The Urethane Blog

Tempur Sealy Comments from Investors’ Call

Scott Thompson

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 of 2019.

I’d like to highlight three items from our third quarter results. First, as I mentioned, global net sales grew 13% for the third quarter versus the prior period with broad base increases in demand, above our expectations for both Tempur-Pedic and Sealy all around the world.

Looking internationally, net sales grew 8% on a constant currency basis. We experienced a degree of market uncertainty in the U.K. France, Hong Kong, and China, which created choppy business conditions. Despite these countries specific issues, the international team delivered a solid performance.

In North America, we grew sales a robust 15% in the quarter, with both Tempur-Pedic and Sealy growing double-digits. As a reminder, this quarter had no new products and no significant changes in distribution for the Tempur-Pedic brand.

Rollout of the new Tempur-Pedic product lines were complete in the second quarter, and new significant distribution gains for Tempur-Pedic start shipping in the fourth quarter of 2019. We believe Tempur-Pedic continues to take market share in the premium price band. I should also note that we improved our product mix as our high end TEMPUR-Breeze products continued to gain momentum.

Turning to Sealy’s performance in North America, we are very pleased to see continued sales momentum, while at the same time we also successfully expanded our distribution. The combination resulted in outstanding sales growth in the quarter. Our focus on internal initiatives to deliver the highest quality product and the highest level of manufacturing reliability and customer service continues to be the reason that existing retailers lean into our portfolio of products.

We also believe the recently enacted anti-dumping case duties against China manufacturing benefited all U.S. bedding manufacturers. Our North America operation team has evaluated our near, and long term opportunities with Sealy and Stearns & Foster. The results of which are that we expect to open one new state of the art Sealy plant in Texas in late 2020. Although we currently have adequate capacity to serve the market, we believe, we have long term upside in these brands, and this plant will support our higher volume of units we expect across the U.S. network.

The second highlight from the quarter was the over 60% growth in our global direct channel. International direct grew 21% on a constant currency basis, with growth both in e-commerce business and our company owned stores. In North America, the direct channel almost doubled year-over-year and grew over 30% excluding the acquired Sleep Outfitters stores.

We opened our 50th Tempur-Pedic retail store during the quarter, and we expect to open a handful more by the end of the year. As we said previously, we can see the Tempur-Pedic retail stores over the long term being 125 stores to 150 store opportunity. Stores open more than a year had very strong same-store sales at over 20%. It’s worth noting that same store sales growth does not include our e-commerce channel.

Our direct-to-consumer online channel also had solid double-digit growth. It is clear that our direct-to-consumer business is significantly outperforming the average disruptor brand in the U.S. market, both in sales growth, and more importantly in real, sustainable profits and cash flow.

The third highlight for the quarter is it reported the highest quarterly gross profit in the company’s history at $361 million. The cumulative growth from our direct channel, a higher product mix due to the success of our premium price, Tempur-Pedic and Stearns & Foster products and unit volume increases resulted in gross margin leverage. This quarter’s reported gross profit is greater than the gross profit we generated back in 2016, when we had higher total sales, and are bedding products were sold through a greater number of third party retail doors, including Mattress Firm.

Over the past few years, we’ve developed new innovative products, invested in our operations, and diversified our go-to-market strategy, all to deliver healthy gross margin expansion and broad based sales growth.

Our competitive position has never been stronger. On top of this momentum, we are thrilled to have improved our wholesale distribution in North America, by recently entering into a new win-win supply agreement with Mattress Firm, which we believe will benefit both companies and the U.S. bedding business as a whole.

Before turning the call over to Bhaskar, I want to mention that two members of our executive team will be taking on new reduced roles starting in 2020, as they transition towards retirement. Rick Anderson, EVP, President in North America, and Carmen Dabiero, SVP of Human Resource.

I want to thank them for their many years of contribution to Tempur Sealy. We’ve been preparing for these transitions for several years, and I’m very confident in our succession plan. Both executives have built a strong team; an internal leadership is in place to ensure continued performance.

With that I’ll turn the call over to Bhaskar to walk you through the financial results in more detail.