Q4 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by welcome to the Tempur Sealy fourth quarter 2019 earnings conference call I.
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After speech presentation there'll be a question answer session.
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I'd now like to have a cost over to your speech today, how many more of Investor relations. Thank you. Please go ahead ma'am.
Thank you operator.
Good morning, everyone and thank you for participating in today's call.
Good morning, Lexington headquarters or Scott, something Chairman, President and CEO embossed around executive Vice President and Chief Financial Officer.
After prepared remarks, well open the call for QNX.
Forward looking statements that we make during this call are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Investors are cautioned that these forward looking statements, including the Companys expectations regarding sales earnings net income adjusted EBITDA and anticipated for 2020 in subsequent periods involve uncertainties.
Actual results may differ due to a variety of factors that could adversely affect the company's business.
These factors that could cause actual results could 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 Companys FCC filings, including but not limited to annual report on form 10-K, and the company's quarterly reports on form 10-Q under the heading special note regarding forward looking statements indoor with doctors.
Any forward looking statements speak only as of the date on which it has made the company undertakes no obligation to update any forward looking statements.
This morning's commentary will include non-GAAP financial information.
The press release contains reconciliations of this non-GAAP financial information to the most directly comparable GAAP in person.
Except as otherwise discussed in the press release as well as information regarding the methodology used in our constant currency presentation. We've posted the press release on the company's Investor website under Investor thought Tempur Sealy Dotcom and have also filed it with the 60 or.
Our common supplement the detailed information provided in the press release.
And now with that introduction, it's my pleasure to turn call over to Scott.
Thank you Albert.
Good morning, and thank you for joining us on our 2019 fourth quarter and full year earnings call I will start with comments on the quarters record operating performance, then BOSC or will review, our quarterly and full year financial performance with you in more detail. Finally, I will conclude with an overview of our long term.
Corporate initiatives and our update on current trends.
The fourth quarter of 2019 was outstanding.
The best fourth quarter in the company's history.
It was a record fourth quarter for sale.
Adjusted EBITDA and free cash flow.
As compared to last year, both sales and pro forma earnings grew double digit and our leverage ratio declined by one full turn to 2.9 times.
Multani easily we've been repurchasing 50 million of common stock each quarter, starting with the third quarter of last year.
Both our North America and International segment grew constant currency sales.
Across both wholesale and direct to consumer channels.
As you can clearly see we're reporting a broad based performance.
Turning to the reported result for the quarter net sales increased 29%.
Adjusted EBITDA increased 29% and adjusted EPS increased a robust 52%.
This marks the seventh consecutive quarter of adjusted EPS growth.
I'd like to highlight four items.
For the fourth quarter results.
First our record fourth quarter global net sales net sales increased 29% for the quarter and North American net sales grew 36% versus prior year, we experienced strong growth rates for both Tempur Pedic and Sealy in North America and across both wholesale and direct trade.
Ill.
In fact, not only are we growing faster than most of the digital native direct to consumer mattress, Brad, but we're doing it profitably.
I should also point out that our customer acquisition cost and direct to consumer decline again this quarter and that's our profit margin expanded again.
This in our opinion is evidence of real brand strength and customer brand preference.
Our growth in North America wholesale channel was broad based across many retailers with significant new distribution gains in the fourth quarter of 2019.
We believe Tempur Pedic continues to take market share in the premium price band as our products are loaded with innovative features that consumers want and need.
Our growth outside of this new distribution gains are tempered <unk> tempur pedic was above our expectations and as a reminder.
We had a very difficult comp, 24% sales growth in the fourth quarter 2018.
While it is early we're not currently seen any indication of cannibalization at our existing retail partners after adding new points of distribution.
Additionally, we are starting to see our share of voice in advertising grow the should fuel future growth.
Turning to see lease performance in North America, we once again seen strong sales momentum continuing sealy.
We spent considerable time effort and besting sealy, including within the Sealy Assembly plant global supply chain or freight and logistics and customer service.
