Barry A. Hytinen - Tempur Sealy International, Inc. Scott L. Thompson - Tempur Sealy International, Inc..

Beryl Bugatch - Raymond James & Associates, Inc. Keith Hughes - SunTrust Robinson Humphrey, Inc. Michael Louis Lasser - UBS Securities LLC Jon N. Berg - Piper Jaffray & Co. John Baugh - Stifel, Nicolaus & Co., Inc. Karru Martinson - Jefferies Seth M. Basham - Wedbush Securities, Inc. Curtis S. Nagle - Bank of America Merrill Lynch Carla M.

Casella - JPMorgan Securities LLC Jessica Schoen Mace - Instinet LLC Sameet Desai - KeyBanc Capital Markets, Inc. Laura Champine - Roe Equity Research Kevin L. Ziets - Citigroup Global Markets, Inc. William Michael Reuter - Bank of America.

Good day, ladies and gentlemen and welcome to the Tempur Sealy Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. I would now like to turn the call over to Barry Hytinen, CFO. Please go ahead..

Thank you, operator. 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, net income, and adjusted EBITDA, and anticipated performance for 2017 and subsequent periods, 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. 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, except as otherwise discussed in the press release as well as information regarding the methodology for constant currency presentation.

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 is my pleasure to turn the call over to Scott..

Good morning, everyone and thank you for joining us on this call. Today, I'd like to take you through the highlights of our record financial performance, update you on our recent new product launches and provide you with some thoughts regarding operations subsequent to the contract termination of our largest customer in North America.

Then Barry will take you through the details of our financial statements and our 2017 guidance. First, our financial performance. For the fourth quarter, adjusted EBITDA increased 4% and adjusted EPS increased a robust 19%. It was our seventh consecutive quarter of double-digit adjusted EPS growth over the same period last year.

We are pleased with these results, especially considering the North America market was distracted by very noisy presidential election and our largest customer was rebranding a thousand of its stores. For the full-year, adjusted EBITDA increased 14%; adjusted EPS increased 27%; and adjusted operating margin expanded 170 basis points.

Our robust earnings growth and margin expansion in the fourth quarter and full year were driven by continued progress in improving our operations. Key drivers included improving Sealy manufacturing, reducing our overhead and price actions taken in early 2016.

While I'm pleased with our progress over the past year, there is more room to improve and the team will continue to work towards driving improvement quarter-after-quarter. As we've discussed previously, the entire organization remains focused on a few key initiatives that are designed to drive earnings growth over the long-term.

Let me take a minute and reiterate these initiatives. First, develop the best most innovative bedding products in all the markets we serve worldwide. Second, invest significant marketing dollars to promote our brands. Third, expand North American margins, while maintaining market share. We'll talk more about that in a moment.

Fourth, grow our market share outside of North America. And finally, optimize worldwide distribution to make sure our products are properly represented in all channels.

The team's done a nice job over the past year, and I'm confident that by maintaining our commitment to each of these initiatives, we will continue to drive earnings growth over the long-term. Turning to new product launches. In January, we launched new products for both North America and the international markets.

In North America, we have new products for Tempur-Pedic and Sealy. First, let's discuss Tempur-Pedic. To celebrate 25 years of sleep innovation, we're introducing the new limited-edition TEMPUR-Legacy mattress. This mattress is priced at $2,499 for a queen set and we expect it to drive growth in $2,000 to $3,000 segment.

As you might recall, this is a pricing segment Tempur-Pedic had trouble with in 2016. We also have brand new campaign for Tempur-Pedic called Tempur-Pedic Sleep is Power. This campaign features real-life high-performing people, who've experienced the Tempur-Pedic difference and how sleep on Tempur-Pedic has changed their lives.

I should also note that we've listened to feedback from our bedding customers and we're simplifying the pricing structure of Tempur-Pedic mattresses in North America. Pricing step-ups are now consistent across all Tempur-Pedic product lines.

And, we're making it easier for retailers to present products to customers and for customers to find the right product. Our most significant 2017 product announcement is the exciting launch of Sealy brand. We are revamping the line with better aesthetics, better support, and better value to the market.

Additionally, we are uniting the Sealy products under one master brand. This year, we're introducing the Response line, which is all Sealy's innerspring mattresses, and the Conform line, which is Sealy's memory foam line.

Posturepedic will no longer represent its own brand but become Posturepedic Technology and will be a premium feature offered on mid and high price point Sealy products. This will help us further simplify our brand portfolio by clearly differentiating product lines, which will result in easier selling process for retailers.

