Welcome, everyone to the Sealy Corporation's fiscal third quarter 2007 earnings conference. Today's call is being recorded. At this time, I'd like to turn the program over to Mr. Kenneth Walker, SVP, General Counsel and Secretary of Sealy Corporation. Please go ahead, sir. Kenneth Walker: Thank you. Good afternoon, everyone. I want to thank you for joining us on Sealy's financial third quarter 2007 investor conference call. Before we begin, let me remind you that in accordance with the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, the company knows that certain matters to be discussed by members of management during this call may constitute forward-looking statements. Such statements are subject to risks, uncertainties, and other factors that may cause the actual performance of Sealy to be materially different from the performance indicated or implied by such statements. Such risks and factors are set forth in the company's annual report on Form 10-K for the year ending November 26, 2006. I now turn the call over to Dave McIlquham, Chairman and Chief Executive Officer of Sealy Corporation.

Good afternoon. Thank you, Ken. I also want to thank all of you for joining us to talk about Sealy's third quarter of fiscal 2007. Joining me on this call is Jeff Ackerman, our Chief Financial Officer; Larry Rogers, President of North America; and Mark Boehmer, our Treasurer. I will give a brief business overview and update on key operating initiatives. Jeff will provide a financial recap on our third quarter and year-to-date results, and then I will wrap up and we will open the line for questions. Let me begin by providing some additional context for our call. We are going to start discussing our business in a slightly different manner than we have in the past, due to the ongoing growth of our specialty business. Through the end of the third quarter, our specialty business produced revenues in excess of $100 million. From a growth perspective, in only 30 months since we launched Sealy's specialty business, it has grown in size to equal the sixth-largest innerspring and to be the third-largest specialty bedding company in North America. This now represents a significant element and the fastest-growing portion of our business and we believe providing additional context and differentiation from our innerspring business is very important. During the third quarter, we successfully remained focused on our strategy of driving unit volume worldwide, both in innerspring and specialty, increasing Sealy's market share and continuing to generate solid cash flow. Our domestic unit volume grew 10.3% in the quarter while the rest of the ISPA reporting members declined 2.6% over the first two months of our quarter; clearly illustrating how Sealy has gained market share. The retail environment has remained challenging for innerspring due to weakening demand and competitive pricing pressures. We can't predict when the market is going to turn,…

Thanks, Jeff. Let me summarize and close by saying the following: We recognize there are areas within our innerspring business where we must improve the performance. Building on the success of our new Stearns & Foster and Posturepedic reserve products, we are committed to identifying and implementing opportunities to improve the margin and profitability of these sales as we move forward. In addition, as you have heard from me and again from Jeff, we are committed to continuing to build on our growth and profitability in our specialty portfolio, especially in our latex products and to that end, we are evaluating changes to the business model including our go-to-market strategy. Some of these initiatives for latex include collaborating with our key retailers on a joint strategy for growth, introducing new products by the end of the first half of fiscal 2008, introducing a marketing strategy that leverages the Sealy Posturepedic brand, and a new long-term business plan for this portion of our specialty business; each of which are intended to drive long-term shareholder value. We are confident about the future and remain committed to building profitable, long-term market share. Thanks for joining us on the call, and we will now open the line for questions.

Your first question comes from Keith Hughes - SunTrust Robinson Humphrey. Keith Hughes - SunTrust Robinson Humphrey: First, numerically can you give us what the gross profit or gross margin was for the U.S. business in the quarter? Jeff Ackerman: Gross profit for the U.S. was 41.5% for the quarter. Keith Hughes - SunTrust Robinson Humphrey: Secondly, you talked about the industry environment earlier and I think it's pretty obvious it's going to remain that way for some time. Why did SG&A costs go up a little bit sequentially and, of course, up a lot year over year? Are you not looking at the cost structure of the business to bring that down during this difficult time? Jeff Ackerman: We absolutely are. I think it's important for people as they think about our business, one of the things is that our SG&A expenses are approximately 60% variable. So as I mentioned in my prepared comments, the single largest driver of the increase was the increase in cooperative advertising. As I said, that was about $5 million. We also saw, with the 10.3% increase in units here in the U.S., that drove increases in the delivery costs. Beyond that, we had some marketing and promotional activities that drove about $3.6 million. We had $1.4 million of charges related to some realignment activities associated with the salesforce, and then finally we spent an incremental $1.3 million in national advertising to build the Sealy brand. Keith Hughes - SunTrust Robinson Humphrey: I understand, but you have 40% that's fixed that is up $55 million in the quarter. Given the environment we're in, a 5% or 10% cut there would make a big difference. Is that something you're looking at doing or is the fix where it's going to be in the future? Jeff…

Your next question comes from Kevin Sykes - Goldman Sachs. Kevin Sykes - Goldman Sachs: Thanks for taking the questions. You talked about on one hand taking price increases or at least evaluating taking price increases. I was just wondering if you could talk about where? You've also talked about your comfort with price levels and then on the other hand that the environment remains tough and that you'll continue to be active. I just want to get a sense for where you think price is going and where are you versus your main competitors?

