Comments from Tempur Sealy’s Investors Call
Mark Sarvary – President and Chief Executive Officer
Thanks, Mark. Good evening everyone; thanks for joining us. Today, I’ll provide an overview of our performance in the first quarter and the progress we’re making against our stated sales, margin and earnings growth objectives. Dale will then provide details on the first quarter results and the updated 2015 guidance.
I’m pleased to report that the first quarter of 2015 has been strong. Sales and profits are growing. Correcting for currency, net sales were up 9% and adjusted EPS was up 20%. Margins are improving as we expected and were particularly strong in North America, where both gross and operating margins improved materially. These improvements are the continuation of the operating margin improvements we saw in the back half of last year.
These results are consistent with the plans that we communicated at our Investor Day in February to drive sales at above industry rates, to grow adjusted EPS by 15% a year and to improve margins by more than 100 basis points in 2015 and 300 basis points over the next three years.
Our sales performance was as planned in Q1, it was driven primarily by North America, but international sales were also slightly better than planned and this despite a more challenging foreign exchange environment. Regarding FX, our first quarter adjusted EPS of $0.55 included a negative currency impact of $0.09 a share compared to Q1 of 2014 and was about $0.02 worse than we had anticipated at the time we provided guidance in February.
Turning now to North America segment net sales, our North America business segment net sales were ahead of plan, driven primarily by higher Sealy sales. Net sales were up 7.5%, with US net sales up 8.7%. And while Canada net sales were down 4.5%, on a constant currency basis they were up 7.2%. In the US, sales of both Tempur-Pedic and Sealy products grew at a high single digit rate.
Tempur-Pedic was driven by the continued sales momentum of last year’s new product introduction as well as adjustable bases and sales through the direct channel. Sealy was driven by strong growth of the Sealy brand sales and solid double digit growth of Stearns & Foster and Optimum.
As we look to the balance of the year in North America, we expect the recent launches of TEMPUR-Flex and Posturepedic products as well as continued momentum of adjustable bases and last year’s launches to continue to drive our top line growth.
Now, on margins, North American margins were up significantly year over year and in line with where we expected them to be. Correcting for currency, adjusted gross margin increased 150 basis points, driven by the US where Tempur margins increased over 300 basis points and Sealy’s margins improved 100 basis points.
We’re particularly pleased with the overall gross margin performance, given that both the lower-margin adjustable bases and Sealy products were a higher proportion of the mix than anticipated. Pricing initiatives were implemented during the quarter and productivity, particularly in the Tempur plants, also contributed to margin improvement.
The Sealy US gross margin initiatives that we discussed at the Investor Day are well underway and we believe will contribute to margin improvement to some extent in 2015 and to a larger extent in 2016. The work is proceeding well and we remain confident that we will improve Sealy’s US gross margin to 33% in the next few years.
Overall, the operating margin momentum we saw in North America in the second half of last year continued into the first quarter of 2015. Excluding the effects of the Canadian dollar, North America adjusted operating margin improved 100 basis points and we expect further improvement as the remainder of the year plays out.
Now, turning to international, we're also seeing good performance internationally, with results slightly better than planned. Correcting for currency, net sales increased about 13%, with very strong growth in Asia Pacific and Latin America and modest growth in Europe. Our Asia Pacific growth resulted from the contribution of the recently acquired Sealy brand rights in Japan and our established Tempur business throughout the region. Our Latin America growth was driven by both Sealy and Tempur brands. Sales in Europe were constrained by continued weakness in Central Europe, which was down in the quarter. Sales of Sealy and Stearns & Foster products in Europe contributed the majority of growth.
We transitioned manufacturing of the Sealy hybrid mattress to a new supplier and are now fully up and running. Sealy Europe represents a $200 million growth opportunity and with the supply chain established and distribution building across Europe, we are now in a position to capitalize on this potential.
From a margin perspective, international margins declined as expected. As we grow the Sealy business internationally, we expect to generate higher operating profit dollars but at a slightly lower margin rate. In the first quarter, Sealy drove the majority of the growth and foreign exchange was a drag. As we look to the remainder of the year, we expect foreign exchange to continue to pressure sales and margins, but we are projecting an improvement in gross profit and operating income dollars in the second half of the year versus the prior year after correcting for foreign exchange.
2015 is an important inflection point in our business. Over the last two years, we've accomplished a great deal. We responded to the changed competitive environment in 2012 by taking decisive and effective action through 2013 and 2014, which has resulted in a doubling of the value of Tempur Sealy from September 26, 2012, the day before we announced the acquisition of Sealy. This game changing acquisition was completed in 2013 and we then drove strong growth at Sealy in 2014, with Sealy gaining US market share for the first time since 2009 and coming into 2015 with strong momentum.
We've also captured $45 million in synergies to date, with another $25 million in our projections that we are confident we can achieve. At the same time, we re-energized Tempur-Pedic in North America, strengthening the leading premium brand in the industry, achieving a 9% sales increase in 2014 and along with significantly improved margins in the second half of the year. We also positioned our international business for future growth, through the acquisitions of Sealy brand rights in Europe and Japan. However, our opportunity to improve margins is significant, particularly for Sealy. It is a primary focus of the company and we are implementing a comprehensive program to improve operating margins by 300 basis points over the next three years.
Today, we expect significant improvement to both the top and bottom line to be realized from these initiatives in 2015 and beyond. Our team has successfully addressed the changed market and as we look to the future is executing a clear plan that will enhance results as we outlined at the investor Day. We are pleased that our first quarter results met the benchmarks we set, especially with regard to our aggressive gross margin improvement plan and believe this is just the beginning of our positive momentum. We are confident that the continued execution of our plan by this management team will generate enhanced value for our shareholders.
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