Good day ladies and gentlemen and thank you for standing by. Welcome to the Tempur Sealy Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the opening remarks, there will be a question-and-answer session. At this time I would like to turn the conference over to Ms. Aubrey Moore, thank you. Ma’am please begin.

Thank you, operator. Good morning, everyone and thank you for participating in today's call. Joining me in our Lexington headquarters are Scott Thompson, Chairman, President and CEO; and Bhaskar Rao, Executive Vice President and Chief Financial Officer. 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 these forward-looking statements, including the company's expectations regarding sales, earnings, net income and adjusted EBITDA and anticipated performance of 2020 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 Form 10-Q under the heading Special Notes Regarding the Forward-Looking Statements and/or Risk Factors. Any forward-looking statement speaks only as on the day on which it was made. The company undertakes no obligation to update any forward-looking statements. This morning's commentary will include non-GAAP financial information. The press release contains reconciliations of this non-GAAP financial information to the most directly comparable GAAP information except as otherwise discussed in the press release as well as information regarding the methodology used in our constant currency presentations. We have posted the press release on the company's investor website at investor.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.

Thank you, Aubrey. Good morning and thank you for joining us on our 2020 third quarter earnings call. Our thoughts continue to be with those around the world whose lives have been impacted by the global health crisis. I’m proud of the team’s success in providing employees and customers a safe environment while dealing and mitigating in array of complex issues caused by the global health crisis. I'll begin the call with an overview of the quarter with some highlights. Then Bhaskar will review our record quarterly financial performance in more detail. Finally, I'll conclude with our thoughts on long-term capital allocation. The quarter was very strong. In the third quarter global net sales grew a record 38% year-over-year despite the material impact of supply chain constraints on our operations. Our results reflect a continuation of a solid broad based industry trends and our worldwide leadership position. The third quarter sales growth of 38% exceeded our internal target primarily driven by an over performance of Tempur-Pedic in the U.S. and quicker than an anticipated recovery in our international operations. Sales would have been higher in the quarter if not for the continued supply chain constraints impacting Sealy and Sherwood in North America. Today the industry and specifically Tempur Sealy are squarely in the middle of people rethinking their priorities in life. One impact of COVID-19 has been peoples’ increased focus on their health and wellness and simultaneously spending a great amount of time home. We believe this focus on health, wellness and quality of life is going to remain a priority for consumers in the future and that our products will continue to resonate for those seeking quality sleep as part of their overall wellness plan. COVID-19 has caused so many disruptions and noise in our day-to-day lives, but at…

Thank you, Scott. Before going into the detail, I would like to highlight few items as compared to the prior year. Adjusted gross margin improved 300 basis points to 46.9%. Adjusted operating margin improved 540 basis points to 20.1%. Adjusted EBITDA increased 86% to $279 million which is a record high for any one quarter in the company’s history and adjusted earnings per share more than doubled to $2.94. The increase in adjusted EBITDA was primarily due to higher sales volume and fixed cost leverage. These benefits were somewhat offset by plant inefficiencies due to the supply chain issues previously mentioned and various virus related items. As a reminder, our business is flexible and our cost structure is highly variable as evidenced by our ability to quickly reduce cost in order to maintain profitability in the second quarter when we were uncertain of the outlook. Our confidence sequentially improved and in the third quarter we brought back virtually all of our expenses that we had previously cut. Those costs we’re incurring now reflects a forward looking confidence we’ve about the business as we make the investments necessary to grow over the long-term. Commodities were slightly higher than expected for the third quarter as prices had increased off their record lows over the past year. We now expect to experience headwinds going forward. To offset these commodity headwinds, we recently announced a price increase across all of our U.S. brands including Sealy, Stearns & Foster and Tempur-Pedic. We expect this price increase to fully offset the commodity cost inflation we’re now anticipating in 2021. Turning to North America. Net sales increased 43% in the third quarter. On a reported basis the wholesale channel increased 44% driven by broad-based demand across existing and new distribution. The direct channel increased 35% driven by…

