stuff. But look, we -- we're advertising big time on Tempur and leaning into our media really for the foreseeable future, and that’s what we're seeing over the last couple of months, is the Tempur growth rate has come up significantly. And now it's actually growing faster than Sealy. We think it's important for us to help lead the industry kind of out of this trough and help push ASP because it has a huge economic benefit for our retailers. And we kind of look at that as part of our responsibility as largest bedding company in the world.

Thank you. Our next question is from the line of Seth Basham with Wedbush Securities. Your line is open.

Thanks a lot. And good morning and congrats on delivering a very strong quarter in the end. The question I have is just around mix. You mentioned leading the industry out from an ASP standpoint, but can you comment on within the Tempur brand, are you anticipating seeing ASPs move higher on a year-over-year basis and your mix be favorable to gross margins for the balance of the year?

Within the Tempur brand -- within the Tempur brand, I would expect we have positive product mix, within the Tempur brand, is what we're seeing, right, Bhaskar?

Absolutely. So if you think about what happened in the second quarter specifically is that retailers were coming back. Now as we sit here in the third quarter, the vast majority if not all, of our retailers are back at the sales force in-house. So when you think about it, the trained sales force is back and now versus a volume focus will be focused on higher priced products specifically on the Tempur side and that should help us ASP, not only within Tempur but in Sealy as well.

Our next question comes from the line of Keith Hughes with SunTrust. Your line is open.

Thank you. As you look towards the third quarter with the 25% you discussed earlier. Would you still expect North American sales to come in excess of that, or is there going to be a catch up here with the international given the weak second quarter?

Yeah, we will we would expect North America to be stronger. But we'd also expect international to be positive.

That's right, Scott.

Okay, thank you.

Our next question is from Laura Champine with Loop Capital. Your line is open.

Thanks for taking the question. So it's really about what's happening industry wide. You mentioned some concerns around supply chain constraints impacting Sealy. Can you give us more color on what components are being impacted and how that -- how you expect that that supply to come back online? And will that potentially drive up the pricing of those components which might offset some of the tailwinds that you see on COGS on the on the Tempur side?

Okay, thank you. Thank you for your question. And look, I think we're benefiting from two things. I think we're benefiting from our competitive position and being positioned correctly going into this. And then you're absolutely right, we also have an industry tailwind that we're riding. When you go to the capacity constraints, and we'll go down to the supplier issues, the supply chain is -- is operating well, but I would have to say it's a little bit fragile, wasn't built for quite this sales surge that the industry is going through. So there are some hiccups in the supply chain. Probably the biggest choke point in North America right now would be in the area of springs. And that's mainly pocketed springs, working very closely with our supply partner there. There has been some price increases that were passed on relative to these springs here in the third quarter. I think that takes care of it. We'll see. But it depends on what goes on in the future. But it's possible that there might be minor price increases in our spring beds going forward.

[Operator Instructions] Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Your line is open.

Hi, good morning and nice results here. Wanted to follow up on the topic of e-commerce. Scott, you gave us a lot of interesting tidbits here, on the call this morning. I was hoping you could talk a little bit more about your learnings over the last few months, and how your outlook for Cloud and Cocoon have evolved, given the strength that you've been seeing? And how you think you might be able to further enhance the e-commerce offering of the Tempur-Pedic brand in particular?

