Tempur Sealy International Inc (TPX) 2016 Q3 法說會逐字稿

Good day ladies and gentlemen and thank you for standing by. Welcome to the Tempur Sealy third-quarter 2016 earnings conference call.

(Operator Instructions)

It is now my pleasure to hand the conference over to Barry Hytinen, Chief Financial Officer. Sir, the floor is yours.

Thanks Brian. Good morning everyone, and thank you for participating in today's call. Joining me in our Lexington Headquarters is Scott Thompson, Chairman, President, and CEO. After prepared remarks, we will open the call for Q&A.

Forward-looking statements that we make during this call are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements, including the Company's expectations regarding sales, earnings, adjusted EBITDA, or net income, and anticipated performance for 2016 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 release. Any forward-looking statements 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 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.

Thank you Barry. Good morning everyone and thank you for joining us on our call this morning. I'd like to use our time today to take you through the highlights of our record third quarter. How we are progressing, against our goals, context around our results, including our competitive position and the overall health of the marketplace. Then Barry will take you to through details of the financial statement and through our revised 2016 guidance which we provided last month.

Overall, I'm pleased with our continued progress in achieving profit margin expansion and EPS growth. This quarter's unadjusted results show our operating margins increased a robust 160 basis points. EBITDA increased 9% and EPS increased 19% compared to last year's adjusted results. The entire organization is focused on a handful of key initiatives that are designed to drive margin expansion and earnings growth over the long term.

These key initiatives include, first, develop the best bedding products in all the markets we serve worldwide. Second, invest significant marketing dollars to promote our brands. Third, expand our North American margins while maintaining market share. Fourth, grow our market share outside of North America, and lastly, optimize our worldwide distribution to make sure our products are properly represented in all channels. I'm very proud of our team's progress against each of these initiatives year to date, and especially during the soft retail environment we experienced this quarter.

Now I'd like to call out if you specific items in the quarter. The third-quarter sales were down 4.6% year on year on a constant currency basis versus the third quarter last year. This was below our expectations. The sales shortfall is largely due to a 5.8% decline in the North America segment. I'd like to take a minute and talk about the factors impacting our top-line results in North America.

Coming out of the second quarter, North America orders were low single digits, year to date. So we are feeling okay about product demand and the strength of the US consumer. In fact, orders were positive, and in line with our expectations in July, but in early August, orders unexpectedly declined, and declined more significantly during the key Labor Day promotional period.

We believe this air pocket in sales during the third quarter was driven largely of the following. First, it is clear that the retail environment in the US in the third quarter, was less robust than we had expected. Based on our review of industry data and conversations with industry participants, overall mattress sales in the US were soft during the third quarter. In addition, to softness, but not limited to the mattress industry, as we've seen similar challenging results in furniture, home appliances, auto retail, and other consumer durable goods.

Second, we experienced some significant weakness in our largest national account, which is in the process of rebranding and re-merchandising over 1,000 recently acquired stores. To put this factor in perspective, if we were to exclude the sales of our largest national account, in the third quarter of 2016 and 2015, our US sales would have been flat for the third quarter. We expect this transition of stores to be very successful, but we also expect it will continue to impact our sales for the remainder of 2016, before improving in 2017. We are encouraged by the improved Tempur Sealy sales trends in the markets that have already undergone rebranding, and are thrilled to help where we can in this significant transition.

Third, we made a couple of mistakes in our marketing and sales strategy. For example, our advertising campaign overemphasized our newly launched TEMPUR-Breeze line and neglected to support legacy Tempur products. This resulted in very strong performance from our TEMPUR-Breeze line of products, but declines in our legacy products as they were not included in the advertising.

Another example of a misstep was our reduction in the number of promotional days around the key Labor Day period, compared to last year. This put us at a disadvantage on the retail floor. I should also point out that we redesigned our Tempur Labor Day incentives, adding unnecessary complexity.

Lastly, our non-bedding product sales, which include pillows and products sold through our North American joint venture were down $20 million, representing almost half of our North American revenue decline this quarter. We have mentioned previously that our pillow business needs some attention, and we plan to update you on our plans next quarter. As for our North America joint venture, we have advised you in the past that the orders are very lumpy, and although the sales were disappointing this quarter, the lumpiness is not uncommon.