The new lines in Sealy products are designed with compelling features that consumers want and with strong step-up features to help retailers drive higher average selling price. Also, it's important to note, they are designed for manufacturability.

We've reduced our Sealy SKUs by 20% and significantly reduced the number of unique components across the line. We expect these actions to lower our overall labor cost, while (7:50) resulting in significantly better product quality and durability.

At the same time, we've invested in higher quality and more innovative components like the DuraFlex Edge system that provide support features at the edge of the bed. Feedback from our retail partners has been outstanding, with many commenting that this is the best Sealy product line they have ever seen.

I'm very proud of the teamwork between sales, marketing, and manufacturing in bringing our new Sealy products to market. Internationally, we're re-launching our flagship line of Tempur-Pedic mattresses. This features the iconic aesthetic similar to the Tempur-Pedic mattresses that you see in North America.

The upgraded design elements as well as the EasyRefresh cover have been well received by our international retail partners. As these products rollout this year, we expect them on a constant currency basis to drive double-digit sales growth in our international markets.

I should point out on a worldwide basis, we are launching more products than any time in the company's history and these products will be supported by a record amount of direct advertising in the U.S.

Now let's turn to the termination of the contracts with our largest North American customer Mattress Firm, wholly-owned subsidiary of Steinhoff International Holdings. During the week of January 23, Mattress Firm initially communicated a surprise verbal termination of our contracts and subsequently demanded significant economic concessions.

We considered their demands, but we ultimately concluded that it was in our long-term best interest of our stakeholders to terminate the contracts with Mattress Firm. Upon termination, the original contracts called for immediate stoppage of orders and deliveries.

However, to facilitate a more orderly transition with Mattress Firm, we signed an agreement to allow for a two-month wind down. Mattress Firm represents 21% of our consolidated net sales for 2016, and in light of their volume was the largest recipient of promotional dollars.

On the brand and product side, Tempur-Pedic product represented approximately 60% and Sealy product represented approximately 40% of our net sales to Mattress Firm. In making this distribution decision, we had to consider our other retailers that comprise almost 70% of North America sales.

We feel strongly that we must focus on retail partners who have the greatest commitment to promoting our premier branded products. We also feel strongly that it's important to maintain a healthy competitive balance in the marketplace we serve.

Despite the challenge presented by an unexpected loss of our largest customer, we feel confident we have chosen the right path. Here are few reasons why we are confident? First, we have a premier portfolio of branded beds.

Starting with Tempur-Pedic, we've invested over $1 billion in the past 15 years advertising the Tempur-Pedic brands to consumers, which has resulted in a significant brand advantage. Our research shows that more than 94% of Tempur-Pedic owners would recommend the product.

In addition to Tempur, we have two other strong mattress brands in Sealy and Stearns & Foster. Sealy is a 130-year-old iconic brand, known worldwide for its reliable support and quality. We believe Sealy has one of the highest brand awareness of any U.S. mattress brand. Stearns & Foster founded 170 years ago is known for rich quality and craftsmanship.

In 2016, Stearns & Foster posted year-over-year sales growth, even without being on Mattress Firm's floor for most of the year. We believe product, service, and advertising is a winning formula. Second, we have a strong network of retail partners throughout North America, who are committed to promoting our premium brands.

In the U.S., excluding Mattress Firm, Tempur Sealy products are available in over 12,000 doors. Our network of retail partners is incredibly excited to capitalize on the fact that Mattress Firm will no longer carry Tempur-Pedic, Sealy, and Stearns & Foster.

We believe they fully understand the opportunity this creates for their business and we expect them to seize the opportunity. Third, we believe our North American business is solid. In fact excluding Mattress Firm, our sales in North America grew 4% for the full-year and grew 7% in the fourth quarter with our direct business up 84%.

Halfway through the first quarter, excluding Mattress Firm, our TEMPUR sales are up 3% which is an improvement from the fourth quarter, which was down 5%. This transition will be disruptive and will result in short-term sales, EBITDA and market share declines. Additionally, we expect a one-time charge to the 2017 income statement.

I've talked before about our highly variable nature of our cost structure.

While the team is currently working through their plans to partially adjust our expense structure, it's important to note that our near-term expense adjustment will be minimal on both manufacturing and the marketing side as we expect over time to recapture the majority of the lost sales volume.

On the manufacturing side of our operations, we're expecting some lower operating efficiencies in the short-term to fully retain our high-quality manufacturing capabilities, which we expect the market will need. On the marketing side, we'll be increasing our investment on both an absolute dollar basis and as a percentage of sales.

This will be across all brands, Tempur-Pedic, Stearns & Foster and Sealy. Consistent with our long-term brand strategy, our products will stay top of mind for consumers and will continue to drive traffic to our retailers.

