Tempur Sealy International, Inc.

Kenneth Walker – Sr. VP, General Counsel, Secretary Lawrence Rogers – President & Interim CEO Jeffrey Ackerman – Executive VP & CFO Mark Boehmer - Treasurer

Chad Boland - Raymond James Laura Champine – Morgan, Keegan & Company Keith Hughes - SunTrust Robinson Humphrey Peter Wahlstrom – Goldman Sachs Anthony Gikas – Piper Jaffray John Baugh – Stifel Nicolaus Mark Rupe – Longbow Research Ruma Mukerji – JP Morgan Reza Vahabzdeh – Lehman Brothers Karru Martinson - Deutsche Bank Carla Cassola - JP Morgan

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 on our execution of these initiatives.

As we have previously communicated, our six strategic initiatives are: (1) driving average unit selling price or AUSP growth; (2) implementing new retail and direct-to-consumer advertising and marketing strategies; (3) improving our gross margins; (4) reducing our costs; (5) continuing our commitment to growing specialty and (6) building our international business. Let me first discuss our initiative to drive average unit selling price growth through product mix shifts with new introductions, slot conversion to higher price points and the price increases.

Our December price increase and the accelerated speed with which we are executing to transition retailers to the new Posturepedic line, has helped us to build on our progress in the first quarter with respect to our domestic average unit selling price. In the second quarter we grew our domestic AUSPs by 0.6% year-over-year.

We are currently implementing additional price increases which go into effect on July 21st on our low and mid-priced mattresses to help us offset the considerable material inflation we are experiencing and help protect our profitability. This should provide a slight benefit to average unit selling price primarily beginning in the first quarter.

We expect to receive material cost increases for the second half of the year of approximately 10% to 12% on average from the levels that we experienced at the end of May. Furthermore, we are cautiously optimistic that our AUSPs will be positively impacted over time from the improved mix in our new Posturepedic introductions, particularly the Posturepedic innerspring line as well as a new True Form Visco and PurEmbrace Smart Latex lines.

The Posturepedic launch is on track. Sealy’s second quarter domestic sales were impacted as we expected by floor sample discounts associated with the rollout.

However, this was clearly a positive for Sealy as retailers were very receptive to the new Posturepedic line. The impact of floor sample discounts was also accentuated by achieving our goal of rolling our Posturepedic at a rate that was twice as quick as our last line change-out in 2006.

By the end of July we anticipate that the new line will be fully rolled out in the US and we have been encouraged by the fact that our retail customers who have rolled out the new Posturepedic line have seen an improvement in their sales compared to the pre-rollout period. The redesign of our largest product line also led to a broader review of our entire portfolio including our Stearns & Foster line as it is currently performing below our expectation and we are taking steps to address this.

Our second strategic initiative is to implement new advertising and marketing strategies for our retail and direct-to-consumer advertising on our Sealy Posturepedic brand. As we have communicated we have already completed the first step of this initiative by creating and distributing new, more powerful point-of-sale and advertising materials for the Posturepedic innerspring line based on pressure point management and our no toss and turn positioning.

We have also stated that we plan to take national advertising action in the second half of this year assisting our retailers when they need our help most. We recently launched the “get a better six” national advertising campaign at the end of June.

This campaign is based on the human truth that most of us no longer get eight hours of sleep a night, and in fact, research tells us the average American is lucky to get six hours. While we cannot increase the number of hours they sleep each night, we can provide them with a way to optimize the sleep that they do get, by offering the most advanced mattresses designed with the aid of orthopedic surgeons to eliminate tossing and turning caused by uncomfortable pressure points and thus the most restorative sleep possible when they do get it.

We communicated our national advertising strategy would be tested extensively with consumers and this was certainly the basis for the “get a better six” campaign. In fact, our research showed that nearly 75% of consumers surveyed told us that the campaign would motivate them to shop for and ask for a Sealy Posturepedic.

This campaign also addresses the need that Sealy and our customers have to develop direct-to-consumer advertising and a more consistent brand message. We will reach a broad number of consumers with over one billion impressions delivered across TV, print and the Internet.

Our third strategic initiative is to improve our gross margins, in the second quarter the positive impact of our December price increase was more then offset by substantially heightened cost pressures. By deferring the price increase I mentioned until July 21st, we absorbed some significant material costs over the Memorial Day and July 4th selling periods.

It is important that we work with our customers by delaying the effect of the increases as it allows them to maximize key summer holiday selling periods. Utilizing our value engineering expertise, we are also looking at ways to address our exposure to the highest costs materials and continue to identify and remove non-value-added production costs without affecting our product quality or performance.

Additionally our specialty margins have begun to increase due to the improved product mix in our new visco and latex lines as well as supply chain efficiencies. We continue to expect our second latex line to be fully operational by the end of Q3 eliminating the current need to import cores from Europe.

In summary the material cost inflation the industry and Sealy is experiencing is unprecedented and will present a considerable headwind for the second half of the year, but we are working diligently to implement solutions to mitigate its impact. Our fourth strategic initiative is to reduce our fixed operating expenses, selling logistics and infrastructure as well as product launch costs.

