Good day and welcome to the Sealy Corporation’s second quarter fiscal 2008 earnings conference call. (Operator Instructions) At this time I would like to turn the conference over to Kenneth Walker, Senior Vice President, General Counsel and Secretary of Sealy Corporation; please go ahead sir.

Good afternoon everyone. I want to thank you for joining us on Sealy’s financial second quarter 2008 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 on this call may constitute forward-looking statements. Such statements are subject to risk, 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 risk and factors are set forth in the company’s Annual Report on Form 10K for the year ending December 2, 2007. I’ll now turn the call over to Lawrence Rogers, President and Interim Chief Executive Officer of Sealy Corporation.

Good afternoon and thank you, Kenneth. I want to also thank all of you for joining us on our call to discuss Sealy’s second quarter results. Joining me today are Jeffrey Ackerman, our Chief Financial Officer and Mark Boehmer, our Treasurer. On this call I will give an overview of our second quarter results as well as an update on the progress we are making on our Posturepedic rollout and our strategic operating initiatives. Jeffrey will go into more detail on our second quarter financial results and then we will open the lines for your questions. As we had anticipated and communicated on our first quarter conference call, the second quarter was challenging especially in terms of domestic sales. We also were impacted by lost distribution from a few of our accounts such as Levitz and Wickes, who were forced to shut down operations beginning the fourth quarter of 2007. Looking at our results from a broader perspective, the domestic retail mattress industry remains difficult. Pressures on consumer spending continue to effect demand and consumer traffic but mattress retailers who are advertising, tend to be performing somewhat better. Additionally, manufacturers are facing unprecedented cost inflation particularly in steel, foam, and fuel. We cannot control the external forces but we are committed to working on initiatives that can positively impact our business consistent with what was discussed during our last call; completing the Posturepedic innerspring rollout, ongoing product innovation, controlling costs, affective working capital management and making prudent investments for the long-term. While the business climate is as soft as I’ve experienced, the one constant is we are still continuing to generate meaningful cash. We are also making steady progress on the key initiatives we laid out at the beginning of the year. I now would like to provide an update…

Thanks Lawrence, I’d now like to walk you through the financial details. For the second quarter total sales were $375.4 million, a decrease of 6.6% compared to the prior year. Net income was $12 million or $0.13 per diluted share compared to $16.1 million or $0.17 per diluted share in the same period of 2007. I’ll now go into more detail on the components of our second quarter sales results. Total domestic net sales fell by 14.7% year-over-year to $258.7 million. Wholesale domestic net sales which excludes sales to third parties from our component plant were down 15.6% to $252.9 million and were impacted by a 16.1% drop in unit volume partially offset by a 0.6% increase in our average unit selling price. Second quarter 2008 AUSPs were favorably impacted by the price increases we implemented in December, 2007, the new Posturepedic line rollout and the change in estimates used to calculate our warranty and other product return reserves. Partially offsetting these gains were shifts in sales mix and discounts associated with an increased volume of floor samples. The decline in our wholesale domestic unit volume is primarily attributable to the factors Lawrence mentioned earlier including softening industry demand driven by ongoing erosion in consumer spending which can be seen in reduced traffic on retailers’ floors as well as certain of our customers scaling back or ceasing operations. We are pleased that the sales of our new Posturepedic line and specialty products helped to partially offset weakness in other parts of our product portfolio. Branded specialty bedding sales were up slightly in the US. Our new visco line is helping to drive AUSP growth in our specialty portfolio, specifically specialty AUSPs were up 18% this quarter; however the industry is being pressured by lower demand for high end mattresses, which…

(Operator Instructions) Your first question comes from the line of Chad Boland - Raymond James

You obviously did a terrific job with operating expenses in the quarter and I guess from—how to think about this from a modeling perspective for the rest of the year, I think you had initially looked for an incremental $15 million to $20 million in product launch costs and I think Jeffrey had said $3 million to $4 million is getting shifted into Q3 and Q4, about how much were the product launch costs in Q2 and I guess what help can you give us as far as thinking about that SG&A ratio for the rest of the year.