In short, we're keeping our foot on the gas and promoting our brands and we expect our retailers to benefit greatly from our continued commitment to their success.

This approach is consistent with our long-term strategy, which we've stated numerous times and reiterated earlier in the call to retain market share in North America and grow market share internationally.

So, in North America, until we recapture the market share loss for the distribution chain, we will be in the market share recapture mode, and of course, we will continue our steady market share expansion internationally. Going forward, we will advise you periodically on how we're performing against this plan.

Now before I turn the call over to Barry, for detailed financial review, I'd like to briefly discuss our capital allocation strategy.

As we've mentioned in prior calls, we've gone through a thorough evaluation of the company's capital structure and concluded our debt target would be 3.5 times adjusted EBITDA on a trailing 12-month basis with some ranging of 3 to 4 times. At the end of the fourth quarter, we were at 3.6 times.

When we set the debt target and stress-test the capital structure, we included many scenarios including unexpected but possible events. These include scenarios where sales declined in excess of the full amount of our Mattress Firm business in 2016. The business continues to generate significant profits and lots of cash flow.

We remain committed to invest capital and opportunities with the highest return on invested capital while balancing our debt target. In the near-term, we anticipate EBITDA trailing down, and using some of our cash flow to pay down debt.

Over time, as we develop a better understanding of the North America sales trends, we expect subject to market conditions to repurchase shares with any excess cash flow. Thus we've expanded our stock repurchase buyback authorization. I'll now hand off the call to Barry to discuss the details of the quarter and full year.

Barry?.

Thank you, Scott. First, let me take you through our fourth quarter performance. Worldwide net sales for the fourth quarter was $769.5 million, consistent with the fourth quarter last year, and on a constant currency basis, up 1.7%. Adjusted gross margin improved 60 basis points to 41.7%, and adjusted operating margin was 14.6% of net sales.

Consolidated unadjusted EBITDA was $130 million in the fourth quarter, up $15 million or 13% from last year. This included approximately $8 million of restructuring costs in the fourth quarter. Consolidated adjusted EBITDA was $138 million, up $5 million or 4%. We incurred incremental product launch costs of $13 million during the fourth quarter.

Excluding these costs, adjusted EBITDA would have increased $18 million or 14%. In addition, both adjusted and unadjusted EBITDA includes about $3 million of one-time asset write-downs and there were no unusual gains in the quarter. Adjusted EBITDA growth was primarily driven by operational improvements which were offset by those launch costs.

Foreign exchange rate impact was about $2 million of headwind, and we had about a $3 million benefit from lower commodity costs. GAAP earnings per share for the quarter was $1.12, up from a loss in the same period last year. Adjusted earnings per share for the quarter was $1.18, up a robust 19% from the same period last year.

Operating cash flow in the fourth quarter was $56 million versus $101 million in the fourth quarter last year, due to the timing of payments. On a segment basis, North America net sales increased 1.9% in the fourth quarter. Sales in Canada were up 8% on a constant currency basis.

Excluding Mattress Firm, North American net sales increased over 7% and our sales to Mattress Firm declined 11.4%. North America bedding product sales increased 2.6%, driven by price and mix with bedding units flat.

Sales were driven by growth in Stearns & Foster and Sealy Posturepedic, but offset by lower sales in Tempur-Pedic brand business as well as the optimum and value priced Sealy products. As Scott mentioned, we believe our product launches and advertising will improve performance going forward in those areas.

Year-over-year average selling price was positively impacted by pricing actions taken in 2016, and positive merchandising mix across both TEMPUR and Sealy brands. Like-for-like price increases contributed a little over 100 basis points for the fourth quarter and for the full year.

Our North American retail channel declined 70 basis points to $576 million. However, excluding Mattress Firm, this channel was up 4%. North American other channel increased 50% in the quarter driven by increased sales from our direct and hospitality businesses.

Our North American direct business continues to grow rapidly and was driven by increased sales through our websites, which more than doubled in the fourth quarter compared to last year. We have improved our processes around Internet selling and are sharing learnings with our retailers to help them drive their own Internet sales.

North American adjusted gross margin improved 60 basis points to 39.5% as compared to the prior year. The primary drivers of improvements were operations, pricing actions and favorable mix, which were offset by incremental launch costs in the quarter.

North American adjusted operating margin decreased 10 basis points to 16.7% as compared to the prior year. The decline was due to the product launch expenses, which typically occur in the first half of the year and are unusual to have in the fourth quarter.