On the operational side, I am very pleased with the team's continued progress on a number of initiatives that clearly helped us mitigate the financial impact of the sales decline and truly set the Company up for continued financial success. Sealy assembly continues to improve across all key metrics, safety, employee turnover, margin, on-time delivery, and quality. Tempur manufacturing continues to be world-class.

We reported very strong operating margins while we stayed committed to our long-term strategy. I should point out that we fully supported our retail customers during this less-than-robust sales period, spending an additional $5 million in advertising this quarter, as compared to same quarter last year, and we fully invested in future products and expanded Internet capabilities.

We had a great cash flow quarter, which allowed us to repurchase an additional 1.4 million shares for $96 million. This brings our year-to-date share repurchase to $318 million, more than 10% of our current market cap, with plans to increase sales and earnings in the future, we believe that repurchasing our shares represent a tremendous value for our shareholders. I'll now hand the call over to Barry to discuss more details about the quarter. Barry?

Thank you Scott. As Scott mentioned, net sales for the third quarter were $832.4 million, down 5.4%, versus the third quarter of last year, and on a constant currency basis, they were down 4.6%. First margin improved 220 basis points to 43.5% and operating margin improved 160 basis points to 15.7% as compared to adjusted gross margin and adjusted operating margin in the prior year. Please note, much of my commentary will be comparing this year's results, which have no adjustments, to last year's adjusted results.

Now, on a segment basis, North America net sales decreased 5.8%. Sales in Canada were up 1%. North America bedding product sales decreased 3.4%, with bedding units down 8%, partially offset by price and mix. The weakness in sales was primarily driven by our Tempur-Pedic brand business, as well as value priced Sealy products in our US joint venture. This was partially offset by significantly higher sales of high-end products like the TEMPUR-Breeze, Sealy Posturepedic, and Stearns and Foster bedding products.

Year over year, average selling price was positively impacted by pricing actions taken earlier this year and positive merchandising mix. Like-for-like price increases contributed approximately 100 basis points in the quarter. Our North American other channel decreased 6.6% in the quarter. Sales from our direct business were up, but was offset by a decline in sales through hospitality, which is principally timing because that business is always lumpy. Other product sales were down in the quarter, as Scott mentioned, this was driven by decrease sales of accessories through our joint venture and lower pillow volumes.

North American gross margin improved 240 basis points to 41.5% as compared to adjusted gross margin in the prior year. This is the highest gross margin the Company has realized since the Sealy merger. The primary drivers of improvement were operational efficiencies, pricing actions, and product mix. North America operating margin improved 200 basis points, to 18.4% as compared to adjusted operating margin in the prior year and was driven by the improvement in gross margin and lower operating expenses.

Operating expenses were down 4.3% or approximately $7 million year over year, excluding adjustments in the third quarter of last year. Lower G&A expenses were driven by reduced incentive compensation accruals, and successful expense management, which were partially offset by an increase spend in the national advertising that Scott mentioned, of $5 million.

Turning to our international performance, net sales decreased 3.5% and on a constant currency basis were up 2%. Bedding product sales decreased 3.7% and on a constant currency basis increased 3.2%. Units decreased 5%, the average selling price increased due to improved mix, and some like-for-like pricing.

On a constant currency basis, sales were up modestly across all regions, with Asia-Pacific being the best-performing region compared to last year. In Europe, our sales were up slightly and we think we took a fractional amount of share as we believe European bedding demand has been weaker recently. Other channel sales were up 13% on a constant currency basis driven by strong Internet sales and Company-owned stores.

International gross margin increased 110 basis points to 53.8%, compared to adjusted gross margin of 52.7% in the third quarter of 2015. The gross margin increase was primarily driven by operational improvements and improved product mix. International operating margins increased 60 basis points to 19.1% as compared to adjusted operating margin last year.