Listen, we are committed to improving margins. Jeff just talked about some elements and we're focused on every aspect of the product assortment. We're looking at value engineering opportunities. We're looking at supply chain efficiencies and you'll see some of those implemented as we roll out the new Posturepedic TrueForm. Clearly we'll start to see those in latex now that Mountaintop is at a steady state. We're looking at the new line merchandising associated with the Posturepedic launch that we're going to effect in the first half of the 2008. We're clearly looking at a new strategy as to how we drive the business and pricing and margins and specialty on a go-forward basis and we're developing that now. Finally, we're looking at a pricing on every aspect of our business in trying to evaluate it. The market is tough and we can't control the external market. We are gaining market share in slots and as we've said before, Larry and I have been through this before and we're going to be positioned to take advantage when the industry rebounds but we are looking at pricing actions. The fact is that our industry and we have incurred significant cost increases because of FR and we've got to figure out if it's possible and how we can pass some of that on. So we're looking at every aspect of the business. As I said in my opening remarks, we do believe we've got very competitive values. We have picked up slots, but we've got to find a way to improve margins over the long term in this business. Kevin Sykes - Goldman Sachs: With the roll-out costs that may be incurred for next year's new product launches and the new strategy on specialty, I was just wondering, you talked before about a debt target of 2.5 to 3 times; is that still the target and when do you think you can get there? Jeff Ackerman: That is still our target and it's our policy not to give guidance on that. But, Kevin, let me just reiterate. As I mentioned in my prepared remarks, we generated $31 million of operating cash flow in the quarter, despite the tough environment that we're going through and that was a $14 million improvement over the prior year. So we've been able to continue paying down debt, paying dividends and buying back stock. Kevin Sykes - Goldman Sachs: You're not going say if you expect that to continue. Thanks for the color.

Our next question comes from Al Kabili - Goldman Sachs. Al Kabili - Goldman Sachs: Good afternoon, a question on the specialty business. What kind of actions are you taking and when can we see the gross margins there equal the innerspring business?

We've built a terrific business in the last 30 months, obviously. As you heard Jeff say, it's more than $100 million year-to-date. I think there are a number of keys to success for us, particularly in latex as we think about the future, but also across our whole specialty category. Clearly you have to have the right supply chain. You have to have innovative and differentiated product. We believe you've got to have scale to compete. You've got to have a selling strategy that works in that market and we believe you've got to have a brand-building plan. Now we've put the right supply chain in place with our new TrueForm introduction. We clearly put it in place with the Latex plant. Our new TrueForm launch gives you an indication of our thinking in terms of innovative and differentiated product from the competitors there. We clearly have the scale now that we've built in the last couple years and quite candidly, we believe that this new plan has to focus on selling strategies and brand building. We're committed to be a leader in this category, and as I said in my earlier comments, we think specialty is different from innerspring. The competitors clearly are different. The consumer buying process is different. The marketing approach is different and the retailers treat the category differently and so we're in the early stages of development of this plan, but we are committed to building a business plan that will drive long term profitable growth and that growth has to include, over time, growth in margins. We've been putting the building blocks in place and you'll start to see that in the second quarter of 2008. Al Kabili - Goldman Sachs: Is it just scale that's going to drive the margin expansion or is there other stuff?

Oh, no. I think it's having the right supply chain. It's got to be innovative and differentiated product; scale is a part of it. But I think a key is our selling strategies and our brand-building plan. We clearly feel really good about latex. You heard Jeff say that our latex business last quarter more than doubled and that was off a base that was bigger than Visco and we think it's the key. It's all about reaching the consumer, selling the product differently. I think it involves different SG&A approaches to the business versus the traditional innerspring business and it's why we say that we're in the early stages of development and it's why it's going to require collaboration with our retailers. We're going to run the specialty business differently than we run the innerspring business.

Our next question will come from Mark Montanin - Citigroup. Mark Montanin - Citigroup: Regarding the flame retardant compliance, assuming the $9.5 million increase in raw material costs this quarter is an increase over those recorded in the second quarter, holding volume levels steady do you believe the increase in material costs associated with making your products compliant has plateau'd? Or should we expect potential for additional material cost pressures going forward? Jeff Ackerman: Mark, could you just repeat the last part of your question? I didn't quite catch that. Mark Montanin - Citigroup: Holding volume levels steady just to get rid of that variable, are your costs associated with making your products flame retardant compliant, do you believe that they've plateau'd on a constant volume level? Jeff Ackerman: Mark, they have. I just want to correct your assumption on the costs. The $9.5 million is not an increase sequentially with the second quarter. It's an increase over the prior year. So year-to-date, though, our FR costs are just north of $19 million in material costs. Mark Montanin - Citigroup: Have they been increasing steadily sequentially? Jeff Ackerman: No. Remember in the second quarter we were still rolling out the promotional line which was becoming FR compliant and then we've gone to some new product designs. So we're now I think at a fairly steady state. Mark Montanin - Citigroup: Also regarding the possible change to your latex business model, in particular your go-to-market strategy and collaborating with some of your key retailers, could you expand on that a little bit?

