Barry A. Hytinen - Chief Financial Officer & Executive Vice President Scott L. Thompson - Chairman, President & Chief Executive Officer.

John Baugh - Stifel, Nicolaus & Co., Inc. Bradley B. Thomas - KeyBanc Capital Markets, Inc. Beryl Bugatch - Raymond James & Associates, Inc. Mark Rupe - Longbow Research Seth M. Basham - Wedbush Securities, Inc. Jessica Schoen Mace - Nomura Securities International, Inc. Keith Hughes - SunTrust Robinson Humphrey, Inc.

Peter Jacob Keith - Piper Jaffray & Co (Broker) Curtis S. Nagle - Bank of America Merrill Lynch Daniel H. Hofkin - William Blair & Co. LLC.

Good day, ladies and gentlemen, and welcome to the Tempur Sealy Fourth Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer; instructions will follow at that time. I would now like to introduce your host for today's conference, Mr. Barry Hyte (sic) [Hytinen]. Please go ahead..

Thanks, Catherine. Good morning, everyone, and thank you for participating in today's call. Joining me in our Lexington headquarters is Scott Thompson, Chairman, President and CEO. 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, earnings, adjusted EBITDA or net income and anticipated 2016 performance 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, regulatory, competitive, operating and other factors discussed in the press release issued today.

These factors are also discussed in the company's SEC filings, including but not limited to annual reports on Form 10-K and the company's quarterly reports on 10-Q under the headings Special Note Regarding Forward-looking Statements and/or Risk Factors, as well as the company's press releases.

Any forward-looking statement speaks only as of the date on which it is made and the company undertakes no obligation to update any forward-looking statements. This morning's commentary will include non-GAAP financial measures.

The press release contains reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures as well as information regarding the methodology used for constant currency presentations. We have posted the press release on the company's website at tempursealy.com and have also filed it with the SEC.

Our comments will supplement the detailed information provided in the press release. And now with that introduction, it's my pleasure to turn the call over to Scott..

a solid growth throughout the world in constant currency. In North America, sales grew 5%, driven by TEMPUR-Flex and TEMPUR-Breeze products and our Posturepedic launch has achieved record distribution and considerable strength in Hybrid collections.

Internationally, we grew 12%, with solid growth in Asia-Pacific, Latin America, including particular strength in our Sealy business. The next highlight is operating margin. Adjusted operating margin expanded 160 basis points to 14.5%.

This was driven by improved operating efficiencies from global sourcing, lower commodity costs, supply chain and plant improvements and higher-priced products.

In addition, we leveraged our operating infrastructure while remaining committed to invest in brand, new products and innovation, as evidenced by R&D and advertising spend both being up for the quarter. We had great flow-through in cash as operating cash came in at $101 million in the fourth quarter, an increase of $57 million over the prior year.

While we are far from where we want to be, I'm pleased to report we saw improving trends in our Sealy assembly margins. As we discussed on the third quarter call, clearly this has been a big focus item for our North America team.

In the fourth quarter, we saw stable margins year-over-year, which has marked a significant trend change from the year-on-year declines we have been facing in recent quarters. This was more than just the impact of commodities. We experienced improvements in manufacturing productivity from a trend standpoint.

We still have work to do, but it's refreshing to begin to see the results of our work in the reported numbers. Turning to capital allocation, as we foreshadowed on the last earnings call, we've gone through a thorough evaluation of the company's capital allocation strategy.

After looking at the business model in depth and the prospects across multiple economic scenarios, we've concluded that the appropriate leverage target should be about 3.5 times EBITDA.

The business has reasonably diverse geographic footprint, generates a lot of cash, has low maintenance CapEx, behaves reasonably well in recessionary stress testing due to the high variable cost structure and has no significant off-balance sheet debt. So what should you expect? The target leverage is just that, a target.

There will be times when we're above as we take advantage of opportunities and there will be times we might be below as we're viewing investment options. Having said that, it is clear that based on where we are today and our expected near-term cash flow that we have some excess capital in the system.

After reviewing several options, we currently think the best way to deploy some of the excess capital is to give it back to shareholders in the form of share repurchase activity. We are pleased to announce that the Board of Directors unanimously have authorized $200 million in share repurchase.

We expect this to be the first authorization in what will be a series of authorizations. We'll be working on a debt agreement to align them with our new average target and long-term strategy to return capital to shareholders. We've also been working on guidance policy.