Now turning back to the Company's worldwide performance, consolidated EBITDA was $155 million, up $34 million or 28% from last year. And it was up 9% as compared to adjusted EBITDA last year, when we had over $21 million of net positive adjustments to EBITDA. EBITDA growth was primarily driven by operational improvements, but was partially offset by increased advertising at a time of reduced sales.

For the 12 months ending September 30, 2016, our adjusted EBITDA was $516 million, an increase of $77 million, or 18% over the same period last year. I will note, EBITDA included about $3 million of benefit from lower commodity costs, that were totally offset by $3 million of foreign exchange headwinds. GAAP earnings per share for the quarter was $1.32, up over 100% from the same period last year. This represented an increase of 19% as compared to adjusted EPS in the third quarter of 2015.

Now, moving on to the balance sheet and cash flow items, operating cash flow in the third quarter was $58 million versus $132 million in the third quarter last year. As we mentioned on our last call, during the quarter, we put a $92 million payment on deposit with the Danish tax authority. This amount is consistent with our reserve position. While the matter is not yet resolved, by making this deposit we have mitigated risks related to foreign exchange and interest.

Excluding this item, operating cash flow would have been $150 million, and an increase of $18 million versus last year. Cash cycle was off about two days from the prior year, due to higher inventory days. And on a sequential basis, cash cycle improved two days.

At the end of the third quarter, net debt was $1.6 billion. Our leverage ratio on a trailing 12-month basis was 3.2 times at the end of the third quarter. This is slightly down from 3.3 times in the same period last year. I should highlight we improved our credit profile even after the repurchasing of $318 million of stock year to date, funding all capital leans of the business and making the $92 million one-time deposit for the Danish tax matter.

During the third quarter, the Company repurchased approximately 1.4 million shares, for a total cost of approximately $96 million. While our weighted average share count for the third quarter was 58.8 million, giving effect for shares repurchase, we ended the quarter with 58.3 million diluted shares outstanding.

We have approximately $280 million available under our current authorization for future share repurchases. As a reminder, our credit facility permits unlimited share buybacks up to 3.5 times net leverage, and also allows for share buybacks between 3.5 and 4.5 times based on a basket that grows with the Company's earnings. Once we file the 10-Q, the size of the basket will be a little over $460 million.

Now, turning to our financial guidance, consistent with our expected full-year sales forecast of down low single digits, we are reaffirming our adjusted EBITDA guidance to range from $500 million to $525 million. The midpoint of the range represents an increase of 12% versus prior year, and would equate to approximately $3.88 in adjusted EPS, which would represent a 22% increase versus 2015. Our guidance assumes a continued revenue decline in North America.

Before I turned back over to Scott, I would like to note a couple items relevant to the fourth quarter. First, we are in the process of restructuring principally and back-office support of our international operations. We are moving to a more efficient, centralized structure. Our guidance does not reflect one-time charges for this, which we expect to be around $7 million, with the payback of less than one year. This should complete our major restructuring of the Company's workforce.

Also, just as a reminder, in the fourth quarter, we will have four models to complete the Stearns and Foster launch an incremental Tempur-Pedic distribution for the store transition Scott referenced. As you know, we do not traditionally have launch activity this late in the year. So year on year, we'll have approximately $10 million of incremental floor model discount, and as much as $5 million per associated launch expenses. And now I'll turn it back over to Scott.

Thank you Barry. Stepping back a moment. This quarter represents the sixth consecutive quarter of year-over-year increases in both EBITDA and operating margin. The entire Tempur Sealy Team is committed to improving these metrics through consistent execution quarter after quarter, year after year. Everyone on the team knows there's a lot of work to do and in order to achieve our goals, we must find problems, communicate problems and jointly fix problems as quickly as possible.

As we look forward the team remains laser-focused on our 2017 Project 650 aspirational target. While we're not providing guidance on 2017 today, the team is making progress on numerous opportunities to improve operations and deliver earnings growth. With that operator, would you please open the call for questions?

My pleasure.

(Operator Instructions)

Our first question will come from the line of Brad Thomas, with KeyBanc Capital Markets. Your question please.

