Tempur Pedic International (TPX)

Q3 2011 Earnings Call

October 20, 2011 5:00 pm ET

Executives

Barry Hytinen - Senior Vice President of Financial Planning & Analysis, Investor & Media Relations & Competitive Intelligence

Dale E. Williams - Chief Financial Officer and Executive Vice President

Mark A. Sarvary - Chief Executive Officer, President and Director

Analysts

Jason Campbell - KeyBanc Capital Markets Inc., Research Division

Mark Rupe - Longbow Research LLC

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Jessica Schoen - Barclays Capital, Research Division

Chad Bolen - Raymond James

Peter J. Keith - Piper Jaffray Companies, Research Division

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Jon Andersen - William Blair & Company L.L.C., Research Division

Eric Hollowaty - Stephens Inc., Research Division

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to Tempur-Pedic Third Quarter 2011 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. Now I'll turn the call over to Barry Hytinen, Senior Vice President. Please begin.

Barry Hytinen

Thanks, Tyrone, and thank you to everyone joining us on today's call. Joining me in our Lexington headquarters are Mark Sarvary, President and CFO; and Dale Williams, Executive Vice President and CFO. 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 forward-looking statements, including the company’s expectations regarding sales and earnings, 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, competitive, operating and other factors discussed in the press release issued today. These factors are also discussed in the company's SEC filings, including the company's annual report on Form 10-K under the headings Special Note Regarding

Forward-Looking Statements and Risk Factors. Any forward-looking statement speaks only as of the date on which it is made. The company undertakes no obligation to update any forward-looking statements.

The press release, which contains a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures, is posted on the company's website at tempurpedic.com and filed with the SEC.

Now with that introduction, it is my pleasure to turn the call over to Mark.

Mark A. Sarvary

Thanks, Barry. Good evening, everybody, and thanks for joining us. Today, I'll provide an overview of our performance in the third quarter and an update on our strategic focus areas. Dale will then provide a detailed review of the financial results as well as our updated financial guidance.

We're pleased with our third quarter performance globally. Sales were up 30% from last year, and earnings per share were up 45%. Tempur continues to gain market share both in the U.S. and internationally, primarily as a result of our strategic investments in new products and brand advertising.

Gross margin improved 140 basis points year-over-year, a result of our productivity programs, favorable mix and fixed cost leverage. And the improvement in gross margin allowed us to maintain our commitment to significantly invest in marketing while still expanding operating margin 220 basis points to 25.2%. Having said that, our gross margin in the third quarter was lower than in the second quarter, and Dale will provide more details on that when he talkies about our financial results.

Now I'd like to provide an update on our strategic initiatives. Firstly, our commitment to ensure that there is a TEMPUR mattress and pillow that appeals to everyone. In our international markets, the Cloud launch is progressing very well. The line is now in distribution in all markets with the U.K. being the large major geography to start shipping. Retailer and consumer feedback remain very positive, and we believe the Cloud Collection is highly incremental. We anticipate that our Cloud business will be an important contributor to our international markets' overall growth during 2012.

In the U.S., our rollout of the Contour Collection was completed on schedule in advance of the Labor Day shopping period. This line is designed for those consumers with a preference for the original Tempur feel and offers an improved product with a broader differentiation within the line compared to the products it replaces. Again, we're very pleased with the response that this line has received both from retailers and consumers.

Additionally, in the U.S., we showcased our new Traditional pillow line in August at the Las Vegas Bedding Show and began shipping this quarter. These new pillows supplement the very popular iconic TEMPUR-molded pillows. These are filled pillows designed to appeal to consumers who prefer a more traditional pillow, one that is more huggable. A broader range is a key component of our strategy to ensure greater distribution for our pillow products.

Lastly, from a new product perspective, as I mentioned on our second quarter call, we have several new product concepts in various stages of development. Over the coming 12 to 24 months, we will introduce exciting new products that we anticipate will drive considerable growth and market share gains in the premium space by meeting the needs of large consumer segments that we currently do not address. These new products cut across all of our lines and geographies.

We're in the final stage of development for a new line we expect to introduce in January at the Las Vegas show that we're very excited about, and we look forward to showing it to many of you in person. As our investors understand, due to the competitive nature of future product introductions, we'll make no further comments on this topic during the call.

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