Tempur Sealy Comments from Investors’ Call

Scott Thompson

Thank you, Barry. In the second quarter net sales increased 5.2%, adjusted EBITDA increased 38% and adjusted EPS increased 74%. This is Tempur Sealy’s best second quarter in the company’s history for sales, adjusted EBITDA and adjusted EPS. Additionally, our use of capital continued to improve. Our return on invested capital over the last 12 months on a GAAP basis improved to 16.4% and on an adjusted basis 18.3%. Our focused execution has driven this improvement through a combination of increased revenues and cost reductions while holding invested capital essentially flat.

I think its noteworthy the team achieved this in a worldwide economy that I would describe is just okay. I’m personally very pleased with the strong performance by the entire worldwide team as they focused on what matters and passionately attacked a broad array of issues and opportunities. The quality of earnings is very high, with strong conversion to cash and no unusual adjustments. Despite this initial progress I can comfortably say we all feel we can do more and we are engaged in the areas that are underperforming. The organization continues to focus on our key initiatives.

Let me highlight just a few of our initiatives. First our ability to develop the best bedding product in all the markets we serve. In the first quarter, we launched the new TEMPUR-Breeze in the Stearns & Foster product lines in North America. The new Stearns & Foster line including 19 models with an average retail prices up significantly over the old one. Both the new TEMPUR-Breeze and Stearns & Foster product lines are driving traffic into our retailer store by targeting specific needs that are resonating with consumers. For those who sleep hot, we are offering new and improved cooling technology with the TEMPUR-Breeze. For those seeking high quality innerspring mattresses we offer the craftsmanship of Stearns & Foster. These products are being supported by creative and impactful marketing.

Internationally, where we roughly get 25% of our EBITDA the Tempur-hybrid has been launched and has been performing above our expectations. I should foreshadow that the international team has a full plate of launches over the next 18 months and I am looking forward to updating you on those products as they hit the market. The second initiative I’d like to highlight, our ability to expand North American margins without sacrificing market share. North American adjusted operating margin improved a robust 430 basis point, as compared to second quarter last year, the third consecutive quarterly increase.

During the quarter, we benefited from operational improvements, price increases, positive mechanizing mix and operating leverage on SG&A expanding margins even as we continue to invest in marketing and advertising as well as new products and innovation. Both the Tempur and Sealy brands drove price and mixed benefits with Stearns & Foster performing exceptionally well. Stearns & Foster is comping positive over the last year at a higher price point and it is not completely rolled out all customers.

As many of you know, we’ve been focused on gaining efficiencies from our Sealy assembly plant. In this quarter, we’re pleased to report we made another step forward in what we call four-wall margin. This is measure that takes out the impact of commodity changes and focuses on what is controllable at the plant. To quickly refresh in the third quarter of 2015, we reported 100 basis point decline in four-wall profitability. In the fourth quarter, it was flat. In the first quarter, this year reported 100 basis point improvement and I am pleased to report that we realized a 200 basis improvement this quarter. There is still a lot of work to do and opportunity to go after, but I think you can clearly see we’re on the right track.

Another key initiative I’d like highlight is, growing market share internationally. Our international business net sales increased 7.6% on a constant currency basis slight below our expectation but understandable considering the global events in markets. These are truly interesting times we live in. The world is full of change for sure, Brexit, or the recent tragic event in France and Germany being just a few example of the challenges our international team has to deal within last three months. Higher performance companies learn to accept change and rapidly adapt. We expect to continue grow our international sale despite these uncontrollable issues by focusing on new products innovation, expanding distribution and compelling marketing program.

I am proud of the progress the entire team has made on all of our initiatives to service our customers, drive innovation and expand profitability. People from many different areas of the company have worked together to deliver this quarter. This continues to be a journey that the team is passionate about and I feel fortunate to lead.

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