Yes, thank you for taking my question. My first question will be on distribution, and really two parts. I was hoping you could talk a little bit more about transition, the rebranding that's underway at Mattress Firm and maybe give a little more color around how much of an issue may be at the Sleepy's stores that are being rebranded. And how the floor space is changing, are you gaining share as they rebrand the stores? What that medium outlook is there? And then part two would be longer-term, how you think of the opportunity with Mattress Firm, particularly as they are now under new ownership. Thank you.

First of all, let me say that I would normally never even talk about an individual customer on the phone but the FCC requires us to have some financial disclosure of that concentration so it's impossible not to. You will see some of that disclosure in the Q that we will be filing.

I think the first thing I would say is, we think it will be very successful, the transition of the stores. It's a fluid process. We're not going to talk about their game plan because that's confidential, but I can tell you where they have made the transition in rebranding.

The stores have done well. And Tempur Sealy 's sales have increased from a balance of share stand point. I think I can say that clearly.

As far as new ownership, look, we work with the Steinhoff Organization worldwide, in general we find them to be outstanding. And our balance of share has increased generally worldwide in markets that we have worked with them. And we are wildly optimistic about the future for both the Mattress Firm team and Tempur Sealy.

Thank you, our next question comes from the line of William Reuter, with Bank of America. Your question please.

Hi, I wondered. You talk to little bit about better results in those products where you had spent more advertising in terms of the TEMPUR-Breeze and then some softer results in some of your legacy products. Can you talk about the magnitude of some of those differences?

Yes, I would say they were big. What we're talking about is, we had a general focus on the high end of our product portfolio. And we had good growth in the high end of the Tempur products, in primarily in Breeze line, and we had declines in the lower dollar value of the Tempur products.

Thank you. Our next question comes form the line of Mark Rupe, with Longbow Research. Your question please.

Good morning Scott and Barry. You'd mentioned units were down 8% in North America. Just curious, I assume value price Sealy products, given that they're a lot of units at lower price, which are probably a little bit worse than that. And the fact that they are, I don't believe, too heavily penetrated into your largest customer. Just curious to see what you might think is going on with that product line.

Mark, I would say, first off, in total, our Sealy total brand, all of Sealy Posturepedic Sterne and the value was down but less than the total, and, as you would guess in light of Scott's earlier comments, Tempur was down considerably more. And as it relates to the value-oriented line, that line is been out there for some time, and we feel very good about upcoming launches and what's coming to market. So we feel good about reigniting our value-oriented business into the future.

Thank you, our next question comes from the line of Budd Bugatch with Raymond James. Your question please.

Good morning Scott and Barry, this is Bobby filling in for Budd. I appreciate you guys taking my questions.

Good morning.

Scott, can you maybe update us on your promo and advertising plans for the fourth quarter. And as the second part, Barry can you give us an update outlook on raw materials for the next six months, particularly steel and the foam related costs.

If you'll promise me that I don't have any competitors listening in on the conference call, I'd be more than happy to walk you through my promos in detail.

But in general, what I would tell you is I've called out some mistakes that I think we made in Labor Day. The teams worked very well together to come up with some corrections in those areas. And so I think what you'll see is a little different promotional activity.

But at the same time, being very prudent, being very ROIC focused. I think a lot of where we can make improvements, actually isn't going to cost us very much money but the execution will be better. I think that's all I'd like to say in detail.

I'd be more than happy to update you when we report the fourth quarter with changes in detail. Barry, do you want to talk about commodities?

Yes, Bobby, from a commodity standpoint, raw material, as I noted in the third quarter we got about a $3 million benefit from those that was completely offset by the FX headwinds. As we look forward into the fourth quarter, and consistent with what we've been thinking throughout most of the year, the fourth quarter benefit would be minor, maybe $1 million to $2 million. Incidentally, as you look at FX rates, particularly with what's going on with the pound, I would expect that FX would once again offset that benefit, with a $1 million or $2 million FX hit. And as I look out beyond, look, we are not here today to do guidance for next year. We will speak about that on the next call.

To help you a little bit, from a planning posture, we'd always probably be a little bit conservative. If I had to do a budget today, I'd probably expect it to be a little bit of a commodity headwind next year, but we've got a few months before that. Were in the early stages of our budgeting process.