As we did talk about on the last call we expected an incremental $15 million to $20 million of product launch costs sequentially from what we saw in the first quarter. We came in below that and the variance was, about half of it was a deferral into the back half of the year from the second quarter and the other half was savings. So we are still focused on, for the full year, to show an improvement year-on-year on the product launch costs.

But we should expect some incremental advertising costs for the new national campaign as well?

Right. As we said in the prepared comments we are very focused on our costs and we saw a $14.9 million improvement on the fixed side of things and most of those we anticipate to be ongoing. However the second half as I mentioned, there’s the $3 million to $4 million shift in product launch costs as well as the advertising spending that we’ll be incurring in the second half of the year to support the national ad campaign. Chad Boland - Raymond James If I’ve done my math correctly based on the table that you gave us, I think excluding the accounting change, the gross margin would have been about 37.7% which is down a little more sharply versus the Q1 kind of run rate. I guess just to help me understand, that’s a one-time benefit that we saw in this quarter, we wouldn’t expect that to recur or show up in any way for the rest of the year, so if we’re kind of looking for a base line to look at gross margin, we should exclude that and maybe exclude the latex start-up and the tariff refund from last year as well?

Yes, the table that you referenced that we included in the press release, all those items we would expect really are unusual or special items for the second quarter only and would not anticipate seeing those in the third or fourth quarter.

You did comment that the specialty margins have begun to increase, could you quantify for us at all how they compare say to the company average? Are we getting close, are we above yet? Any numbers you want to throw behind that?

We’re not going to comment on that at this point in terms of how it compares to our other product margins.

Your next question comes from the line of Laura Champine – Morgan, Keegan & Company Laura Champine – Morgan, Keegan & Company: On the top line you do mention deterioration retail conditions, but I also know that in the most recent quarter you had a very significant shift on retail floors towards the new Posturepedic, do you expect your business trends to improve or to continue to deteriorate on the top line in the domestic side of the business in the back half of the year?

Clearly as we said in our prepared remarks, our retailers are certainly feeling the effects of the headwinds as far as consumer spending goes. Although I would tell you, the ones that are advertising are performing better then the ones that are not and through this period, we’re going to continue to be supporting our retailers and attempting to continue to provide them with new products as we’ve done with the new Posturepedic and PurEmbrace Smart Latex lines. We are seeing an uptick in the business based on the new Posturepedic product when you compare the pre and the post launch period. So the retailers who have rolled it out are doing better on Posturepedic then they were previously and are doing better then the retailers who are still rolling it out.

I think as we had in the prepared comments and as you accurately captured, we did see some increasing pressure as Lawrence mentioned and so that if you look sequentially, you’ll see that sequentially the domestic performance was down more in the second quarter then it was in the first quarter and as we mentioned those challenges have certainly continued into the third quarter. So we would expect that clearly the back half is going to be more challenging. There’s just a lot more headwinds as we’ve seen the retail environment become much more challenging and offsetting some of that are all the things that Lawrence mentioned around—we are seeing some improvement with in those accounts after they launched the new Posturepedic line. Laura Champine – Morgan, Keegan & Company: On your price increases I think I heard Lawrence say that you don’t see the positive impact on that until Q1, buts it’s a July 21 price increase, is there something phased about that rollout that we should know?

I’m sorry, that was just a mistake there. Its actually in the fourth quarter, we meant to say in the fourth quarter that you’ll actually see that impact. So as we said, we’re taking the price increase this month, so it’ll go effective July 21st, and really that’s in response to the significant material costs that we’re seeing that are really blending in and really starting to already hit us. They’ve hit us every quarter and it just accelerates now as we move in to the third quarter. And so that cost increase is going to be in the 10% to 12% range of our total material costs and that’s probably where we’ll finish the year, where the prices will be relative to where we exited the second quarter. Laura Champine – Morgan, Keegan & Company: Where does that put your raw materials as a percentage of COGS and how much of that increase do you think you can recapture?

Historically that’s been in about the two-thirds range, 65% or two-thirds, right in that range is what material costs have been. Obviously that’s going to start impacting us. That should shift over time for two reasons, the obvious one being the material increases but the operations team has done a fantastic job on focusing on driving down labor costs, improving efficiencies there, taking out fixed costs so that ratio should improve and move more towards materials over time. Laura Champine – Morgan, Keegan & Company: And the percentage of those price increases you think you can pass on to retail in Q4 and beyond?