All of these investments increased operating model flexibility improve service level for retailers and consumers and enhanced our ability to capitalize on the changes in the competitive landscape.
We believe these investments are helping to drive a resurgence in the strength of the Sealy brand.
Well, we have been ramping up new distribution, we're investing quality control to maintain our highest possible product quality and service levels.
Also this year, we're launching the new innovative lineup Oh Sealy posturepedic products for all those reasons, we're optimistic about the fundamental trajectory of the Sealy business.
Our operating team is always evaluating opportunities to opt to optimize our network plans as a means to continue to deliver improved <unk>.
Our operating model.
We've identified an opportunity to open a new state of the art Sealy plant in Dallas, Texas in late 2020.
Although we currently have adequate manufacturing capacity to serve the market.
We believe we have a long term upside that we need to capture Kristy Lee Stearns <unk> Foster brand and this plant will support the elevated demand that we're anticipating across our U.S. network.
The second highlights in the quarter. He is our crisp execution of our expanded North American distribution.
We and more importantly, our customers are extremely pleased with the way the launches have been executed.
Well, we're happy with the early results of our new distribution. It normally takes six to nine months to fully train our assays and reach optimize floor. Therefore, we expect that our performance with these new customers will continue to improve throughout 2020.
The third highlights for the quarter was or over 60% growth in our global direct channel.
We believe this performance compares favorably when benchmark against dedicated direct to consumer brands.
In North America, our direct channel grew nearly doubled year over year grew almost 30%, excluding the acquired sleep outfitter stores.
We currently have 57 premium temper retail stores throughout the U.S. that excel at providing a low pressure environment for consumers to explore our entire line of innovative tempur Peter products.
As we've said previously we believe that over the long term there'll be an opportunity to have 125 to 150, Tempur pedic retail stores and we plan to open approximately 20 new stores this year.
I'm pleased to share with you that we've signed a lease to open our first Tempur Pedic store in Manhattan.
Late in the second quarter 2020, we expect to open a 3000 square foot space at the corner at 58 and third in the Bloomberg building.
We expect the store will perform like our other tempur pedic stores and drive local brand awareness, while also providing incremental direct sale.
The store combined with our new compressed Tempur cloud product designed for a few high density market.
And our various other compressed betting offerings will drive our share of the market that has been a feeding ground for unprofitable betting brands.
Turning to international our direct sales grew 20% on a constant currency basis with growth both in our E Commerce business and our company owned stores.
The last highlight for the quarter is that we reported a record amount of fourth quarter free cash flow at 87 million and the lowest debt EBITDA leverage ratio in Tempur Sealy is history.
Our economy brands and products have been performing well throughout the world, resulting in record sales growth gross profit growth and gross margin.
We now feel our fortified balance sheet and improved cash flow or significant competitive advantages.
Turning to a few general comments.
I want to emphasize our commitment to Tempur Sealy purpose, our people and our environment.
And it's our belief that commitment to environment, social and corporate governance improvements listing business growth and generates long term shareholder value I'm proud to say that's always been a critical part of Tempur Sealy DNA.
But given that we've recently published our first corporate social value report I would like to take a moment to share with you a few of our initiatives.
First our recent long term funding of Tempur Sealy charitable foundation in order to serve important causes an organization.
Second our mattress donation program, which since inception has donated mattress is valued at over 300 million individuals in need including military veterans and people impacted by natural disasters.
Lastly, our recently announced data the arts solar power project in Albuquerque.
Which went operational powered nearly half our new Mexico, Tempur Pedic plan with renewable energy.
Additionally, our facility in Dumfries Duffield, Virginia has achieved the U.S. Environmental Protection Agency is energy Star challenge for industry by reducing its energy intensity by almost 40% within four years and successfully achieving the energy Star Challenge.
Tempur Sealy decile facility has reduced over 3800 tons of greenhouse gas per year and saved enough energy to power over 500 homes.
Before turning it over to busker, one highlight one more topic.
We recently acquired in majority interest in Sherwood betting.
A major manufacturer in the U.S. private label OEM bedding market.