Thank you. Our next question comes from the line of Jessica Mace, with Nomura. Your question please.

Hi, good morning.

Good morning.

My question is on the, kind of implied, guidance for the fourth quarter, or I think that you mentioned, you're expecting another sales decline. Some of the factors, the five factors you outlined, that impacted the third quarter, some were controllable and some were not. Could you just help us think about what are the largest impacted that you are expecting in 4Q. Thank you very much.

Just to get everybody's level set, our guidance for the full year is to be down 1% to 3% in sales. And if you squeeze the fourth quarter, I'm going to call the midpoint, wouldn't that be, Barry, about 3.7% down, if you squeeze the midpoint. So that would be the implied midpoint guidance.

I think first thing to again, get everybody set on the same page, if you were to ask me where we are today, and I don't normally do monthly sales trends, but I've always thought that when you have a trend change that it's worth talking about. As we sit here today, the fourth quarter is running about flat from a sales standpoint and that would be both a worldwide comment and a US comment. To be fair, if I take out floor models, which are unique in the fourth quarter this year that Barry talked about, we would be down 1% in North America as we sit here today.

I think the other comment, I think I would say in the area to give everybody a full understanding is that when you talk about Tempur sales, the Tempur sales are very volatile. And in a given week, Tempur sales could be up or down 20%, just to give you kind of a framework to think through. So as far as estimating sales, that makes it very difficult in a period where we've got a little bit of election goofiness going on in North America, and we have our largest customer going through some transition.

So that kind of give you a framework. Then we just talk about the different factors, look, we think we have the promotional stuff knocked out. We did a deep dive, did some soul-searching. And I think we are much improved from a Company, from that standpoint, and we will be spot on on the promotions again, it will be effective in the marketplace, and certainly be supportive of our retailers.

In the transition stuff, we are working closely with our largest accounts and will continue to work very closely with them and make the investments we need to in people and energy to make that transition successful. As to what is, what I'll call, just the general strangeness of the third quarter in consumer durables which I called out, which was not really just a mattress issue. You can go listen to Whirlpool's appliance earnings call, automobile retailers, clearly the high end consumer was nervous during the period.

We are hoping that gets better post election and we hope that is more of an election issue rather than some kind of macroeconomic issue. So I guess the long answer to your question is, the implied guidance at the midpoint is down 3.7%, we're running better than that. But it's highly volatile.

Thank you. Our next question comes from the line of Michael Lasser, with UBS. Your question please.

Good morning, thanks Bob for taking my question. In your, those comments Scott, is the improvement thus far driven by some better results in the Tempur units? I think that metric would now down 8%, is an area of focused. My other question is, what's you're overall view right now on customer acquisition costs and the direction that they are going, advertising was up considerably, obviously, but not when you wanted them to be. You have to make some adjustments over the next 12 to 18 months (inaudible).

First of all, your first question, both Tempur and Sealy are performing better in the fourth quarter so far as compared to the third quarter. Having said that, Tempur is still slightly down, to be fair.

As far as advertising, certainly we had some deleveraging of advertising expenses during the quarter. Look, I think part of our job is to support our retailers and we will continue to be aggressive from an advertising standpoint, but certainly focused on our return on invested capital when it comes to advertising. But I don't see anything significantly changing from a business model standpoint on customer acquisition cost. I think we just have to be more effective with our message in the marketplace.

Barry, do you disagree with any of that?

I think that's all right on.

Thank you. Our next question comes from the line of Peter Keith, with Piper Jaffray. Your question please.

Hi, thanks, good morning. I wanted to ask two questions related to the Q3 sales weakness. Could you talk about the adjustable base business, and if you're beginning so see any weakness with regard to the Temper adjustable bases. And then secondarily, give then success of the Stearns and Foster launch this year, have you contemplated that might be cannibalizing your premium Tempur business?

Yes and yes. The adjustable business, we are feeling some pressure in the adjustable business and we are working on that. I suspect we'll have some news for you over the next quarter or two from an adjustable standpoint. Yes, there is some weakness in the adjustable business.