Thank you Bhaskar, great job. I’d like to take a moment on behalf of the Board of Directors and the leadership team to thank all of our outstanding employees, third-party retailers, suppliers, licensees and joint venture partners for their contributions this quarter. The results reported are due to the hard work and dedication of the entire Tempur Sealy team and our strategic partners all over the world. I'm especially proud of our dedicated global workforce who continue to deliver exceptional results each day in spite of supply disruptions, the pandemic and the general health uncertainty in their lives. Together we've weathered everything thrown our way by remaining focused on our four key long-term corporate initiatives. As a reminder our four initiatives are as follows; first, develop the highest quality bedding products in all of the markets we serve. Second, promote worldwide brands with compelling marketing. Third, optimize our powerful omnichannel distribution platform and fourth, drive increased EBITDA. These long-term initiatives are focused on serving all bedding consumers in the marketplace with the highest quality products and services. In further pursuit of our first and fourth objective about 12 months ago, we began applying our skill set to the bedding OEM market in the United States. This diversification will drive incremental sales and allow us to capture manufacturing profits from bedding brands beyond our own. Think of this as mining miners’ kind of strategy. Besides its profitability on a standalone basis, it makes our whole business stronger as we create additional synergies and level the workload in our plants. This strategy is consistent with our willingness to invest in new streams of business over the last few years such as our expansion of our company-owned stores with Tempur-Pedic, Sleep Outfitters and Sober our highly successful own web page and alternate retail…

Our first question or comment comes from the line of Peter Keith from Piper Sandler. Your line is open.

Morning everyone great results and nice execution. Maybe I'll just ask a question around the price increases that you highlighted. There has been some chatter in the industry that the price increases by you and even others are a bit bigger than normal. I was wondering if you could comment on that and is there potential that some of the increase is exceeding that of the commodity cost inflation?

Well thank you for the kind words. When you look at the price increase obviously most of it is commodity based, but I'm sure if we benchmarked it against other Sealy and probably Tempur Sealy price increases it's probably the largest price increase in the company's history in total. Whether or not it more than covers commodities hard to tell because obviously commodities is an estimate. I think what I'd call out is one it demonstrates that the industry manufacturing still has pricing power and the business model is to pass on commodity increases. The other I think call out that might be a little bit different this price increase is the normal track is, we incur the commodity expenses and have a negative in our operations for a quarter or two before it gets passed on through to retail on the customer. This particular situation is the price increase is coming in with what Bhaskar, we think one quarter lag so it's considerably faster into the marketplace than previous price increases. And I guess the other thing I point out is, it's heavily loaded towards entry level pricing which will as you probably know the lower value bedding, has lower margins in it should be healthier for the entire industry.

Thank you. Our next question or comment comes from the line of Keith Hughes from Truist Securities. Your line is open.

My congratulations as well outstanding numbers. On the fourth quarter there's clearly going to be a gap here between the price increase and the raw material inflation. Can you give us any sort of feel for how much that's going to impact the EBITDA in the fourth quarter?

Sure. Great question. If you think about it on a year-over-year basis is we do expect some headwinds from a commodity. A way to think about it would be enter around $5 million on a year-over-year perhaps slightly ahead of that.

Thank you. Our next question or comment comes from the line of Curtis Nagle from Bank of America. Your line is open. Mr. Nagle you may need to unmute your phone.

Guys good morning. How are you doing?

Good morning.

So just a quick one on I guess it's not officially guidance but the comment for high teens EBITDA growth, growth relative to low double digits, sales growth I don't know it just looks a little light. I'm assuming it's pretty conservative just considering the terrific results you guys are putting up, the leverage, the product mix all that sort of stuff. So maybe you can contextualize that a little bit?