Well historically that has not been our practice and was not our practice with the price increase that we took in December to just try--everything that we end up with in terms of price increases for materials to just pass that through in pricing. So we’re focused on that and we’re augmenting a lot of the efforts that I just mentioned around reducing our costs to manufacturer as well as looking at other ways to reduce material costs through either design changes, using alternative materials, and then just trying to leverage our scale on pricing with our suppliers. So we’re using all those things as well as driving improved mix with new product launches, all those things really to offset the impacts of that material inflation.

Your next question comes from the line of Keith Hughes - SunTrust Robinson Humphrey

The July price increases you mentioned earlier, will that be on the new Posturepedic line as well as the other Sealy products?

It’ll be on the low to mid-priced mattress categories, pretty much across the board. It will also include the new Posturepedic product as you’ve identified.

We’re going to have, as Lawrence mentioned, by the end of July we expect to have the whole new line rolled out so there’s really, as far as the old line, there’s very little impact there.

We won’t see anything on Stearns & Foster or the specialty products, is that correct?

The Stearns & Foster line will remain unchanged for the moment.

You talked about the national ad campaign earlier; can you give us some rough dollars of how much you’ll be spending on that in the second half?

That’s, for competitive reasons, that’s not something that we’re going to disclose.

The one-time warranty item that you talked about earlier, is that on domestic business, is that what that’s related to?

It is.

Are you—you gave us the units in the US, the decline in units, can you put some kind of magnitude around the difference between your lower end products, the under $1000 for a Queen, versus the higher end. Were the higher end substantially [worse] then what we see for the average in the US?

We’re not going to break those out we just can’t break those out for some competitive reasons but as we said, we’ve seen pressure kind of up and down the price points and didn’t disclose—I can only share with you what we’ve already told you and we did say that on the specialty business we did see a 15% unit decline.

Your next question comes from the line of Peter Wahlstrom – Goldman Sachs Peter Wahlstrom – Goldman Sachs: Once again going back to the materials piece, what sort of price increases actually required do you believe to really offset that 10% to 12% expected increase in the back half of the year and do you ultimately see more as you head into the first half of 2009 as some of your supply agreements roll off?

As I said, our practice is not to try and just pass everything through in terms of a price increase that ends up being a bit counter productive to our ability to stay competitive on the floor and it really doesn’t help our retail partners drive any kind of volume. So it’s a tool that we use and I mentioned the other tools that we use, so we’re just using that to supplement some of the other things that we do because it’s such an extraordinary price increase. And then to the second part of your question about will we see additional price increases, we forecasted out as far as we can and we’re going to look for every way possible to offset any price increases and at this point I think that’s one of the things that we mentioned just the volatility in the market right now makes this a bit of a challenge so I would only be speculating as to what I thought prices were going to do as we go into next year. Peter Wahlstrom – Goldman Sachs: When we look at [ISPA] units kind of down in the 5% range year-to-date, can you help us bridge the gap here in kind of what you’re seeing in terms of additional weakness. Is it related to primarily the Posturepedic rollout as a function of low end that you don’t mind losing that type of business, just a little color there?

Our units in the US I think you were referring to were down 16% and as I said before those are—it’s across pretty much all the price points. I don’t think there’s any one set of price points that’s immune to this environment. Peter Wahlstrom – Goldman Sachs: Could you just provide a little bit more detail on the adjustment for the warranties and other product return reserves and really what was behind this one-time item?

If you go back to what we had been—what I talked about, there was an $8.2 million impact and that’s illustrated on our attachment that we had to the press release. A little bit of the background on that is that we had implemented some new systems back in probably about four years ago, that provided us with the ability to track a lot more detail on our product returns and so we now got to the point where we had generated enough history that we could have a statistically significant sample that would allow us to more accurately predict what our future obligations would be in terms of product returns. So it’s just a much more sophisticated approach to doing that then what we were capable of doing in the past. Peter Wahlstrom – Goldman Sachs: From a working capital perspective we see that the accounts payable line was up year-over-year just even as kind of the sales and volumes were down modestly, can you provide just a little bit more detail on how tightly you are running the cash flow perspective?