As far as cannibalization, from Stearns and Foster into Tempur, that's a hotly debated item internally. But look, I don't think there's any question that the high end of Stearns and Foster, and I would also say, the high end Beautyrest Black business is probably cannibalizing and hurting a little bit of the lower end Tempur business.

Peter, I would just add that on the adjustable base business, if you look at it in total, for Tempur and Sealy, we have seen nice progress, improving the Sealy adjustable attach rate, and grown our adjustable business together with our retail partners. That's inclusive of some new products that we launched earlier this year that are doing really well.

And on the Tempur side, two things, one, adjustables are down and some of that it obviously is just going to go with the decline in mattress revenues. And then the attach rate as Scott is referenced, is down some. Part of that could be the high end consumer being a little more challenged.

Thank you. Our next question comes from the line of Laura Champine, with Roe. Your question please. Pardon me. Laura, please check you mute button.

Operator, why don't we go on to the next questioner and she can jump back in the queue if she's available.

Alright, next question comes from the line of John Paul, Stifel. Your question please.

Thanks and good morning. Two questions quickly, one, with Mattress Firm or any other retailer for that matter, has there been any measurable change in your floor space? Could you give us an update on where the Stearns & Foster launch is?

And then the second question is on the comments I think you made, Scott, around the guide lower a month ago. You spoke to being able to track promotional efforts with skewed performance within the Tempur line. I'm curious, with the changes you've already made in promotions, have you seen that gets less bad and I guess, would be the question.

Yes, hopefully I can remember all of those. Barry was writing them. Let me do a couple of them. From a floor space standpoint, there's floor space changes every day, up and down. I would say that my perspective is that we've had net increases in distribution from a floor space standpoint and would expect to continue to have increased distribution in the fourth quarter from what I've seen.

On the Stearns & Foster, I think you asked about the status of the rollout. We've been building the last bit of the floor model's for Stearns and Foster. Those are rolling out currently. And by the end of the fourth quarter we will be fully rolled out in Stearns & Foster and most of those are going to our largest retailers stores.

And watch out, as Barry said in his prepared remarks, is it's unusual to have floor model expenses in the fourth quarter. So when you do a comparison, there is quite a bit of additional expense coming up in the fourth quarter for that, that we didn't have last year. Be careful with your EBITDA forecast. Just kind of a call out there.

By the way, if you were to adjust our guidance in the fourth quarter, what I will call our squeezed fourth-quarter guidance, you would come up with what looks like a negative. And it is a negative, but what is in there and the reason it's negative is the launch costs related to Stearns and Foster. If you adjusted for that $15 million or so that Barry called out, you would find that our EBITDA growth rate is not dissimilar from what we experienced in the third quarter.

And with that, Barry, I forgot the last five other questions he asked?

Yes, John snuck in a three-part question on our one question at a time. He asked about, during the promotional period, by skew, and how we --

I can do that. Couple of things, during the promotional period, and the promotional period was about 30% of the quarter. During that period, those 30 days, represented 60% of the decline that we are having to deal with in the third quarter. So first of all, maybe point out that it was during the promotional period where we really felt sales pressure.

And you asked about velocity of slot turns. No question, they've gotten better. By definition, when I tell you that sales are running flat in the fourth quarter, although Tempur is down some and Sealy is up some, no question that it's improved.

I would agree with that. John, the only other thing I would add is the next promotional period as we think about them is coming up soon. We haven't had another promotional period. It's not a very significant one in the scheme of things as compared to Labor Day.

Veterans Day, Black Friday is coming up and those are the promotions that Scott was referencing that we've adjusted. And I guess the only other thing I'd add on to the first part of the question is, we have just been thrilled with how Stearns & Foster is performing. It's up kind of double digits and that's despite much less distribution versus last year.

Thank you. Our next question comes from the line of Curtis Nagle, with Bank of America. Your question please.

Good morning, thanks for taking the question. So just a quick one on Sealy. Forgive me if this was addressed but what was your margin improvement there. And then any updates you give on improving Sealy manufacturing base?

I'll do it overall and then Barry will give you the details. I couldn't be happier with Sealy assembly. The margin is improving and it's got a lot of momentum and I think we've got a lot of upside going forward.