As we progressed through the second quarter and realized our sales performance was going to be weaker then anticipated, we pro-actively took additional actions to remove costs from the business. This resulted in our second quarter in a row of significant SG&A improvements as we reduced our non-volume-related expenses by $14.9 million through streamlining our workforce, and aggressively working to reduce our costs in areas such as professional fees and travel and entertainment.

Our fifth strategic initiative is an ongoing commitment to growing the specialty business. Our specialty business was not immune to pressures in the domestic bedding industry in the second quarter but we believe we still managed to gain market share.

As we communicated we plan to add to our latex portfolio in the second half which we have done with the early June launch of our new PurEmbrace Smart Latex products. The new PurEmbrace Smart Latex line will initially be exclusively sold at Macy’s with wider distribution in fiscal 2009.

We are running Sealy sponsored national print advertising to support the Smart Latex product launch. In terms of production capacity our second latex line is up and running and is on track to be fully operational by the end of the third quarter.

While the domestic bedding market particularly at the high price points have come under pressure, we believe we have continued to gain specialty market share with both our latex and visco products and we remain confident that our special portfolio continues to be a meaningful contributor to the long-term growth opportunity for Sealy. Our final key strategic initiative is to continue to build our international business as we expect to achieve one-third of our growth from this business over the long-term.

While our European business continued to grow in the second quarter and our Canadian business was relatively stronger then the US, we are mindful that similar challenges to those we are facing in the US are spreading to the European and Canadian markets. In Canada, we now have the new Posturepedic line rolled out and in Europe the OEM business remains solid.

We are taking the same approach in Europe and Canada to reduce expenses where possible. As a final note on international, our business in Mexico continued to perform well through the second quarter.

We expect our second half performance to be challenged due to the pressure from multiple industry headwinds including slower retail demand, and significant heights in material and operating costs. As we have demonstrated we continue to focus on executing our strategic initiatives including driving average unit selling price growth led by the completion of our Posturepedic line, implementing new advertising strategies including our “get a better six” campaign, improving our gross margins through implementing price increases to protect or profitability, reducing our cost structure by aggressively managing our expenses and working capital, building on our specialty business through expanding distribution of our latex products including our PurEmbrace Smart Latex line and driving growth in our international business, all of which we believe will strengthen our competitive position.

We will continue to conduct a search for a permanent CEO and we are confident that when the industry turns, the steps we’re taking will allow Sealy to emerge with an improved, long-term growth profile as we have done previously in previous recessionary periods. I’ll now turn the call over to Jeffrey Ackerman.

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 is consistent with the 15% decline in specialty unit volume that we experienced.

By product category, sales of our branded latex business were up 8% in the second quarter while our branded visco sales declined less then a percent. Internationally sales grew to $116.7 million, an increase of 18% over the comparable year period or 6.1% on a constant currency basis.

The growth in our overall international business was driven by a 7.6% increase in unit volume. This was partially offset by a decline in AUSP primarily due to an increased sales mix of lower priced OEM products in Europe.

Our OEM sales continue to outpace our finished goods sales as we work to improve utilization of our available capacity. Our Canadian sales were up 11% but down 1% on a local currency basis due to a 1% decrease in AUSP on flat unit volume.

In our European markets sales were up 31% in the quarter or 12% on a local currency basis. The growth in sales in local currency terms was driven by a 17% increase in unit volume which was partially offset by a 4% decline in AUSP.

Both the unit growth and decrease in AUSP were driven by higher sales of our OEM latex cores which carry both lower prices and margins. Our total gross profit fell by $24.1 million from the same period a year earlier to $148.4 million.

Domestic gross profit was 41.1% of domestic net sales in the second quarter of 2008 compared to 44.7% in the second quarter of 2007. The decline in gross profit was primarily due to lower volumes and higher material costs including a considerable increase in inflation on inputs such as steel and foam as well as an incremental $3 million in FR costs.

Keep in mind that we still expect the year-over-year impact of FR costs to dissipate in the back half of 2008 as we anniversary last year’s July 1st compliance deadline for the new FR standards. Additionally domestic gross profit margin was impacted by deleveraging of overhead expense on lower volumes as well as floor sample discounts associated with the new Posturepedic rollout.

These unfavorable impacts were partially offset by the following: (1) a benefit in the second quarter from a change in estimates related to our warranty and other product return reserves which resulted in an increase to sales of approximately $3.7 million and a $4.5 million reduction of cost of goods sold; (2) our December, 2007 price increases; and (3) continuing improvement in our manufacturing efficiencies particularly labor productivity and scrap management. Keep in mind for comparison purposes in the second quarter of 2007 we received a one-time rebate of $2.5 million on lumber tariffs from our Canadian suppliers and incurred $0.8 million in incremental start-up costs for our Mountaintop, Pennsylvania latex plant.

International gross profit was $42 million or 36% of international net sales as compared to 37.5% in the second quarter of last year. The decline in our overall international gross margin was driven primarily by a product mix shift in our European business.