Well, let me talk about in general and then I'll let Bhaskar probably really answer your question as I dodge it. Look when we look around the world Asia is doing very well. The Asian market has dealt with the health crisis very well. Business feels normal, growing double digits very impressive operations from an Asian perspective. If you go over into Europe, Northern Europe orders look good and then Southern Europe has been a little choppy and they've recently got some information on some closures. So we've baked all that in to I don't know what I'll call it it's not guides we'll call it our targets and then North America has been certainly solid. I think the reason we call it targets or whatever is with the virus around you're just not sure what's going to hit you next, but in general we feel very good about the fourth quarter in the trends going into the fourth quarter and as I think Boston you called out in your area we went into the quarter with the largest backlog in the company's history. So we go into the fourth quarter very strong. On the other side, tough compare or tougher compare I would say because we were loading in a new distribution and so I got a little tougher compare because we did have a load in from last year. Bhaskar did I miss anything?

Not much to say incremental to that the only thing I would call out is we do remain capacity constrained from a springs perspective and we have that contemplated in how we're thinking about the fourth quarter.

Yes and that's something we're not in control of which always makes it difficult to do a forecast.

Thank you. Our next question or comment comes from the line of Bobby Griffin from Raymond James. Your line is open.

Thanks for taking my questions and congrats on another good quarter.

Thank you.

Quickly I just want to see Scott I understand you don't want to give detail by account but can you help us maybe put in context of 43% North America growth on an organic basis and then including your new distribution wins to maybe help separate that out where we can get a good feel of maybe what the industry was doing in the third quarter?

I can work around that a little bit. Obviously, we're benefiting from some large distribution gains from last year but I got to tell you we have growth, obviously very strong growth online which we called out specifically with our compressed bedding growing over 200%, our online business over a 100%, a little bit of headwind from our stores because we were very conservative on the reopening of the stores. And certainly the industry grew, ex any distribution gains we saw good growth in the non-new distribution gains. So I don't know if we look at our numbers obviously we study the competitors numbers, obviously we get some information from component manufacturers. I don't know, but we probably haven't aligned on a number but I'm going to say industry up 10. maybe 10% - 12% maybe something in that area that's obviously an imprecise guess and we need some more public companies to report and I need a little more information on the imports which I expect will start coming down very rapidly, but up in the third quarter I'm sure there was a lot of imports. They were pushed ahead in front of the tariff but now that'd be a guess probably if that helps.

Yes. That's helpful. And then you would think you outperformed that 10 to 12 guess from without X new distribution?

I think if you look at the whole industry it kind of depends on how you cut the industry. Clearly the online segment grew probably faster than the brick and mortar and we have probably more business in brick and mortar than the online. So depending how you cut the industry yes we grew faster. That's why we put out that I call that 200% number from a compressed bedding market because I think that market grew very rapidly. So I'm expecting people who have concentrations in that smaller segment might have higher growth rates. But when you look at total I don't think there's any question that we outgrew the industry in total.

Okay. Thank you Scott. Thank you Bhaskar.

Thank you. Our next question or comment comes from the line of Atul Maheswari from UBS. Your line is open.

How confident are you that sales growth will be solid as you lap these big numbers especially in the back half of next year? If I ask this question in another way do you think the current strength is pulling forward demand from future periods which will simply make it harder for you to grow sales meaningfully as you lap these numbers? Thank you.

Okay. Great question. We would, I said solid because we really feel strongly about. If I use the words that we feel solid it means we have a high degree of confidence just in general. The only caveats I would kind of put around that is, we're assuming there's not a global recession okay and we're assuming a positive trend in the health crisis. If you take those two off the table, I would tell you that we feel very confident that we'll be able to comp the current performance. And it doesn't feel to us that we're pulling forward demand and the best market I guess I can point to is the China market. When markets reopen we're not it just doesn't feel like we pulled for demand. It clicks and comes on. So it may be housing formations. It may be just a permanent or semi-permanent change in disposable income and the share of the wallet that we're going to get, but in a prior life I was in the car business where we did pull forward demand occasionally because of high incentives from the manufacturer or something and you get this spike then he comes off this that is not what we're seeing in any of the markets around the world.

Hey man, I’m on the call.

You may want to mute your phone, others on the call. They want to mute your call. I'm not sure who's on the phone but we might learn something we're not supposed to so. Hello? Okay. Anyway that's the answer that question. Operator are we still on?