So I don't think we're at the end of the journey on Sealy margins. When I look through the stats and I get them weekly, there's probably not a stab, and there's not a stat that I look at that actually isn't pointed in the right direction. That's turnover, that's quality, that's safety, that's margin, merchandising mix is better, labor cost improved. What was the four wall?

The four wall contributed several million to the EBITDA, up well over 100 basis points. So very significant improvement and continued opportunity going forward.

And the overall?

The overall, when you look at our total operation, including the four wall, that contributed about $14 million, $15 million of incremental EBITDA year on year, and that's excluding the benefit from Commodities.

I think one of the things, for me, that jumped out in the quarter, even though the sales were down and there was a sales decline, when you look at gross profit on a consolidated basis, our gross profit was actually up a little bit, when we had declining sales, and realizing we had an unfavorable merchandising mix as Sealy did better than Tempur.

To add to that, Curt, our Sealy margin in the quarter was up in total inclusive of four wall, operational improvements, sourcing, etc, was up over 300 basis points year on year. And as I mentioned, we had a considerable advancement and EBITDA from operations. That includes great productivity out of our Tempur factories as well.

I guess, I'm going to get on that a little bit, because I really think we did a great job from a manufacturing standpoint. When you realize that the sales decline that we experienced was unanticipated, and we were still able to right size the operations, so it didn't deteriorate from a margin standpoint.

And I think the other part of your question really gets to, what do we think about the future. We haven't finished our 2017 budgeting, and we are working through it. As we sit here today, our expectation is that we've got more upside in gross margin in Sealy, for sure, although probably at a slower pace than and we've experienced recently, and that we continue to have upside in gross margin at the Tempur operations also.

Thank you. Our next question comes from the line of Seth Basham, with Wedbush. Your question please.

Thanks, and good morning. First a follow-up on an earlier response, specifically related to the spend for floor model reset and launch cost of $50 million for the fourth quarter. Is it appropriate to assume that if your launch timing was on schedule your EBITDA would've been $15 million less in the third quarter?

And secondly my question is around more color on the Tempurpedic North American unit performance. How much were they down and how much were the legacy units down relative to that number?

Let me take the first one and Barry, correct me if I am wrong. I think the answer that is yes, as far as your EBITDA in one in one of your other quarters would've been a little bit less. It probably would've been some in the second quarter and some in the third quarter. So I think that's true and fair. But I also think that because of the success of the product, the launch costs are much larger than we would have anticipated.

We are certainly getting more distribution.

Because there's more distribution and we really anticipated. In total the launch costs are more than we anticipated.

I would add that's not all Stearns & Foster, as I mentioned.

Seth, there's a considerable amount of floor models there for incremental distribution that we did not have planned for Tempurpedic brand, as those store transitions, that Scott mentioned, as those stores transition to a different flooring, we're seeing incremental Tempurpedic distributional. So from our last time talking to you all, we have more floor model discounts than planned in the back half, and it's setting us up really nicely for 2017.

From a timing standpoint, that part's a fair, that's a fair callout. And, was the other question --

On the units, look, the Tempur units were, as I mentioned earlier, down considerably more and our Sealy units were still down aggregate, but less than the total.

Thank you. Our next question comes from the line of Carla Casella, with JPMorgan. Your question please.

Hi, this is Mei on for Carla. You have something about extending your international presence. What do you see being your optimal geographic mix? Today I think it's about 18% LTM. And, just another quick followup on that, do you still expect $75 million of CapEx and implied pre, big pick up in the fourth quarter to $33 million from run rate of about $20 million in that.

You found Barry sand bagging CapEx, he'll talk about that in a second.

Internationally, when you're talking about the mix, I'm going to assume you're talking more like a five-year timeframe. And if you're talking like a five year timeframe, I expect internationally for it to grow more quickly than North America. So I would expect over time, with international EBITDA, to be a greater percentage of the total pie over a period of time.

But by definition, it's international, so I also would expect it to be lumpy at times. What we're actually, we've got a lot of launches going in internationally towards the end of the fourth quarter into the first quarter. So I really expect 2017 to be a year where we get probably more growth in the international sales line than we do in the North American sales line.