Now in reviewing our fourth quarter results, please note these included floor models, point-of-sale material, and other store funds of approximately $13 million of incremental expense. Almost all of this expense was attributed to the launch of Stearns & Foster and other transitions at Mattress Firm in the quarter.

As you might remember, we advised you on the third quarter call that we would have these expenses. Excluding the $13 million of unusual fourth quarter product launch costs, our adjusted operating margin improved 190 basis points. Turning to our international segment.

On a reported basis, net sales decreased 6.2% and bedding product sales decreased 6.8% with units decreasing 4.4%. Turning to constant currency, total sales were up 1% and bedding product sales were up 1.4%. Average selling price increased 6%.

We experienced strong growth in Europe and I would like to highlight that sales in Germany increased in the fourth quarter as compared to the prior year and sequentially. This is the first time we have seen year-over-year sales growth in Germany since the third quarter of 2015.

International adjusted gross margin increased 150 basis points to 51.3% compared to adjusted gross margin of 49.8% in the fourth quarter of 2015. The gross margin increase was primarily driven by operational improvements and channel mix.

International adjusted operating margin increased 220 basis points to 22.2% as compared to last year driven by the improvement in gross margin and lower operating expenses. Now I will summarize the income statement for the full-year 2016. Worldwide net sales decreased 0.8% to $3.13 billion.

North American sales decreased 0.3% and international sales decreased 2.9%. On a constant currency basis, sales increased 0.7% with North America flat and international up 4%.

While our comments about individual customers will be limited, since it is available in our quarterly filings, I'll provide a brief summary of our sales results with and without Mattress Firm. Our sales to Mattress Firm were down approximately $80 million or 11% as compared to last year.

Excluding Mattress Firm, our North American sales increased 4% in 2016. Our top five customers collectively represented 39% of sales, and which collectively declined 5% but excluding Mattress Firm grew 2%. For the 12 months ending December 31, our adjusted EBITDA was $522 million, an increase of $66 million or 14% over the same period last year.

This included $11 million of headwinds from foreign exchange and about $20 million of benefit from commodities. Adjusted operating income increased to $425 million as compared to $374 million in 2015, and our adjusted operating margin improved 170 basis points. For the full year, GAAP earnings per share was $3.38 as compared to $1.17 in 2015.

Adjusted earnings per share in 2016 increased 27% to $4.05 as compared to adjusted EPS of $3.19 in 2015. On a constant currency basis, adjusted EPS increased 31%. Now, moving on to the balance sheet and cash flow items. Operating cash flow for the full year 2016 was $166 million.

Excluding the previously disclosed deposit for the Danish tax matter of $92 million, operating cash flow would have been $258 million for the full year versus $234 million in 2015. Regarding the Danish tax matter, there are no further updates at this time, as we continue to work through negotiations.

We continue to believe the issue has been fully accounted for based on everything we know at this time. Cash cycle was off five days from the prior year due to payable days, principally related to the timing of payments in 2015. On a sequential basis, cash cycle improved three days.

At the end of the fourth quarter, net debt was about $1.9 billion, and our leverage ratio on a trailing 12-month basis was 3.6 times at the end of the year. As a reminder, the maximum leverage covenant in our 2016 credit facility is 5 times on a trailing 12-month basis. We don't expect any issues with covenants.

During the fourth quarter, the company repurchased approximately 3.5 million shares for a total cost of approximately $215 million. In January, we bought approximately 600,000 shares for a total cost of approximately $40 million. As of today, our basic and diluted share count is 54 million and 55 million shares, respectively.

Today, we announced that the board of directors has approved another $200 million of share repurchases, and we now have approximately $227 million available for future share repurchases.

In the first quarter of 2017, due to the termination of the contract with Mattress Firm, there will be some restructuring charges and one-time non-cash write-offs related to certain prepaid items and intangibles associated with that particular customer relationship. Now, turning to our financial guidance for 2017.

The company currently expects adjusted EBITDA to be in the range of $400 million to $450 million, which includes headwinds of $15 million from commodity inflation and $12 million from unfavorable foreign exchange. This guidance also includes increased advertising on an absolute dollar basis in 2017 compared to last year.

Our guidance is based on adjusted figures and is based on various factors and estimates. We note that particularly in light of the recent termination with Mattress Firm, the number of moving parts this year makes the estimation process more fluid. And now, I'll turn the call back over to Scott..

Thank you, Barry, and great job. In conclusion, Tempur Sealy, its employees, and its brands are strong and positioned well with market-leading products, strong retail partners, and world-class operations. Operations have had an outstanding fourth quarter and full-year in 2016. We set records in manufacturing against key operating metrics.