Thanks. Great, thank you. It's one of my favorite topics. You know, first of all, the TEMPUR-Cloud has been an absolute home run, works perfectly in high density cities, and an outstanding product. The Cocoon by Sealy, we had it for a number of years, and it has just continued to accelerate in the marketplace, and now it's become a significant bed in the box product in the marketplace. I think I'm going to answer your question kind of two ways because you kind of focused on you know, the -- what you call the direct business. But another I mean, we're working very hard with our retailers and during this shutdown, we're able to help them with their e-commerce business. And the traditional retailer, okay, that everybody's been saying, is going to get disrupted and everything. I will tell you that the traditional retailers get outstanding job during the shutdown online and we saw sales increases from the traditional retailer of 4x what they were doing before the pandemic. So a lot of the learnings really happened in the traditional retailers. And I think you'll see the traditional retailers now making the proper investments in people and processes to be more competitive online. And so we're -- we're thrilled with what we see from the traditional retailers from an online standpoint, and we're glad to help them at times in that process. Of course, we continue to work on our ability. I think there the business is going to continue to grow. But I will also say, one of the most interesting things that happened since stores have opened, you would normally expect as the stores open for the online business to kind of do a little bit of give back, as customers are in store. And, you know, to-date, what we're seeing both in our direct business and maybe even more importantly, in our retailers business, our third-party retailer business is, the online business is not coming down. It's holding as they open stores. And that was a little bit surprising and but it's a -- it's an outstanding trend for the industry and proof to my earlier comment that this pandemic has forced the traditional retailers to get in the game. And they have been very surprised both on the volume, the profitability, and their ability to do business online if they were forced to.

And our next question is from Bob Drbul with Guggenheim. Your line is open.

Hi and good morning. I was just wondering if you could give us a little bit more color in terms of the commodity cost, input costs. You know, how, if you were opportunistic with some of your buys over the last few months, and just sort of how you're positioned? I think you said there should be some benefit in the third quarter, but just the duration of the input cost and commodity costs that your position for the remainder of the year?

Absolutely. Good question. So as we think about commodities, generally the way our contracts and our relationships work, is we have any way anywhere between the 30- to 60-day lock as it relates to future purchases. So with that, as a backdrop is, I would anticipate in the third quarter, somewhere between $4 million to $5 million of upside on a year-over-year basis.

Great. Thank you.

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

Hi, this is Maryann for Bill. Thanks for taking my question. You previously implemented cost savings that were expected to generate $300 million of savings. Are you so moving forward with those given your strong results, and had any those actions been taken before demand really picked up?

Well, yeah, I can see some of that. Some of those actions were taken and then immediately reversed. As I think you can probably tell from the prepared remarks, going into this, we -- we thought we had a pretty tough road in front of us, very aggressive and getting our cost down. But time we got our cost down, we realized, oops, we need our cost to get up. We need people, we need advertising. And the majority, in fair price the majority of those cost reductions were almost immediately reversed. And now we're in the growth mode, we're probably in the market hiring somewhere close to 600 to 700 incremental people, to staff new operations. So probably that would be a different business plan than we found ourselves in and when we did roll that out, we did say that those costs were, quite frankly costs we didn't want to cut. And so actually we're happy that we got to spend those -- spent that money, brought people back from furlough and now we're in an active growth mode.

The only additional thing I would call out, in the prepared material we did indicate that suppliers or our customers are our number one priority. So in order to make sure that we get the supply where it needs to be, is that we are investing from a cost standpoint to make sure that is satisfied.

And our last question comes from the line of Seth Basham with Wedbush Securities, your line is open.

Hi, I was just hoping that you could touch a little bit more on cap allocation, obviously what kind of target leverage ratio, but remind us what the restrictions are as it relates to share repurchases and how you're thinking about share repurchases going forward here?

Sure, we have board authorizations for a large amount of share repurchase. I don’t remember the exact number but we can look it up. But we did put a kind of a safety net loan in the second quarter to put some additional liquidity into the company. It's a 364 loan. And in that loan, we agreed not to buy stock back until we pay back that loan. Quite frankly, we're probably not going to need that loan back but we're not going to need that long. But it's still outstanding. So before we could buy stock back, we would need to pay off that $340 million.

$200 million.

$200 million you know, loan and then we would be back in the game if we chose to buy stock back.

Thank you. We are not showing any further questions. So I'll now turn the call back over to Scott Thompson for closing remarks.

Thank you, operator. To the over 7500 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. That ends our call for today.

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