The company, the team really, the team is focused on the near-term aspirational plan, which is based on 2017 EBITDA. For 2016, we're working hard to get on a glide path for success in 2017. Also as we've talked about, we're leaning towards margin versus revenue.

So where we are, is we're going to give annual EBITDA guidance in a range and some commentary on revenue and other items. As I mentioned, 2016 has started off in a solid fashion. Our guidance for 2016 EBITDA is $500 million to $550 million, growth of 10% to 20%. Barry will give you some more color on this in a minute.

Before I hand over the call, I would like to briefly comment on two other matters, the Danish tax matter and the recently announced streamlining of the Board of Directors. First, the Danish tax matter. While Barry will discuss it in detail, as the new guy on the team, I want to share my perspective. This is an international transfer price dispute.

It is about who gets the taxes, Denmark or the United States, in double-taxation under Subpart F of the Tax Code. The company did everything it was supposed to do, including relying on numerous independent firms, to determine what was the appropriate royalty rate. After a lot of review, we have determined we should increase our reserves.

This is an issue that's been worked on by the company for over 10 years. I want to put it behind us, eliminate the uncertainty and move forward. Turning to refreshment and streamlining of the Board of Directors, as I'm sure you saw from our press release on Tuesday, at my request, the Board of Directors worked on a plan to refresh and streamline.

The results are outlined in earlier release. I want to take just a minute and truly thank the five Board Members, who have chosen not to stand for reelection, for their many years of service and demonstrated leadership.

During their tenure as directors, the company grew significantly, established the Tempur brand worldwide, successfully acquired the Sealy brand and established the company as the largest bedding manufacturer in the world. They leave a legacy of accomplishments.

The 40% reduction in Board size is consistent with the overall organization's focus to drive to become more productive. Now, Barry will walk you through the quarter and the year results..

Sales growth of mid-single-digits on a reported basis and capital expenditures of approximately $75 million. Our 2016 CapEx is slightly elevated due to our continued productivity initiatives. Once we complete these initiatives, we anticipate approximate $60 million to $65 million in annual capital expenditures.

We anticipate depreciation and amortization to be approximately $95 million to $100 million in 2016. Our guidance is based on adjusted figures and dependent on the factors that I discussed at the beginning of the call.

From an adjusted EBITDA perspective, our guidance reflects margin expansion resulting from improvements in North America, offset partially by unfavorable merchandising mix internationally as we continue to launch our Sealy Europe operations as well as expand our distribution in Latin America and Asia.

We expect to ship a significant number of floor models as we launch the new Stearns & Foster collections and the TEMPUR-Breeze offerings.

So the demand for floor models has been strong, which is a great long-term sign, but will put pressure on our reported numbers in the first half of the year as we expect product launch costs to be ahead of prior year in the first quarter and second quarter.

Please carefully note our 2016 earnings seasonality should be similar to what we saw in 2015, with about 40% of EBITDA coming in the first half of the year and 60% in the back half of the year. And with the launches we discussed, we expect the second quarter to be stronger than the first quarter. With that, I'll turn the call back over to Scott..

Thank you, Barry. Great job. One last topic I'd like to address, since we talked last, there's been a significant transaction in our industry. I would like to congratulate Mattress Firm, its Board of Directors, Steve Stagner and his team on the pending acquisition of Sleepy's. It's an exciting opportunity for Mattress Firm.

I also see as an exciting opportunity for the company to have our portfolio of brands sold in the first ever national specialty mattress retailer and one who shares the importance of advertising and driving higher ASP.

We're pleased to announce that we've reached an agreement to extend our long-term supply agreement with Mattress Firm and strengthen our relationship by offering the limited assortment of exclusive Tempur-Pedic and Stearns & Foster products.

These products are designed to drive higher ASP and margins, while creating broader array of products for our customers to choose from. With that operator, we open the call up for questions please..

Thank you, ladies and gentlemen. Our first question comes from John Baugh with Stifel. Your line is open..

Thank you and congratulations on a strong fourth quarter. I was wondering if you could touch on Sealy International. I think you made the comment, Barry, that you expect it to be EBITDA-accretive.

Obviously, there was some drag on overall margins, but could you give us a sense of where that rollout is? What the impact may be on revenue over the next couple of years and sort of what your expectation on profit is there?.