SG&A expenses declined by $19.2 million or 14% from the same period a year ago to $116.4 million. As a percent of net sales, SG&A expenses improved by approximately 270 basis points to 31% from 33.7% in last year’s second quarter.

The decrease in SG&A expenses in both absolute dollars and as a percent of sales we driven by our previously communicated efforts to aggressively reduce our cost structure which resulted in a $14.9 million reduction in fixed expenses in addition to a $7.8 million decline in volume-driven variable expenses as approximately 60% of our SG&A expenses are variable. As we progressed through the quarter and saw volumes declining more then anticipated we took action to further reduce costs including a decrease in product launch expenses, a decline in salary and fringe benefit related costs and lower spending on professional services and other discretionary items.

These factors were partially offset by $2.7 million of severance costs. You may recall that during the second quarter of 2007 the company recorded a $2.6 million gain on the sale of its Orlando facility and incurred $1.7 million of costs associated with an organizational realignment.

We have provided a table in the press release which provides a summary of these special items to make the net effect of all these items on operating income more clear. Now on to our balance sheet, we managed our working capital requirements aggressively during the quarter.

Looking first at accounts receivable, we are making every effort to keep tight control of our receivables during this difficult economic period. Our second quarter day sales outstanding improved two days from the same period a year ago.

Overall day’s inventory on hand increased three days driven by our domestic days on hand which increased by approximately four days to 27 days from the prior year. This was due primarily to an increase in in-transit inventory from suppliers.

International was four days better then the same period last year. Looking at accounts payable, our days payable increased 17 days as we worked to more effectively manage our working capital.

Turning now to cash flow, for the second quarter of 2008 cash flow from operations increased $42.1 million over the prior year quarter to $60.3 million, as the decrease in net income we experienced was more then offset by our aggressive working capital management. Capital expenditures totaled $4.8 million for the second quarter, down from $9.5 million in the prior year quarter.

The company’s debt net of cash was $743.1 million at June 1st, 2008, compared to $802.7 million at the end of the second quarter of fiscal 2007. As of June 1st, 2008 Sealy’s leverage ratio of net debt to adjusted EBITDA as defined by our credit agreement was 3.61 to 1, and below the maximum ratio of 4.25 to 1.

The maximum leverage allowable in our credit agreement steps down to four to one in the fourth quarter. Let me now provide some brief commentary on what we expect will occur in the second half of our fiscal year.

While we originally anticipated and communicated at the beginning of the year that our second half performance would be stronger then the first, the external environment has changed meaningfully since we made those comments. We have seen a significant deterioration in the retail sales environment coupled with unprecedented cost pressure on raw materials, well beyond what we had anticipated.

Furthermore as we mentioned earlier the weakness we have been experiencing in the US is spreading to international markets. On the cost side, raw material prices on steel and petroleum based input products have continued to rise each quarter.

We expect to receive material cost increases for the second half of the year of approximately 10% to 12% on average from the levels we saw at the end of the second quarter. As Lawrence mentioned, we will be taking pricing actions in July to offset a portion of these material cost increases.

However we expect inflation to further exert pressure on our margins. Additionally, $3 million to $4 million in product launch costs have been shifted from Q2 to the third and fourth quarters.

We will also increase our advertising spend in the second half related to the launch of our new “get a better six” national ad campaign. Based on the ongoing volatility we are seeing in the US market our expectation for further deterioration in the retail environment and ongoing escalation in commodity costs we believe our second half performance is now likely to be below our first half results of $0.25 per diluted share which does not include the previously discussed $0.05 per diluted share benefit from the change in our estimate for warranty and return reserves that will not repeat in the second half.

Going forward we will continue to make progress on those areas of our business that we can control focusing on actions that align with the key strategic initiatives that Lawrence outlined earlier. To drive AUSP growth we are focused on completing the rollout of our Posturepedic line and have plans in place to launch additional new products with some of our largest customers at a wide spectrum of price points in the second half of this year.

To improve both AUSP growth and gross margin we are implementing price increases as well as working to reduce our FR related material costs without sacrificing the efficacy of the solutions. We will continue to aggressively manage our expenses and working capital to better align our cost structure with the expected pace of the retail environment and we will continue to focus on growing our specialty business.

We are confident that when the market turns the steps we are taking to make ourselves a leaner organization with a substantially improved product portfolio will not only enhance our position as the world’s leading mattress manufacturer, but also lead to sustainable, long-term growth. This concludes our prepared remarks.

We will now open the lines for questions.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

Any chance that you can offset some of the Stearns & Foster by switching them out?

There’s some of that is occurring so yes.

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.

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%.

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.

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.

Would you say it was a material number?

It was a measurable portion of the decline.

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.

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.

Would you say it was high single-digits in the second quarter?

Yes.

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.

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.

The $14.9 million of fixed cost reduction, that’s just for the second quarter right?

That’s correct.

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.

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.

But you still are carrying some of this cost savings in the second half.

Yes.

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.

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.

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.