Yes sir. Next question or comment comes from the line of Brad Thomas from KeyBanc. I'm working on the interference. Go ahead.

Thank you.

Hi, thanks for taking the question. Congrats on the great execution momentum here. I just want to follow up on that question about thinking about 2021, obviously there's easy comparisons in some quarters from a sales perspective and tougher in other quarters because something we could just step back and I'd be curious Scott your thoughts on elements of difficulty and comparisons and challenges and comparisons and puts and takes as we fine-tune our models for 2021? Thanks.

Look I mean, we've got, just kind of let's talk a little bit some of the growth vectors. I mean, clearly we expect the online in total next year to grow seeing lots of success in our compressed product. Store openings are going to continue and they're going to be additive. We called out an OEM initiative that is new and that that's a new opportunity that I expect. We'll talk about more in the first quarter, but is clearly incremental. Our stepping into the private label business through Sherwood we're expecting to see strong growth in the Sherwood area. If you go by quarter clearly the first quarter we called out on that conference call that we were slightly impacted by the virus. So maybe that's a reasonable compare there. The second quarter is going to be an easy compare because that was just a train wreck everywhere all over the world. In the third quarter this will be a hard compare but I think we can probably comp it. And so when we look at it in total that's why I called it out in our session it looks pretty good. The other thing that we mentioned in the prepared remarks that you can't really see but hopefully this will help you a little bit think about how our business went this year. We closed factory. We got closed. We furloughed people. We brought them back. Pretty sloppy quite frankly. Then we had excess demand so that created enormous amount of overtime which is very expensive for us that we normally don't run at that level. Then we have this component issue where quite frankly we hired up, I mean as I mentioned we're up 20% in our payroll we hired up people to build more beds expecting we were going to get components. After we hired them we didn't get the components. So our labor factor in the third quarter relatively sloppy. And you put all that together there might be a little bit of extra sales in the third quarter but there are a whole lot of COVID related cost and component disruption cost underneath. So we didn't get the leverage and the full profitability that we would normally get. So when I put it all together it looks like barring a recession or a unusually difficult health crisis that we're expecting to get a little bit better, it shouldn't be a problem to grow sales and EBITDA next year.

Thank you. Our next question or comment comes from the line of Laura Champine from Loop Capital. Your line is open.

Springs. Firstly what's the why behind that component shortage? Is it impacting your competitors as much as it's impacting TPX? And then in the not too distant past TPX made its own springs is that something that you might need to look at again just given the issues that you are clearly having with the supplier?

Laura it's good talking to you. So the first part of that I'll take it and then turn it over to Scott. As it relates to the challenges that we have on springs, number one is yes that is a industry-wide issue and the primary driver of that is there is material that encases a coil called an encased coil or becomes an encased coil and that product, the input that material is being diverted to pull together PPE. Therefore, there is a shortage of that item. Therefore putting constraints on not only us but across the industry. And as we specifically called out is not only is we expected an impact in the fourth is that we'd expect that into 2021 perhaps at least the first half. And then, you asked about optionality going forward. Look we've got great relationship with our primary spring manufacturer normally outstanding from a quality standpoint and delivery standpoint. They've run into some issues not caused by their operations but caused by the global pandemic. But look we're exploring all options and looking at our flexibility and making sure that in the future that we have all alternatives in case we have issues going forward but we'll work closely with our current partner.

Thank you. Our next question or comment comes from the line of Carla Casella from JP Morgan. Your line is open.

Hi good morning. This is Sarah for Carla Casella. We just wanted to know how you think about a more normalized leverage and what's the right level and also if you have any interest in getting to an IG rating level?