Hi, this is Scott. I can give you a little bit of that. I don't do a lot a multi-year forecasting. As I said in my part, we're rolling out some newer products. We think that it will be kind of back-loaded from an international standpoint.

Barry mentioned we're going to be mixing down, but we see EBITDA growth overall from an international standpoint, if you let me take out the FX, which I have no idea which way it's going to go..

Okay.

And then quickly, Barry, on cash flow, just quickly, how would you expect working capital to play out in 2016 based on your mid-single-digit revenue forecast?.

You know, John, working capital tends to move around. What I would say is over the long term, we're very focused on improving cash cycle. As I mentioned in the prepared remarks, we think that there's a significant continued opportunity in payables and we're working on inventory days. And so, I would say that that's our focus over the long term..

Great. I'll defer to others. Thank you..

Thank you. Our next question comes from Brad Thomas with KeyBanc. Your line is open..

Thank you. Good morning, Scott and Barry. Wanted to ask about trends that you're seeing in North America, really domestically more specifically. I think on the Tempur side, you said that if we back out some of the one-time purchases that happened in the fourth quarter last year, you would have been up about 7%.

I think last quarter, you'd been running at about 9.6% growth.

Could you just give us a little bit more of a sense of what you've been seeing in the domestic market and how you're thinking about the outlook for the Tempur brand in particular in 2016?.

Sure, let me talk a little bit about just North America and I'll let Barry talk about particular brand. I mean, when we look at the world, we split the world up between North America and Europe, primarily because those are the biggest drivers of our business. The other markets we're in are significant from a growth standpoint for the long term.

When we look at North America, I mean you look at it, consumers have a cleaner balance sheet. We've got an improving housing cycle with housing starts forecasted to be up. House prices are forecasted to be up. GDP, call it 2.1%, not great, but certainly not bad. Consumer confidence looks good at 96.5%, again, not great, but not bad.

Unemployment rate going from 5.3% this year to 4.8% or so maybe next year, looks pretty good. Wage growth, not great, but again, not bad. Maybe there is a wealth effect from the recent market activity. Certainly, we're feeling some pressure from the oil markets.

Texas is doing fine, but I'd say Houston is a little bit weak, but we're benefiting in other markets. So when I put North America together from a macro standpoint, I would call it good, and we expect solid growth in North America..

Brad, what I would add to that is, when I mentioned the kind of 7% if you had adjusted for the buy-ups last year, that was all of North America. So that's Tempur Sealy and Canada, so if you – most of that activity, you're right and what you alluded to was on the Tempur-Pedic brand.

And as we said on – as I said in my prepared remarks, Tempur-Pedic brand was up mid-single-digits. So if you added the $15 million to $20 million of the buy-up last year and kind of adjusted for that, you'd get a much higher growth rate, kind of mid-teens, which would be similar to where we've been running through the last few quarters..

Thank you. And our next question comes from Budd Bugatch from Raymond James. Your line is open..

Thank you and thank you for all the color this morning.

I wonder if I could coax maybe a little bit more color and assumptions on how you see going from the sales line through to the adjusted EBITDA line for 2016, in terms of cost of goods sold, operating expenses and maybe, Barry, through a little bit on the tax rate expectation for the year?.

Well, Budd, I would say we don't want to get that granular, but as we alluded to on the prepared remarks we expect a continued improvement on gross margin. I mentioned that we'll have some commodity benefit; we'll have some pricing benefit.

Floor models obviously in the launch, just because of the magnitude and the scale of the launch and the price points that we're talking about, will be up. And then as Scott mentioned, we're going to increase our advertising. And so – but beyond that, getting too granular, that's kind of how we think about it..

And tax rate for the year, how should we plan...?.

Yeah, we're using 30.5%, as I mentioned in the prepared remarks..

Okay. Thank you very much..

You're welcome..

Our next question comes through Mark Rupe with Longbow Research. Your line is open..

Good morning, guys.

How are you?.

Great.

How are you doing?.

Doing good..

Good..

Could you share any color, maybe on pricing benefit in 2016 versus 2015?.

Mark, the way I would think about this is we've raised prices as Scott mentioned on both Tempur-Pedic and a small range of Sealy brand products. And those were mattresses, so when you think about our pricing, obviously people should focus on what we specifically raised. So that's the mattress portion of our business, and only a select range.

So, I'd be thinking about a low single-digit percent increase..