We're excited to partner with element family, who will retain 20% interest in the business and who are experts in private label and Oh, we have mattress manufacturing Sherwood operates for manufacturing facilities and is a top 10 U.S. betting producer.
This partnership marks our entrance into the private label category, giving us a complete suite of products offering ranges from Sherwood's Nonbranded private label products to our well known branded products, including Tempur, Pedic Sealy and Stearns <unk> Foster.
We've always closely followed the private label mattress business.
And we had <unk> and we've long admired the ellman families business and operating abilities. So when the Sherwood opportunity appear we were thrilled and jumped on it.
The operations will be Standalone.
Independent business unit within the Tim within Tempur Sealy.
And we'll continue to be led by its current management team.
Your estimate annual revenues are over 150 million and the business is expected to contribute to tempur sealy cash flow and profits in 2020.
With that I will turn it over to Bops grew to walk you through the financial results in more detail.
Thank you Scott.
Before going into the details for the quarter I would like to call out a few financial highlights.
As compared to the prior year adjusted gross margin improved 190 basis points to 44.3%.
Adjusted operating margin improved 80 basis points to 14.2%.
Adjusted EBITDA increased 29% to $152 million.
Adjusted earnings per share for the quarter was $1.37 cents, an increase of 52% versus the prior year.
This was driven almost entirely from operating performance versus share buybacks.
There are few items I want to call out before turning to the result.
First during the fourth quarter, we took a charge of $30 million in connection with the customer bankruptcy.
They represented less than 1% of our global net sales in their bankruptcy did not have a material impact on our 2020 outlook.
Going forward, we did not expect further charges related to this customer.
Second we made a special contribution of 100000 shares of common stock to certain public charities.
Including the Tempur Sealy Foundation.
The shares have at market value of approximately $9 million and represent the largest single contribution in the company's history.
Our North American gap fourth quarter results were impacted by these noncash onetime charges.
As previously announced our acquisition of sleep Outfitters was fully integrated into our North American direct channel during the second quarter.
Sleep Outfitters had historically been part of our wholesale channel since there were previously a third party retailer.
Accordingly, this impacts our growth rates within both channels.
I should mention that sleep outfitters outperformed as 2019 budget and we're very happy with the acquisition.
Turning to North American results.
North American net sales increased 36% in the fourth quarter.
On a reported basis, the North American wholesale channel increased 32% and the direct channel increased 94%.
Include excluding sleep outfitters, the direct channel increased almost 30%.
The new distribution gains were a significant driver of our robust wholesale growth.
The launch with Matt from started during the quarter and resulted in a sales lift partly from discount for model as well as full price back stock inventory.
There are a lot of moving parts to our business as we ramp with new distribution and accordingly, we would like to provide some color on our topline.
We currently expect our first quarter net sales in North America to grow between 25, and 30% as compared to the first quarter of 2019.
Again, partly from discount at four models.
For modeling purposes, we expect strong growth over the next three quarters, and then a hard sales comp in the fourth quarter of 2020.
As we lap the mattress firm rollout.
By the end of the second quarter, we think we'll be in a position to have an initial idea of what the new steady state business will look like with new distribution.
This would include the potential lift in our base business increased doors and higher share of voice net other potential consumer cross shopping.
North American adjusted gross profit margin improved 250 basis points to 42.3% as compared to the prior year.
This was primarily driven by favorable brand mix.
Fixed cost leverage on higher unit volume.
And lower commodity cost.
These improvements were partially offset by increased four model expenses, resulting from the expansion in our wholesale business.
[laughter] North American adjusted operating margin improved 240 basis points to 16.6% as compared to the prior year.
The improvement in adjusted operating margin was driven by the increase in gross margin and operating expense leverage offset by the increased variable compensation.
Turning to international.
Net sales increased 2% on a reported basis.
On a constant currency basis international net sales increased 4%.
Direct channel increased a robust 20% in the wholesale channel was flat.
We continue to experience a degree of market uncertainty in France, Hong Kong, and China, which create a choppy business conditions.