As I told you in our prepared comments our leverage ratio was 3.61 to 1 as compared to maximum allowable leverage ratio of 4.25. Peter Wahlstrom – Goldman Sachs: Okay but any reason in particular for the increase in the payables line?

No, we set out to very aggressively manage our working capital and that was one of the levers that we had available to us and so we pulled that one.

The other color I’d like to give you for the unit question was we’re still being impacted by Wickes and Levitz whom of course were in existence this time last year, and they fell prey to the economy so we’re still trying to of course, transition that lost business and take it into different and new retailers. So that’s another explanation of the units.

Your next question comes from the line of Anthony Gikas – Piper Jaffray Anthony Gikas – Piper Jaffray: Maybe just, I know you talked about that there’s been pricing pressure across all the price points, any more color there? Is it $1000 to $1500 or $2000 and above, any color there might be very helpful? Second question how often historically have you been getting raw material cost increases and how has that changed more recently? Are you getting these much more frequently then you have historically? And maybe just help us out with the tax rate for the back half of the year; it’s a little higher in the quarter then we were expecting.

On the price points as far as kind of breaking that down as I said, for competitive reasons we’re not going to break that down and there’s been no particular set of price points that have been immune to this current environment. On the frequency of price increases I would say we’re definitely getting a lot more then we have historically or that any of us would like to get. So I think as we said, these price increases that we’re seeing and somewhat anticipating that are on just kind of raw commodities are way above anything that we had expected. Anthony Gikas – Piper Jaffray: You talked about reported EPS being relatively flat or down in the back half of the year relative to the first half of the year, could you address the sales?

As I said in our prepared comments, we saw that the second quarter domestically was clearly more challenging and we saw a decline in sales greater then what we saw in the first quarter and then as we moved into the third quarter that continued and so the retail environment has gotten more challenging and as we moved into the third quarter and we’re currently just expecting that we’re going to be in a very difficult retail environment for the back half of the year. Anthony Gikas – Piper Jaffray: Would your comment apply to revenues as it did to earnings? I mean is it possible that revenues could be flat or down?

Yes, I would say—as I said in our comments, its likely that it would be below the $0.25 that we have year-to-date and again that $0.25 I’m adjusting for the $0.05 benefit that we had related to the warranty and other product return reserves. Anthony Gikas – Piper Jaffray: Okay but I’m talking about the top line, is it possible that the top line could be flat to down relative to the first half of the year?

Yes.

Your next question comes from the line of John Baugh – Stifel Nicolaus John Baugh – Stifel Nicolaus : Just to clear up on that last question, you meant year-over-year or you meant second half total volume versus first half total volume?

Typically or historically our second has been sequentially greater then the first half because it’s just the third quarter is such a strong selling season. But I would say, as I look at that, when I talk about the rates year-on-year we were down 14.7% domestically and 15.6% on the wholesale bedding sales and so the second half of the year, we’re seeing those challenges continue to grow in the second half. John Baugh – Stifel Nicolaus : But again, those [inaudible] with the year-over-year percentage declines, not--

I think you can kind of take a look at historically and you’ll get to what the dollar number is. John Baugh – Stifel Nicolaus : Question advertising, I noticed on the balance sheet your accrued incentives and advertising was $26 million which was down sequentially and down $11 million from a year ago, I think it was down about $4 million from the first quarter, is that—and you broke out what you did with co-op advertising in the first quarter, you haven’t talked about it in the second quarter, did your co-op advertising go down above and beyond what your volume did?

No, there wasn’t any kind of real change in rate so what we’re looking at—the item that you’re looking at on the balance sheet, or the cash flow is really just driven by the lower volumes. John Baugh – Stifel Nicolaus : So there hasn’t been any change—I mean with this planned national advertising spending, would you not offset that with reduced co-op or is that truly going to be incremental as we look at the second half of the year?

Well it will be incremental and as we said, we think this is just an absolutely great time to get this out there for a couple of reasons. One is as Lawrence mentioned the customers that are advertising are doing significantly better then the other customers. It supports this great new line that we have in Posturepedic and third it allows customers and gives them something to build on and leverage their co-op dollars and tie into. So those are—it will be incremental but we’re going to be monitoring the effectiveness of that and making sure that we’re getting a good return on that investment. John Baugh – Stifel Nicolaus : Your ISPA data, which certainly is subject to revision so we find out, but it indicated that for the May quarter units were off about 8% and you were off 16%, and I guess the question is really how much of that difference would be due to the disruption caused by the Sealy Posturepedic rollout versus lost shares or any kind of feel you can give us.

