Tempur Sealy International's (TPX) CEO Scott Thompson on Q1 2016 Results – Earnings Call Transcript

Now I would like to call out a few specific things in the first quarter. First quarter sales declined 2.5%, and I want to make a couple observations on the sales results. Barry will have more to say in his section. First, based on our conversation with industry participants, we are hearing that the softness was broad based through the North American mattress industry. With January sales being robust, then February and March being soft.

While it's unclear why the industry experienced this pattern in the first quarter, we believe that Tempur Sealy at a minimum maintained market share in the quarter in North America. You should also note as we move into the second quarter, sales trends have improved with April being strong for both Tempur and Sealy in North America.

Brad Thomas

My question was around sales and you know with the revenue decline that you posted in the quarter, obviously there are questions around how consumer spending is holding up right now within the industry, what changes are unfolding from a competitive standpoint and so I guess the real question would be, you know, how are you thinking about those aspects of sales and as you reiterate your revenue guidance for the year, you know, what gives you confidence to do so, considering that does imply that you probably need to drive high single digit, maybe even double-digit revenue growth, later this year? Thank you.

Scott Thompson

Sure. I can't say that was an unanticipated question at all and I certainly appreciate it. First of all let me just give you just some color outside of the script on — I'm going to start with North American sales. I think if you — the way we see North America economy in the first quarter, we think GDP will be relatively weak, call it 0.7 or something. We believe consumer spending numbers when they're finally come in will be slightly weak. Durables are certainly going to weak. So first of all I would say from first quarter standpoint from the macro standpoint, it wasn't robust. Then in our channel check as you might guess when the sales slowed down in February and March we certainly reached out and touched a lot of people in the industry, talking to them about the furniture demand, what some of our suppliers were seeing, and I think there is no question from our perspective and our research that the industry in general was also not very robust, not just mattresses but just consumer spending. That's our read. It's a little early and we'll get data obviously over the next three weeks as everyone else reports.

I think the other thing that when you look at our revenues you have to be careful of, and it took us a little while to really understand what was going on, is the floor model discounts and Barry talked about it in his prepared remarks, but let me make sure we understand what we've experienced is the Breeze launch is larger than the Flex launch, and on the Tempur side that means that we're going to have more floor models, which is going to be a headwind for revenue.

Also, and this was the part that took us a little while to understand, when you think about Flex last year, Flex was a completely new field. And so our retailers did not have to liquidate inventory of old Flex because there wasn't any old Flex last year. This year, what we experienced in the first quarter as we announced Breeze 2.0, was retailers had to clean out their inventory of Breeze 1.0. And yes, this is an industry that doesn't have a lot of inventory in its system but there is some inventory in the system. And so our retailers found themselves having to liquidate Breeze 1.0 in what was a relatively weak quarter. We think that was a significant drag in the first quarter revenues. A couple other things that I guess I would point out on revenues, Barry called out our joint venture, which had a relatively rough first quarter. Clearly he called out that we're expecting it to have a robust second quarter, so we see that as more of a one quarter item. So that helps our confidence level.

A couple other things, because I got kind of a long list, kind of like I wonder what's going on here, the other thing I have to tell you is you go back and look at my original conference call, I think it was third quarter last year, I think we were pretty clear that one of the strategies that we were going to deploy was that we were going to be EBITDA focused and we see a growth company as a company that grows EBITDA and we're not going to be overly sales focused. Clearly you have to have sales growth and sales are critically important, but that we weren't going to stretch for sales. I think the term I used was we were going to be more EBITDA focused or margin focused than sales and some people didn't really understand that and you know, let me take a couple seconds to kind of talk about that. I also think that's fundamental the way we're running the business going forward which has nothing to do with your particular question, but I think investors need to understand, that from our perspective we can drive sales any quarter we want to. It's very simple. All we have to do is lower price or increase incentives. That's not the way to run this business model.

We run the business model the entire income statement, and so at times, look, we look at each customer relation reports, we look at their profitability and we think about what's the right risk reward for that particular relationship, and at times we pass. And so we are being more focused on profitability than sales and that's in the numbers some, too. But to answer the bulk of your question, when I look at the strength of our new products, both domestically and internationally, when I look at the reasons why there is a small decrease in revenues this quarter and I can pretty well pencil them out as to what caused them, we feel pretty — I guess I should say what I'll call April activity in sales, we feel pretty good. Now, we did get a [indiscernible] first quarter and that January was robust and then it slowed down and we could get a head fake, but I got to tell you as I sit here now we're feeling pretty good about things.

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