While this made it difficult to grow our business in those markets. The overall international performance was in line with our expectations.
I would like to take a moment to comment on the latest health concerns stemming from China.
We feel for those that have been impacted and are supporting our customers partners and employees in China and southeast Asia.
Where a diversified global company.
The majority of our business in China runs through our 50% joint venture.
Somewhat mitigate the impact on our business from the current issues in China.
Having said that it is too early for us to estimate the impact on us if any from these recent health concerns.
We continue to monitor this dynamic situation.
As compared to the prior year, our international growth adjusted gross margin improved 250 basis points to 54.2%.
The improvement was driven by country channel mix.
International adjusted operating margin declined 150 basis points as compared to the per year.
The decline was driven primarily by increases in operating expenses, partially offset by improvement in gross margin.
Turning to the company's global performance.
Adjusted operating income was $124 million and adjusted EBITDA was 152 million up 29% from last year.
The increase in adjusted EBITDA was primarily driven by higher volumes and favorable commodities.
This was partially offset by higher launch expenses higher variable compensation and higher advertising investments.
Regarding commodities.
Input costs were inline with expectations for the fourth quarter.
As we look forward, we'd expect between five and $10 million a favorability in in 2020 with the majority of the year over year benefit occurring in the beginning of the year.
The adjusted tax rate was 26% and interest expense was $20 million down from the prior year.
The result was adjusted EPS for the quarter of $1.37 cents up 52%.
Now moving to the balance sheet and cash flow items.
We generated record operating cash flows from continuing operations of $113 million in the fourth quarter.
Cash cycle was unfavorable by five days compared to the fourth quarter 2018.
This was principally driven by lower days payable, resulting from a timing a payment.
At the end of the fourth quarter net debt was $1.5 billion down slightly from the third quarter of 2019.
Our leverage ratio under our credit facility is 2.9 times down one full turn from 3.9 times compared to last year.
I'm pleased to highlight that we have significantly lowered our financial leverage primarily from stronger operating performance, while also repurchasing stock and investing in the business.
As we look forward on our capital allocation strategy, we have gone through an evaluation of the current economic conditions and business model.
We have concluded the appropriate leverage target should be between 2.5, and 3.5 times debt to EBITDA.
The business the business generates a lot of cash and has low maintenance capex needs, which allows us the ability to stay at our current debt to EBITDA levels. While we continue to consider high ROI see projects or acquisitions, while also continuing to repurchase shares.
We see our financial strength as a competitive advantage in an industry that is thinly capitalized.
The company also repurchased $50 million of shares in the fourth quarter and over $100 million of shares for the full year 2019.
We announced today that our board of directors increase the authorization to repurchase shares to approximately $300 million.
We expect to continue our discipline share repurchase strategy and based on current conditions to continue to repurchase approximately $50 million of shares each quarter in the near term.
Since our management changes in 2015, we have repurchased approximately $675 million of shares.
Now turning to 2020 guidance.
The company expects EBITDA to be in the range of 575 million to 650 million for 2020.
This includes.
The benefit from strong sales growth in North America, driven by the material benefit from new distribution in the first three quarters of 2020, which we expect to drive record full year revenues.
Internationally, you would expect growth and other countries to offset the country specific headwinds I mentioned previously.
Our direct to consumer business, continuing to expand through new doors and capturing share profitably online.
We will be investing additional R&D as well as a record amount of total advertising dollars.
In total we would expect adjusted EBITDA to grow about 20% from 2019 to the midpoint of guidance for 2020.
Lastly, I would like to flag a few items for modeling purposes.
For the full year 2020, we currently expect DNA to be between 135, and a $140 million.
Total capex to to be between 101 hundred $10 million.
Which includes maintenance capex of $70 million.
It's been in an ERP upgrade and it's a new steely plant.
Interest expense of $80 million to $85 million.
A tax rate of 27% to 28%.
And a diluted share count a 54 million shares.
Please note the above items considered the expected impact of our budgeted share repurchase plan.