Our product quality and on-time delivery has never been better. Manufacturing efficiency improved and we feel very good about our ability to provide our customers with outstanding products and services. I'm pleased with our progress both in Sealy and TEMPUR operations, but there's still work to do.

Just as we've aggressively tackled issues in manufacturing side, the leadership team is squarely focused on revenue and profitable opportunities ahead of us. There are numerous opportunities and we believe we can realize them with great execution.

A few key areas of opportunities include, working with our existing retail partners to recapture TEMPUR, Sealy, and Stearns & Foster business in North America, successfully launching our new products and marketing campaigns around the world, continuing to drive improvement in the Sealy operations, aggressively expanding distribution in channels where we're currently underrepresented.

Everyone on the team knows there's lots of work to do to achieve our goals. We must find problems, communicate problems and jointly fix problems, all as quickly as possible. Now, I'd like to open up the call for questions.

As it relates to Mattress Firm or Steinhoff International Holdings, our comments will be limited to our prepared remarks given the competitiveness and public disclosure sensitivity. Operator, please open the call for questions..

Thank you. Our first question comes from Budd Bugatch with Raymond James. Your line is now open..

Good morning, Scott. Good morning, Barry..

Hey, Budd..

Thank you. Thank you for taking my questions. I guess the question I have is I know that you've got a wide guidance for adjusted EBITDA and we've got some color on currency and headwinds of raw materials.

But I wondered, if you could give us from your standpoint, your modeling assumptions maybe disclose some of the other endpoints that might be important? You talk about advertising going up, but I don't know that we have the full-year advertising number and so I would like to know, some of those endpoints that you could possibly share with us?.

I'm sure you'd probably like the entire model. But let me help you with some of that. First off, I think the guidance....

No, no, I don't want the entire model (31:00), just a few of them..

I think the guidance range was the same as last year, so I guess we didn't perceive it as being extremely wide.

We're not going to give absolute dollar numbers on advertising obviously for competitive reasons, but I think we've been clear in the prepared remarks that we expect advertising to be up from a dollar standpoint and of course as a percentage of revenue.

I mean, I guess, I can give you a little bit of color as we see the world in 2017 on a macro basis. Look, we see the underlying demand in the bedding business looking like 2017 looks better for the bedding market in 2016 in the U.S. and around the world.

And we think that we've got some really compelling products both internationally, the new Tempur launch, which I mentioned in the prepared remarks we're looking for double-digit growth from our European subsidiary. Asia continues to be very strong as it has been for a number of years.

And in North America, I think the Sealy launch, as you probably know we're expecting great things from the Sealy Masterbrand launch.

Barry, can you help Budd with any of his other – kind of help him with his model?.

Budd, I'd tell you that the operational improvements that we've been driving will continue. The Sealy assembly facilities are continuing to improve. The TEMPUR facilities are also continuing to have great productivity.

Obviously, we'll have some volume hits with respect to deleverage that we mentioned in the prepared remarks and our channel mix has been favorable and likely will continue to be..

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

Thank you. I guess, you had talked in the release on the adjusted EBITDA range about the cost of the Mattress Firm exit not being included. Obviously you're going after increased retail distribution with your current customers. There are some costs associated with that.

Will that be excluded as well from the EBITDA range that you put out this morning?.

No and I'd probably maybe a little bit clear. I'm not sure I would necessarily agree with you that we have additional costs in distribution, but all its costs whatever the cost are expanding in distribution are included in the guidance..

So, what you were referring to there, Keith was – what I was referring to was some non-cash write-offs related to intangibles and prepaid. So that would be what was excluded. Go ahead, operator. Thank you..

Thank you. Our next question comes from Michael Lasser with UBS. Your line is now open..

Thanks a lot for taking my question and good morning.

Can you tell us what recapture rate you've assumed within your guidance for this year? And then the second part of my question is, how do you think about the economic relationship with your retail partners outside of Mattress Firm changing? I mean especially to try and replace the marketing support (34:22) that you were getting?.

Maybe, I'll start with that. I don't see our relationship with our other retailers changing. Our investment is in product and in advertising. And so I don't see any significant changes with retail partners going forward. As it relates to the recapture rate, that's something we're probably not going to give you today.

I think you have to realize this is a fluid situation. We terminated our largest customer three weeks ago. I think we need to work through that in the marketplace. They need to work through whatever inventory they've got in the marketplace.

And I think you're going to have to give us a couple of quarters before we're going to be able to report back to you from a recapture standpoint.

I think I'd make a couple of points is that on the prepared remarks, we told you we're taking the cost structure down partially and so, that should give you some indication of our bullishness on the recapture rate. But actual percentages today, we're not in a position that we want to disclose those..