All right. Perfect. Thanks..

But for mattress..

Great..

Thank you. Our next question comes from Seth Basham with Wedbush Securities. Your line is open..

Good morning, it's Seth Basham. Thanks for taking my question. I'd like to get a little bit more color around the trends on unit growth in the fourth quarter in North America specifically? I think, Barry you mentioned they're up slightly.

Does that statement still stand excluding adjustable foundations?.

Hi, Seth, good morning. Without getting too granular, I can tell you that our mattresses as a component of the bedding were positive and we also had a kind of a steady attach rate on adjustables on our Tempur-Pedic brand.

We do see adjustables over the long-term as something that from an attach rate perspective has room, particularly on our Sealy brand side where as you mix up within the brands and we have a sort of innovation that we've had with Stearns & Foster and our Posturepedic Hybrid, we think that there's an opportunity there for additional adjustable sales and attach rates.

And as you may remember from the Las Vegas Bedding Show, we just recently introduced a new adjustable, the Ease (43:12) by Sealy, which I think has really nice features and functionality at a sharp price point. So we expect improving performance from adjustables over time..

Just a follow-up if I may, as you look at 2016 would you expect to see positive unit growth for Tempur-Pedic in North America?.

Yeah..

Yeah..

And that's on mattresses as well as adjustables?.

Yeah. When we're thinking about what we've got going in, Seth, for 2016, the Breeze collection and what we're doing and as well as building on the very positive launch we've had from Flex, we certainly would expect unit growth from our Tempur-Pedic brand business and the attach rate even if it was just flat you'd see growth as a result, so..

Great, thank you..

Thank you. And our next question comes from Jessica Mace with Nomura Securities. Your line is open..

Hello? Operator, maybe we can go to the next one....

Hi, good morning..

Hey, Jessica.

How are you?.

I'm good. Understanding you don't want to talk about any product launches in particular, I was wondering if you could comment on the general consumer behavior around bedding purchases that you've seen in the recent quarters..

Recent quarters being third quarter and fourth quarter?.

Yes, just on that..

Fourth quarter and January, yeah..

Yes, and high-end or different categories and how that's really informed your decision about your product strategy in the year ahead?.

Yeah, look I would tell you that we feel like – we're talking North America right now specifically, we can talk about the other markets if you want to, but right now we're talking about North America. I'd tell you demand feels good.

I mean as I said in the prepared remarks, January started out in a very solid fashion and from our viewpoint it looks like North American consumer is in very good shape..

Thank you. Our next question comes from Keith Hughes with SunTrust. Your line is open..

Thank you.

As you look at the 2016 guidance you've given, at least directionally can you talk about Sealy gross margins and which way they would be moving in your view and any other detail you can give on initiatives you have around Sealy for the next sort of year or two?.

Sure. I mean, directionally it's pretty easy. We expect it to go up. Okay? As we talked about pretty clearly I think on the third quarter call, my recollection is Sealy margin had declined 100 basis points since third quarter year-over-year. In the fourth quarter what we're saying is that that deterioration stopped and it became stable.

So we'll call that improvement, but we certainly wouldn't call that success. So our clear indication is we would expect to have more good news about the Sealy margin initiatives that we put in place throughout the year. And it will take several quarters to get where we probably want to get to.

But we certainly expect the Sealy margin to improve some during 2016. We don't really have time on the call to go through the initiatives, but I can tell you that the entire North America team is focused on Sealy margins. And like I said, we're beginning to see real progress as the numbers come in.

So if you give me one more quarter and ask me that question on the first quarter, I think I can probably go into more detail, but I appreciate the thought..

Thank you. Our next question comes from Peter Keith with Piper Jaffray. Your line is open..

Thanks. Good morning, everyone. On the advertising increase that's planned for this year across a number of different brands, I don't know if you would be able to quantify the percent increase in dollar spend, that would be helpful.

But one question we'll be getting is how you think about that from a cost takeout perspective? Do you want to match cost takeouts with advertising increase and drive overall SG&A savings or should we just anticipate some pressure on the SG&A line?.

I mean, I guess I don't tie the two together and I'll let Barry take a crack at this after me. We are committed to advertising for the long-term and I don't see a trade-off between one pot of cost and advertising. Advertising drives this business.