Certainly when we transition the largest part of our product portfolio which Posturepedic innerspring is, we do have typically a period where, you know when the hand off from the old Posturepedic or former Posturepedic line to the new, you do generally encounter a dip in units and as mentioned previously we are still anniversarying the Levitz, the Wickes and the Mattress Gallery on the West Coast, their bankruptcies, during the same period last year, so I think that should help you build a pretty good bridge which is I’m sure what you’re trying to do right now. John Baugh – Stifel Nicolaus : On Stearns & Foster, that brand has been under immense pressure for a long, long time--

As we said, we’re not happy with the performance of Stearns & Foster. We have a full court press on Stearns right now. There will be a new introduction of the Stearns & Foster which is planned and will be delivered in Las Vegas in January 2009. John Baugh – Stifel Nicolaus : On the payables, is that tighter management there basically sustainable going forward, how would you expect that to play out?

Yes, we’ve got very strong working relationships with our vendors so we work with them and I can tell you that we paid all our vendors within terms.

Your next question comes from the line of Mark Rupe – Longbow Research Mark Rupe – Longbow Research: On distribution, obviously Levitz and Wickes and Mattress Gallery have been out, is there any risk of additional distribution changes in the next six to nine months?

Well I think in this clearly there is always risk in this kind of an environment but we’re focused on always making our retailers as successful as possible and we’re attempting as we go through this period to provide them with great products as we’ve done with the new Posturepedic and the PurEmbrace Smart Latex lines. As well we will be launching some new products in the second half of the year in Las Vegas at the end of this month and you know having said that, I think you could see by the numbers that we’re managing our receivables pretty tightly given that we showed a two day improvement in the numbers we’ve just released. So is there risk? Yes but we’re pretty mindful and we’re watching everything carefully. Mark Rupe – Longbow Research: The last couple of quarters you spoke pretty deep on the ability to switch out slots and mix things up, have you been doing that and has it been successful at all in offsetting any of this?

Yes, we have been doing that. Certainly the placement orders on behalf of our retailers on Posturepedic, we were pleased to see the slot placements on the floors moving up. Mark Rupe – Longbow Research: Any chance that you can offset some of the Stearns & Foster by switching them out?

There’s some of that is occurring so yes.

Your next question comes from the line of Ruma Mukerji – JP Morgan Ruma Mukerji – JP Morgan: Did you get around to answering the effective tax rate for the quarter and what we should expect for the rest of the year because it came in slightly higher?

The second quarter was higher but the first half, if you look at it on a half-half basis, the first half shouldn’t be that much different from the second half. Ruma Mukerji – JP Morgan: And so your full year expectation would be--?

We’re—I think we had communicated at the beginning of the year we’re going to be in and around that 38%. Ruma Mukerji – JP Morgan: Actually your incremental flame retardant costs this quarter came in a little less then I expected, how much more do we expect in the back half of the year, I know its dissipating but could you quantify how much is expected in the back half of the year?

We’ve already now, since we’re past July 1st, we’ve actually fully anniversaried it and so there’s just a little bit that would be incremental during the month of June and that’s it.

Your next question comes from the line of Reza Vahabzdeh – Lehman Brothers Reza Vahabzdeh – Lehman Brothers: On the volume decline you mentioned the loss of distribution with two retailers, we know that 16% or so volume decline US, how much of that would have been because of those two?

We for competitive reasons would not break out that number. Reza Vahabzdeh – Lehman Brothers: Would you say it was a material number?

It was a measurable portion of the decline. Reza Vahabzdeh – Lehman Brothers: On the cost inflation front, you mentioned 10% to 12% in the second half that by the way is just for raw materials, right?

That’s correct. Reza Vahabzdeh – Lehman Brothers: Okay and then what was it for the second quarter then? I’m just trying to get a feel for how cost inflation is moving up for you.

It’s significantly more in the second half then what we experienced in the first half. Reza Vahabzdeh – Lehman Brothers: Would you say it was high single-digits in the second quarter?