Mark, not at this time. Listen, we understand the business. We understand what the keys to success are. We've spent 30 months putting the building blocks in place. The reality is that the marketing approach in specialty is different from innerspring and retailers treat the category differently. We have been great partners with our retailers in the past. We intend to be in the future, but we believe to be a leader in the category, particularly given where Tempur and Select are, that it's going to involve different strategies and we're committed to developing and implementing them on a go-forward basis.

Your next question comes from Reza Vahabzadeh - Lehman Brothers. Reza Vahabzadeh - Lehman Brothers: On co-op spending, you touched on co-op spending increase in the SG&A line. If you just ignore the classification of it, was co-op spending higher as a percentage of gross sales or flat or how should I think about that? Jeff Ackerman: Here's how to think about it: it is slightly higher as a percent of sales and what drives that is a little bit of the mix of customers. But again, it's volume variable and so as the sales and revenues increase, then we're going to see an increase in that. Reza Vahabzadeh - Lehman Brothers: But the co-op spending went up some. It sounds like it was up 50 to 100 basis points. Jeff Ackerman: I didn't say. Reza Vahabzadeh - Lehman Brothers: Would you anticipate your overall co-op and advertising spending to continue as you're trying to gain shelf space, introduce new products, grow your specialty business? Or was this a one quarter front-ended spending? I'm just trying to find out the run rate in the spending you have right now. Jeff Ackerman: Reza, every quarter that we have sales growth we'll have an increase in co-op. We've got contractual obligations to provide those funds to our retail partners and so every year, every quarter we have sales growth you're going to see an increase. Reza Vahabzadeh - Lehman Brothers: On material costs I don't know if I heard you right, but you said material costs were up 7.9% on a per unit basis. Is that including the FR costs or is that just the material costs on a standalone basis? Jeff Ackerman: That does include the FR costs and the FR cost makes up probably over 60% of that number.

Our next question comes from Grant Jordan - Wachovia. Grant Jordan - Wachovia: Just to follow up, $9.5 million of FR costs, when will that be anniversaried? I mean when will that not be major year-over-year increase? Jeff Ackerman: It will be really as we move into next year. As I mentioned previously, we had a few products during the first half of the year that were still not FR compliant, so really the third quarter is really the first time we're at the full run rate with FR costs. But let me also just point out that we recognize the magnitude of this and we recognize the impact it's having on our margins. So just like this team has done in the past, we're very focused on value engineering efforts. We're already onto the second and third generation solutions for FR. So we're going to continue to look for ways to reduce those costs and offset that increase. Grant Jordan - Wachovia: My next question, you touched on this a little bit, but it looks like inventory days are down a good bit year over year. Is there something driving that? Should we expect that to remain going forward? Jeff Ackerman: No. Our operations team has done a great job focusing on managing the inventory, but as I mentioned in my comments, the biggest driver of that was last year we did not have our latex plant online and the biggest delta was the amount of raw materials associated with our specialty bedding products. As Dave mentioned, we've made changes to our supply chain on the Visco side and now we have the latex beds where we're now producing cores here in the U.S.

Your next question comes from Budd Bugatch - Raymond James. Budd Bugatch - Raymond James: I understand the margin pressure from the competition and the move to specialty and FR, but I am confused about the SG&A. I think like Keith, to see a 70 basis point deleverage. Jeff, I think you said 60% of the SG&A is variable which if my math is right, would imply about a 25% or a 24% variable to sales ratio? If that's true, then you had about a 10% increase in fixed costs? Could you give us any granularity or color there? Jeff Ackerman: Correct. I did say we had a 10% increase in really just in our total costs, but the fixed components that went up, that was what I mentioned before was about $3.6 million related to some promotional activities as well as some product launch costs; $1.4 million charges related to our realignment activities that Larry mentioned, associated really with the salesforce; and then another $1.3 million of incremental national advertising to build the brand. Budd Bugatch - Raymond James: That will continue at that rate then, going forward? Jeff Ackerman: No. The realignment costs are really a one-time. Budd Bugatch - Raymond James: Yes, but the other two, the national advertising and if you put them into the fixed bucket, we should assume they're going to continue, to build a model? Is that how we should do it? Because they would have, I would have thought, been more in the variable bucket. Jeff Ackerman: These are specific marketing promotional activities that we did with some of our products and they were discreet actions, so I would not necessarily assume that those would continue. Budd Bugatch - Raymond James: My final question has to do with tax rate. You talk about a favorable tax reserve, I think off the balance sheet onto the income statement or onto the tax account. How much is that? Have you quantified that? Did I miss that? Jeff Ackerman: I did. It's $7 million. Budd Bugatch - Raymond James: That would have brought the nominal tax rate to that 34% you talked about? Jeff Ackerman: That's what I said we will finish the year, about 34.5%. Budd Bugatch - Raymond James: For the full year. So the tax rate, how do we get there for the full year, then? Will the fourth quarter be a significant tax expense? Jeff Ackerman: I don't know of really any unusual items. Again, I would just kind of plug for your modeling purposes to get to the 34.5%. That's probably the best I can do for you.