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

Great, thanks a lot. This is Jon on for Peter. My question is just round the pace by quarter of kind of sales and EBITDA growth.

Which quarter do you expect to be most challenged and which quarters do you think are going to be strongest? Is it simply Q2 is going to be the toughest and Q4 will be the strongest or how should we think about that?.

Sure, Jon. Good question. With the first quarter, we're obviously going through the transition, as Scott mentioned, where we signed that wind down agreement.

So you are correct that I think the second quarter from a year-over-year basis would be the most challenged because that's when we're going through and beginning the – well, we've already begun, but significantly increasing the level of advertising and other brand investments and likely the recapture grows over time.

So I think the second quarter's probably your low and then it goes sequentially better from there..

Thank you. Our next question comes from John Baugh with Stifel. Your line is now open..

Good morning, and thank you for taking my questions. I guess kind of two separate questions and I'll lump into one.

First, is there any color, as you looked at 2016, on what Mattress Firm on an EBIT basis was relative to the rest of your North American retail? And secondly, I think you talk about Europe internationally, but just curious, Scott, what's overall revenue and EBIT outlook might be for the international business in 2017? Thank you..

Hey, why don't you go and do the 2017 international?.

Yeah. So, John, we have got tremendous amount of new products rolling out and the initial reception has been quite good. That's total relaunch of the TEMPUR portfolio there, including things like the EasyRefresh cover, simplifying the line and broadening it.

We're seeing increased levels of distribution both in the terms of within store and some even new stores. I think you should expect the improvements to be growing through the year. As you know, our launches internationally tend to be over the entire year as the launch cycles market by market kind of go throughout the year.

But the early launches such as in Continental Europe, at the Cologne Fair in Germany earlier this year, it's been very favorable. And I think you should expect improving rates on a constant currency throughout the year.

And as we've said historically, we certainly see the international opportunity as being a double-digit growth performer as we get into and through these launches.

Scott, do you want to take the former?.

No, of course, I'd rather you do it. Of course, I'll take it. No, look, clearly you won't be surprised that we're not going to talk about profitability by customer, one that's confidential information.

And quite frankly, we generally wouldn't even talk about a customer from a revenue standpoint or anything else except for the Mattress Firm termination was so material that basically the SEC lawyers make us talk about it.

Out of respect for the organization and the people who we've got a lot of respect for, we're just not going to go into any more detail than we absolutely have to from an SEC standpoint..

Our next question comes from Karru Martinson with Jefferies. Your line is now open..

Good morning.

When you guys look at the muted or distracted North American market here as we closed out 2016, I mean what are the drivers that you're seeing that give you the confidence on kind of the improved outlook for 2017?.

I mean I think not dissimilar than some other retailers. There's clearly a firmer base of business post election, what you want to call that the Trump effect. Maybe it's the wealth effect of the stock market. But when you go through the underlying fundamentals post election, it feels better. As you probably remember, it started feeling weak last year.

I guess it was mid third quarter, Barry?.

Yes..

And we appear to have gotten through whatever that choppiness was. I mean I wouldn't call it robust, but I would clearly say there's been a trend change. And that's why I called out the TEMPUR numbers for the first quarter, just because I thought it was a significant trend change from what we've been reporting lately.

So look, it feels better is about all I can tell you..

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

Thanks a lot and good morning. My question is around sales growth assumptions in your forecast for 2017.

Can you help frame that? And also help us understand which customers or which channels you expect to hit most to try to recapture some of those sales loss from Mattress Firm? For example, are you thinking about direct channel being bigger, Costco, warehouse clubs, et cetera?.

Yeah. Let me see if I can help you with some of that. I mean I think first of all, we expect the overall bedding market to be pretty good next year and we expect to get our share of that.

As we called out in the prepared remarks, the direct channel has been doing well and we've had some learnings from the Internet standpoint and we've applied those learnings and we're sharing those learnings with our retailers. So, we expect that to be a contributor.

As far as additional distribution, we look at that every quarter all the time and we'll continue to look at that. And where there's areas where we have holes, we'll work with retailers to fill those holes.

Anything else from that standpoint Barry, you can think of?.

I think that covers it well..

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

Great. Thanks very much for taking my question. I guess not to beat a dead horse here, but maybe following up on the last question. If you could just give maybe a little more detail in terms of where you see the greatest opportunities between new and existing partners in the U.S.

and maybe what you think the cadence of that will be? And then just as a secondary question, within your existing channels, do you expect to get more slots?.