Yes. Reza Vahabzdeh – Lehman Brothers: As far as the pricing front, you’ve made a bunch of pricing actions starting in late fourth quarter and I’m just a little surprised that the AUSP frankly has not moved up more, is it the discounts for new products that’s offsetting the price increases?

I think it’s the significant headwinds that retailers are facing and we are obviously sharing in those headwinds.

Just also for a little bit of context that the price increase that we took in December was really focused at the low end for the most part and was not as broad as this one and so I think with this one will be hopefully a little bit more meaningful then the last one. Reza Vahabzdeh – Lehman Brothers: On bank covenants, I know you are in compliance in the second quarter would you anticipate being in compliance for the year and not having to address or amend bank covenants?

We are very focused on maintaining our financial flexibility and we’re trying to be as proactive as possible as we demonstrated during the second quarter where we really focused on improving our cost structure and will continue to do that. We aggressively managed our working capital and we’ve done that and will continue to do that as well as looking at CapEx where we look to either defer or cancel projects that would not affect our ability to run the business. So we’re looking at all the options available to us and we’re going to make sure that we’re doing what’s best for our company and our shareholders. Reza Vahabzdeh – Lehman Brothers: The $14.9 million of fixed cost reduction, that’s just for the second quarter right?

That’s correct. Reza Vahabzdeh – Lehman Brothers: And do you expect a similar rate of cost savings in the next couple of quarters as well?

Well first off as we said it was about $14.9 million of fixed costs largely going to be things that we can carry forward especially the things like workforce reductions and reducing professional fees and other discretionary spending. But we’ve moved $3 million to $4 million of product launch costs out of the second quarter and into the back half of the year. And we also anticipate having more spending for the ad campaign that we talked about. So those things will be going on in the back half of the year. I’d also say from a sequential standpoint that’s the case, but in a comparison to prior year if you’ll recall, we’d started these cost reduction initiatives back in the third quarter of last year so we’d already taken some cost reductions last year. Reza Vahabzdeh – Lehman Brothers: How much of the cost savings will be lapsing against prior year cost savings sometime in the second half?

I would say that it’s—well it’s a portion of it; it’s not the larger portion. Reza Vahabzdeh – Lehman Brothers: But you still are carrying some of this cost savings in the second half.

Yes.

Your next question comes from the line of Karru Martinson - Deutsche Bank

One of your large competitors has just announced actually price cuts on some of their lines, and I was kind of wondering what you’re seeing out there in the competitive environment and the ability to take share in this type of environment from some of those smaller players.

Yes, we caught news of that as well today. That is clearly at the lower end of the line and I would say is somewhat out of step with what the rest of the industry is doing. That line has been out now I believe about six months and quite frankly it’s a little bit difficult to read because we’re all incurring and facing the same kind of inflationary pressures today.

In terms of when you launched the Posturepedic line, I believe it was about 21 new products were in the $1000 plus range and then 12 in the $750 to $1000 and seven below $750, so do you feel that you’re getting traction with those new $1000 plus lines or is that slowness that you’re seeing there across the board not just Stearns & Foster and specialty?

I would say that once again as we have stated, we’ve seen a significantly improved placements of the $1000 and above, it’s a little hard to read in this market but I’d be comfortable in saying where we compete in a multi vendor environment we are certainly competing at a much higher level then we were previously.

The new, kind of $750 and below, that’s where you’re really seeing the stronger traction?

No, I’m saying that it’s pretty much across the board and where we’re competing in a multi vendor environment we are competing more actively at the $1000 and above price range.

Your final question comes from the line of Carla Cassola - JP Morgan

Have any of your competitors raised prices other then the comment just made previously?

Yes, almost I would say, all of our competitors have either raised prices or issued notification of raising prices. Again, the entire industry—these cost inflations are not unique to Sealy. Its an across the board industry issue.

We have reached the time limit of today’s call; I’d like to turn things back over to Lawrence Rogers for any additional or closing remarks today.

Well we’d just like to close by thanking you for attending our second quarter conference. We appreciate the continued interest that you show in Sealy and we very much look forward to updating you on our progress on our next call. So thank you for your time and thank you for your interest. Good afternoon.