Our next question comes from John Baugh - Stifel Nicolaus. John Baugh - Stifel Nicolaus: It sounds like there's price pressure on the $1,000 and up innerspring products. Is that due to Specialty Sleep just being the primary competitor? Really, what can you do to stabilize that or arguably get prices back up?

I think the price pressure is driven by a couple of things. One is Specialty as you mentioned and clearly all that growth and activity is above $1,000. Two is the softness in terms of the market. Really as we've said, the growth in the category has largely been in specialty for the last 12 months. Third is most of our competitors are being really aggressive as they try to protect their slots and their business and so I think there's more competition in innerspring, demand is soft and then specialty is an issue and that's all come at a time where we've had to confront this conversion to FR as well as some material inflation over the last 24 months in foam and steel. John Baugh - Stifel Nicolaus: As a follow-up, you mentioned collaborative efforts. Are you currently with your Visco or latex doing the co-op model? Are you going to be asking the retailers effectively that they won't get co-op money and that you'll spend the advertising? Any clarity there?

I would say you have articulated it properly in that up until this point in time, for the most part, we've run our specialty business the way we've run our entire business and it has got us to this stage. Some nice scale given where the business is, a good platform for growth, but as Jeff mentioned, the margins are less than our average and cooperative advertising costs are a big part of our SG&A and they just keep going up. So we think we're at the point where we've got the right supply chain. We are developing innovative and differentiated product. We've got scale to compete but the marketing approach in specialty is different. Retailers are treating the category and some competitors differently. To be a leader in this category -- because we think it is a great long-term profitable business -- we've got to have the appropriate selling strategies and brand-building plans that allow us to be a leader. I think to get there is going to involve a collaboration with our customers; to get there is going to involve innovative and different thinking and we're starting that. At this time I'm telling you that as an organization we're committed to being a leader in specialty.

Your next question comes from Kevin Sykes - Goldman Sachs. Kevin Sykes - Goldman Sachs: On the consolidation that you talked about, have you yet seen any pressure from those retailers trying to leverage their larger size?

Kevin, we see leverage every day.

Your next question comes from Al Kabili - Goldman Sachs. Al Kabili - Goldman Sachs: A question as you think about market share versus pricing. At what point do you think that it may make sense to limit pricing declines and try to hold margins at the expense of maybe gaining some market share? Secondly, any concerns on the Reserve about consumers stepping down, cannibalizing sales and margins at the lower price points on Reserve?

Listen, I think that as we've said, we believe we've got incredibly compelling values out there so we're not looking at more aggressive pricing. We're actually, as we've said, evaluating what pricing actions and opportunities there are. We don't have an innerspring demand issue below $1,000. Overall we're gaining share in innerspring. Last quarter our sales were up. I think we're well-positioned when the market rebounds, but as we've said, our performance above $1,000 has been weak. I think we talked about it on the last call. The good news is our Stearns & Foster sales were up last quarter and our new Posturepedic line will be launched in the first half of '08 and we've got to find opportunities to recover the costs of FR and the costs of a soft market, and the competitiveness out there. That's value engineering, it is supply chain changes, it is new line merchandising to better mix up and it is evaluating price actions. All those things we're looking at to improve our innerspring margin.

That will conclude our question-and-answer session. At this time I'd like to turn the program back to our speakers for any additional or closing comments.

I'll just close by saying that I thought this was a good discussion. I hope you appreciate and understand where we're focused. As I mentioned before, we've been through this before and while we can't control the external market, we can control and gain market share in slots and we can do things to improve our margins. We're going to look at innerspring in every aspect of that and we're going to look at specialty different. We've got a terrific and growing latex business. We're excited and confident about the future and we've got a lot of work and a lot of collaboration in front of us. But at the end of the day as you think about specialty and particularly latex, the keys to success are having the right supply chain, having innovative and differentiated product, having the scale to compete, having the right selling strategies and the right brand-building plan. That is what we're focused on and we look forward to sharing that progress with you on our next call. Thanks a lot.