Look, I think the greatest opportunity, when you look at dollars is obviously going to be with our current customers. I mean, they represent 75% of the sales. And so, the near-term and greatest opportunity is going to be working with our retail partners to expand our balance this year in their stores.

And I can tell you that they're eager, the phone incoming calls have been numerous, but you've got to get some inbound calls to actually selling more beds and so, we're working through that..

Our next question comes from Carla Casella with JPMorgan. Your line is now open..

Hi. Two broader industry questions, your thoughts on any trends or competition from the BedInABox concept and then any thoughts on border tax..

I can touch a couple of those. I mean, BedInABox, I mean, look they're around. As you know, getting good data on them is difficult. This isn't a perception. I don't have hard data. My perception is that they're around 5% of the market, that they are growing in aggregate but that growth rate has slowed significantly, would be my perception.

And I don't think there's really much new from a BedInABox standpoint. We've had some learnings from them, and obviously we've applied some of those learnings. And as we mentioned in the prepared script, our online sales are growing at 100%. So we've learnt some things and we're working with our retailers to help them.

But I can't really think of anything particularly noteworthy from a BedInABox standpoint. Border tax, not really – I don't see it as being a big impact to us one way or another. We're basically manufacturing in the U.S. And so, from our standpoint, I guess we don't have a dog in that race..

Our next question comes from Jessica Mace with Instinet. Your line is now open..

Hi. Good morning..

Hi, Jessica..

My question is a follow up on the quarterly cadence. You mentioned that you had more product introductions this year than ever before and I was wondering if you could talk a little about potential floor model impact or what some of those costs might be as we go throughout the year compared to previous years. Thanks..

Yeah. Jessica, thanks for the question. It's a little counterintuitive, but while the launch is by far the largest in history in terms of both breadth and scope, the actual launch expenses this year year-on-year will probably be down some.

Because if you think about it, last year, we were launching all of the Breeze products, which are very high-priced products and, as a result, have a large dollar discount.

We were also doing the same on the Sealy side, launching the high-end Stearns collection, which similarly had relatively large discounts and similar point-of-sale collateral, et cetera, along with other POP. So, in aggregate, you probably expect our launch cost to be a little bit down year-on-year..

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

Hi. This is Sameet on for Brad. Thanks for taking my question. Got a question here on brand loyalty. With all the changes unfolding here, I'm sure you've put a lot of thought and analytics behind your brand strength and ability to recapture.

Can you share any of that data on brand perception of Tempur-Pedic and other portfolio of brands, as well as how strong they are in terms of driving traffic and loyalty? And, how important those factors maybe versus being the closest mattress retailer to a potential customer? Thank you..

Sure. I mean 91% of Tempur-Pedic owners are likely to recommend a Tempur-Pedic. Tempur-Pedic leads the category in the highest brand awareness at 96%, followed closely by Sealy at 94%. More than 40% of consumers would seriously consider a Tempur-Pedic. This is ahead of both Sleep Number and Beautyrest.

Tempur-Pedic also leads the category and very likely to purchase at 95% and somewhat likely to purchase at 97%. More customers believe that Tempur-Pedic builds the finest mattress than any other brand.

But I think it's more than just Tempur-Pedic, I mean Sealy is only second behind Tempur-Pedic and very likely to purchase at 94% and Sealy's primary brand consideration is just shy of double-digit of that compared to Simmons. So I think all of our analytics tell us that the brands are very strong and I think we will prove that in the future..

Our next question comes from Laura Champine with Roe Equity Research. Your line is now open..

Good morning. So it was notable that that Tempur Sealy bought back $200 million worth of stock in Q4 at much higher prices. Does that imply that the loss of the Mattress Firm business was a total surprise? And how does that change your relationship with other retailers in the U.S.

now that this has happened?.

Yeah, we noticed we bought back a lot of stock in the fourth quarter, too. We noticed that we bought it at a higher price. I think the way you would read that is, during that period when those decisions were being made, we were very bullish on the 2017 outlook and is probably some evidence that the termination was a surprise.

So I would probably say, yeah, probably wish I'd bought that at a little lower price but it'll all work out I'm sure. I'd also point out that we probably wouldn't have launched Stearns & Foster in the fourth quarter, on the Mattress Firm's floor which is a very expensive launch for us and we're not going to get any return on that.

And we've also did all our incentive comp, normal incentive comp awards to the officers of the company in early January before Vegas. So I think if you looked at those things they were expensive and indications that, yes, it was a surprise. As it changes our relationship with other retailers, I don't think so.

I mean we continue to implement our strategy as we've done over the long-term, which is to work very closely with retailers who are interested and support our products and we'll continue to aggressively support those customers. I mean, for instance, we have a dealer locator on our web page where we direct customers to particular customers.