Yes. If you go back through the history of the company last few years we've brought down our targeted leverage and we have kind of targeted two to three turns, today as I think, we mentioned we're running a little bit below that right now. I think we'll continue to run a little bit below our targeted range as long as we've got this pandemic, we're working through and we'll continue to kind of study the proper leverage. I don't see us wanting to be investment grade. I don't think that the cost is probably worth getting all the way to investment grade. But I would like to position the company what I'll call conservatively financed so that we're in a position to take whatever opportunities happen to come to market. So yes, the way I think about it is we've got a targeted range of two to three times, but we're probably going to run at the low end or a little bit lower than that for the foreseeable future, but no goal to be investment grade.

Thank you. Our next question or comment comes from the line of William Reuter from Bank of America. Your line is open.

Hi, just a little bit of a follow-up on that. You mentioned you're keeping an eye on the bond market you redeemed a component or a piece of the 23s. I guess what are you thinking about for the remainder of those and I guess since you are running below your target leverage range it would stand to reason that all free cash flow will be used towards either one-off tuck-in acquisitions or shareholder friendly activities. Is that fair?

There is a lot in that question. Let me kind of unpack it a little bit.

Sorry.

Yes. No. It's a good question. I just want to make sure I'm responsive to it. Look first of all we've redeemed a little bit of the bonds. Think about that as just a liability management and cost to capital issue and to the extent we end up with extra liquidity in the balance sheet. Then we're going to go pay off the highest cost debt which at this time ends up being those bonds. We hope with our continued strong financial performance and maybe a little more favorable leverage profile that our opportunity for new bonds will be re-priced to a little more favorable level than where we're currently sitting from a rating agency standpoint. When it comes to free cash flow, look it first goes to operations and whatever operations need, the operations get. If they have a high return on invested capital project we will fund it because operation is important things for company. Then we're going to pay our dividend that we've talked about establishing and set it at what I'd call the lower end of payout ranges. Then money goes to tuck-in acquisitions and opportunities like that to the extent they come up. Don't feel like we have to do any, but to the extent they come up we get a call on capital. Then there would be, start talking about how much stock buyback we've told the market think 3%, our cash flows on a projection certainly would tell you there is extra cash flow there and that would be kind of a balancing act between stock buyback. I don't know if we would actually pay any more debt off, but we continue to look at that based on what's going on in the world and the uncertainty in the world.

Thank you. Our next question or comment comes from the line of Seth Basham. Your line is open.

Thanks a lot and good morning and congrats on an outstanding quarter and reaching the aspirational comp plan. My question is two part. First as it relates to the fourth quarter EBITDA growth guidance just confirming that includes additional incentive compensation from hitting your annual targets? And then second, as we think about growth in the fourth quarter I know you don't usually talk about individual customers. But you have talked about having some perspective on the relationship with matches firm at this point and if you could give us some color on how that's expanding that would be great. Are you gaining additional floor space and share within the store and how do you expect that relationship to develop all the time?

Sure Seth. I'll take the first part of that. Yes, as we think about the fourth quarter and the guide or the thinking about high teens, yes that does include the incremental compensation.

And then when we talk about individual retailers I'm going to answer your question but pivot into kind of a bigger question which is how are we doing with our large customers. is certainly an important customer, but we've got quite a few large customers that are very important and quite frankly that the trend line is the same. I see the larger customers generally performing better than the industry. I see the larger customers becoming very adept at internet sales and that's positive for us and them. And I see our relationship with all the larger customers positive and I guess, I don't know a while back a year or so ago, we think about our positioning not in number of beds that are on the floor anything, but total velocity because we want those beds to be productive for those customers as opposed to just trying to quote fill up their store with our product. I think that's healthier for us and it's healthier for the retailer and I think clearly from our numbers I know we're 47% in the U.S. or something 43 whatever it is productivity of our SKUs and our large customers have been outstanding and I would expect them to continue to be outstanding.

Thank you. That concludes our question-and-answer session. I would like to turn the conference back over to Mr. Scott for any closing comments.

Thank you. To the over 8,000 employees around the world, thank you for what you do every day to make our company successful. To our retail partners, thank you for your outstanding representation of our brands. To our shareholders and lenders, thank you for your confidence in Tempur Sealy's leadership team and its Board of Directors. Operator that ends our call today.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.