And then Barry, you want to talk about what you're going to spend in CapEx and what you've been sand bagging?

Yes, okay, you caught me. So were thinking it's probably going to be more like $60 million or might even be a little bit beyond $60 million. That's kind of our current view. And as you go forward, I would look at CapEx as compared to the D&A that goes with it as being, CapEx would be roughly equivalent if not even below that portion of the D, and the D&A.

So what would that be in dollars, just, I could do a sum question.

I think you are the planning for something in this vicinity on a $60 million, $65 million, kind of on an annual basis.

Thank you. Our next question comes from the line of Keith Hughes, SunTrust. Your question please.

Thank you. You referred earlier to 300 basis point gain in the Sealy family of products. That's nice progress. Would that be something we would expect for the next several quarters assuming sales are within your plan?

300% improvement?

I think, we had a 300 basis, if that's correct, I heard 300 basis.

That's correct. You know, Keith, the way I would think about it is, we certainly were lapping the last of the easier comps, if you will. And we started to flatten out and grow margin in Sealy, not to suggest that we don't see considerable opportunity as Scott referenced. The rate of increase is probably going to come down some, but with considerable incremental opportunity.

Now look, the other thing I point out is the Stearns & Foster mixing to be more of the total segment business is a positive to gross margin. It would get a commercial merchandising mix. I would expect a rate of improvement to maybe taper some.

Yes, I would add on a little bit, in that we've got fourth quarter should be, we've got a pretty easy comp there to step over. And when you get into 2017, all of what Barry said is absolutely right. Plus one other item which would be the 2017 Sealy launch and the success of that product will certainly, is designed to drive, margin improvement.

Yes

And that will be a big factor when we are talking about 2017, and we're talking about the Sealy margin. How those products perform will be key. Early indications are that the Sealy 2017 looks very good and we're actually very bullish on that product line.

Thank you. Our next question comes from the line of Kevin Ziets, with Citi. Your question please.

Hi, good morning, thanks for taking my question. I guess I was curious about your commentary about the additional basket and your credit agreements to be able to go up to 4.5 times. I'm not sure if I heard you call that out. I'm just curious of where your stock price is, if you're thinking about maybe accelerating your leverage targets to at least the 3.5 times or perhaps beyond.

Yes, no, don't overead it, on, calling out how the baskets work. The leverage target is 3.5 and I don't anticipate it changing as far as a target.

But when we set that target, we were also very clear that at times we would be below it and above it. And I think that's still the strategy. If we find compelling investments we may run a little hotter than 3.5 and at times like we are today we're 3.2 or something guys?

Correct

But I don't see any fundamental change in taking the target up that we would stay at accelerated levels from a long-term standpoint.

Thank you. We have a follow up question from the line of Curtis Nagle, with Bank of America. Your question please.

Just a quick one on inventory, it looks like it was trending ahead of top line. I'm just curious what's driving that.

Curt, I would look at inventory and say the days are a little bit up. That's partly, exclusively, driven by the sales short fall. If you look at the cadence of sales in the quarter, we were planning obviously for more and with our Tempur, as well as work in process raw materials, etc, we build in advance of that. Days, we're up four days and you should see improvement in those metrics going forward.

Thank you. We have a follow up question comes from the line of Carla Casella, JPMorgan. Your question please.

Hi, this is Mei again on for Carla. I was wondering if you could clarify for us the revolver drawing and availability in the quarter.

Sure, we basically were at -- just a second let me take a look at something -- yes, we were undrawn.

Ladies and gentlemen this concludes are question-and-answer session for today. I would now like to turn the call back over to management for closing comments and remarks.

Thank you. To the 7000 plus employees worldwide, thank you for what you do everyday to make the company successful. To our retail partners, thank you for your outstanding representation of our brand. To our shareholders and lenders, thank you for your confidence in Tempur Sealy leadership team and its Board of Directors.

This ends our call today. Thank you operator.

Thank you. Ladies and gentlemen, this concludes this program and you may all disconnect. Everybody have a wonderful day.