And once we moved Mattress Firm off the dealer locator, we have other retailers who are having quite a bit of increase in floor traffic and sales instantly and so we're going to continue to support retailers that support us..

Our next question comes from Kevin Ziets with Citi. Your line is now open..

Hey, good morning. Thanks for taking my question. It's related to your leverage targets. If I use the midpoint of your guidance, it seems as though leverage would move pretty deep into the 4 times or over the 4 times range.

So given your commentary about willing to pay down debt in the near-term, I guess, how far do you want to see leverage come down before you flip the switch to share repurchases? And I guess would you use the basket beyond your 3.5 times leverage basket? Thank you..

Yeah. As you know, our target debt ratio is 3.5 turns. We've kind of ranged it from 3 to 4. I think your math – right now I don't have my math right in front of me. But we're going to be over 4 and in the prepared remarks, we clearly foreshadowed there'd be some debt paydown.

Your question is okay, are there opportunities that might be so compelling that you would run over your range of 4 is the way I'm taking your question. I think the answer to that question is yes. I mean like always, you look at your investment opportunities and if your investment opportunities are so compelling, you might run over 4.

So again, that's a range and a target. But I don't think fundamentally our target of 3.5, ranging at 3 to 4 has changed, unless we see unusual opportunities that we feel that we need to capture..

And I guess I'd just add, Kevin, that by our calculation once we publish the K, the basket would be sitting at about $400 million. And that's accessible to us between 3.5 and 4.5 times..

Our next question comes from William Reuter with Bank of America. Your line is now open..

Good morning. I guess I'm curious as you guys think about beyond 2017 whether you feel that there's going to be a period of disruption where customers are going to be looking for your products within Mattress Firm and they won't find them.

And that I guess do you believe that 2017 will be a low point from an EBITDA perspective because some of those ex-other customers that should be gaining more share in 2018 would cause EBITDA to grow from there?.

Well. It sounds like you're walking me into 2018 guidance early here in 2017. And I'm probably not going to do 2018 guidance with you but I think it's a fair question, is we're in recapture mode. 2017's going to be a little choppy, a little fluid.

And so I mean there's all other kinds of things that hit 2018 from commodity prices to FX, to international operations. But as I sit here today, I think 2018's going to be a lot better than 2017 and I think that's kind of your question. So, assuming the U.S.

economy is clicking along and all the other variables, they're going on in the world, I expect EBITDA to be growing and growing maybe significantly in 2018..

Thank you. We have a follow-up from Keith Hughes with SunTrust. Your line is now open..

Keith?.

Sorry about that. The management team has part of your compensation package by hitting an EBITDA target. Obviously, the world has changed.

I guess my question is, do you anticipate or has there been any change to that in terms of elongation of the timeframe, a change in the numbers, any kind of details on that would be appreciated?.

Well I can tell you that the management team in Lexington and worldwide are focused on driving operations, working through this transition and focused on driving shareholder value. And no one on my team is worried or looking at their personal compensation package.

And I can tell you that no one in management has made any recommendations to the board in that area..

We have another follow-up question from Seth Basham with Wedbush Securities. Your line is now open..

Thanks.

Just in terms of advertising in 2017, understand that you've planned it up to some extent, but when you think about advertising for your brands across the market, would you expect those dollars to be up?.

If I understood the question, you're asking us if the dollars in advertising would be up by brand from last year..

For your brands across the market meaning, with co-op advertising and advertising by your retail partners?.

Oh, generally, when I talk about advertising – sorry, I didn't catch the difference – when I talked about advertising, I talked about our direct advertising, the amount that we're investing. And I don't really count co-op, although it is our dollars and we're investing, but it had some retailer discretion.

And that's going to be variable based on revenues and recapture. And I didn't really thought about the advertising in that way. What I can assure you is our direct advertising was already planned to be up in 2017, and it will be up some more from a direct advertising standpoint..

And I guess I'd add that that we've heard from quite a few retailers about their strong interest in going after what's a considerable amount of Tempur Sealy branded business. And that they are recalibrating their advertising plans and how they devote space in their TV and print media increasingly so to Tempur-Pedic and to our Sealy brands.

So I think you will see a lot of active retailers going after what's a considerable amount of business that they can capture along with our recapture..

Yes. I guess, it could actually be up on that side of the equation in total when you add that together. So, hope that helps..

Thank you. And I'm showing no further questions. I would now like to turn the call back over to the company for any further remarks..

Thank you. To the 7,000-plus 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 the Tempur Sealy management leadership team and its board of directors.

This ends the call today. Thank you, operator..

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