We were founded on it and so we will advertise whatever we think the right number is regardless of what's going on in other cost initiatives. Having said that, do we have cost initiatives in place? Sure, we are working on other cost areas, but I really don't tie the two together.

Barry, do you have any other color there?.

I think you hit the high points. We're going to increase our advertising spend, Peter and that will go up a little bit on a rate basis and that's all embedded in the guidance..

Thank you. Our next question comes from Curtis Nagle with Bank of America Merrill Lynch. Your line is open..

Good morning, thanks for taking the question. Just a quick question I guess on the buybacks.

Just, I guess given the leverage targets you guys have laid out, anything more you could say in terms of the timing given that $200 would – not saying it's a mismatch, but leverage should imply something maybe little bit bigger, so again just initial step or how should we think about that?.

Yeah, your math is right. I mean, if you go through the leverage target and you look at the expected operating cash flow, the current authorization, the buyback looks relatively small compared to what the potential could be. What I was trying to say in my prepared remarks is we've got authorization for $200 million.

We see this as the start of a long-term process and we expect future authorizations. We have some debt agreements that we have to work through and Barry can walk you through that in a minute. But, no, I would see this is as the initial share buyback..

Hey Curtis, we have the credit facility which we are going to be working on and then we have the 2020 high-yield bonds, those both would – the first step would be to, as Scott alluded to, work through the credit facility which is something we've got under way and then the bonds would be a factor.

Those are callable in December, so that's another thought to think through and I would be happy to talk to folks about that in detail since it's all disclosed already on additional calls..

Thank you. Our next question comes from Daniel Hofkin with William Blair. Your line is open..

Good morning, gentlemen. Just a question regarding kind of the overall innovation level of cadence of it this year versus same time last year. Just curious kind of how you are feeling, let's say the two bigger – the TEMPUR brand as well as Stearns & Foster where you have had the most innovation recently this time versus last year.

What you think is kind of the incremental newness and the impact of it and then over time if you can comment on it, where you think there are opportunities for further additions to the product pipeline or added features?.

Okay. I'm going to have to be a little bit careful with your question because obviously there's competitive information that you're kind of fishing around, which I'm probably not going to get anywhere close to on an open call.

I think what I would say is, the first thing I did when I got here was to look at the pipeline because I do think that's a critical part for the company's continuing success, and the pipeline as I've said before is robust.

As I mentioned in my prepared remarks, our spending in R&D is up which goes to our commitment and I would tell you that there is a well developed plan for products over a multi-year period that we feel very good about. And I don't know if you want to add anything Barry to that..

I think I would just add that as our customers and a lot of investors saw at Las Vegas in the bedding show and we feel like we brought a tremendous amount of innovation this year to the Stearns & Foster collection as well as the TEMPUR brand. Stearns, we have the new Nano coils. We've got the Precision Edge all the way around.

We totally reinvented our proprietary IntelliCoil. In the Reserve Collection, we've just created I think a tremendous ultra-premium halo collection there which will help mix up pricing. So the Stearns & Foster collection Dan is well improved.

And that's an area, as we said on the last call, was a focus area because our product margins and our merchandising mix, really specifically merchandising mix, has been a challenge. And that's at the high end on our Sealy brand portfolio.

And then on the TEMPUR side, the new Breeze as Scott mentioned in detail in his prepared remarks, it is a significant advancement in cooling. We estimate it's twice as cooling as the prior collection and the aesthetics are great.

We've increased the profiles and importantly we've introduced a Breeze for the Flex Collection, our Hybrid, which has been so successful this year. So we think we brought a tremendous amount of innovation this year. We can't wait to get it out onto showroom floors..

Thank you. And our next question comes from Mark Rupe with Longbow Research. Your line is open..

Well, can you share any details on the exclusivity arrangement on the products with the new mattresses firm deal?.

Not really anymore than I already have which they are designed to drive higher ASP and be margin accretive..

Okay.

You think it's a portion of the line, like a small piece of the line or is it more of an entire line?.

I would say, like I said in the prepared remarks, we are offering a limited assortment of exclusives..

Perfect. Thank you..

That is all the time we have for today's questions. I would now like to turn the call back to the company for any closing remarks..

Thank you, operator. To the 7000 employees worldwide, thank you for what you do every day to make the company successful. To our retail partners, thank you for your outstanding representation of our brands. To our shareholders and lenders, thank you for your confidence in Tempur Sealy's leadership team and the board of directors..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day..