Before turning it over to Scott I would like to quickly address some common questions about our aspiration of plan.
The Aspirationally plan is tied a challenging performance targets and as measured on a rolling four quarter basis.
It's a company achieves between 600 $650 million of adjusted EBITDA as determined by the compensation Committee of the board.
By the end of 2020 than the program Beth between 33% and 50% of the 1.7 million restricted stock units, resulting in a noncash onetime charge.
To be clear share to be clear the maximum share of asked at 50% of 1.7 million shares is 850000 shares for a 1.5% dilution.
The noncash accounting expense would fall into amortization line of the piano will not impact EBITDA.
With that I'll turn the call back over to Scott.
Thank you BASCO great job.
Now turning to the company's long term initiatives.
First develop the highest quality bedding products in all the markets we serve.
The companys undergone several large successful new product launches for Sealy Stearns <unk> Foster in Tempur pedic over the past two years, our consumer centric approach has led to the development of the best overall product portfolio in the market.
Our products are innovative and feature strong step up stories that are easy to understand for both consumers and retail sales associates, making tempur sealy the most desired partner for retailers.
This year, we're launching two new products first.
Is the all new.
Tempur Ergo Smart based collection with sleep tracker technology.
Combined with the adaptive Tempur Pedic mattress Tempur ergo.
Mark base creates a completely integrated sleep system that features automatics more detection and response personalized sleep analytics and coaching and smart home connectivity and voice control.
This product was founded on more than a decade of advance.
Incidents in sleep science as more and more research shows the critically critical importance, but good night sleeps rest for health memory and concentration.
Second we have the all new Sealy Posturepedic plus line.
This innovative collection of mattresses offer improved comfort.
Best in class cooling capabilities and increased support.
We period, the impressive all new Posturepedic technology with bold.
Entre anesthetics and the Sealy brand combined 136 years of Heritage and Trust.
But this line up we're offering a clear step up story above $990.
Simplification of the shopping experience and offer increase in store conversion opportunities with the goal of driving profitability and ASP for the retailer.
Initial feedback on our new 2020 products has been strong more actively working with retailers to roll these products out into the market throughout this year.
Turning to our second initiative promote our worldwide brands with compelling marketing.
We invested significantly in 2019, and we anticipate increasing our advertising further in 2020 in fact, we expect a record amount of advertising spend for Tempur Pedic and Stearns <unk> Foster brands this year.
And even more importantly, the total spend we aligned our advertising strategy to maximize our reach and effectiveness.
The strength of our brands is evident early this year when Tempur Pedic was awarded number one and customer satisfaction with the retail mattress segment in the J.D. power 2019 mattress satisfaction report.
This was the second time in three years, earning this honor.
This year in addition to earning the highest score for overall customer satisfaction Tempur Pedic was ranked the highest for support.
Durability.
Comfort value warranty contact with customer service.
This award is tangible indication of our customers recognizing our commitment to focusing what matters most of them.
Turning to our third initiative optimizing our powerful omni distribution platform.
In addition to developing the most innovative bedding products. We also make sure that our products are well were presented wherever the customer wants to shop.
Our wholesale business continues to be our largest channel of distribution.
And we're focused on growing both within our existing retail partners and adding new wholesale accounts.
In 2019, we experienced broad based growth with existing third party retailers spanning multiple channels of bedding retail, including furniture big box specialty and online only.
In addition to strengthening our existing retail relationships. We also have identified new business opportunities.
As a complement to our material wins in our wholesale distribution, our direct channel continues to rapidly expand.
For the full year of 2019, we realized robust global direct channel growth over 55% through a combination of online sales growth same store sales growth and expanded company owned doors, our direct to consumer initiatives have significantly evolved over the past.
Two years, and we're now within easy reach consumers wherever they choose to shop.
We believe we have the most successful direct to consumer bedding business model in the world.
This is exemplified by our North American Tempur Web page, which has strong average revenue per mattress unit of over $5000.
Revenues from our expanded direct channel distribution fund increases in advertising, which in turn enhances our wholesale business. This balanced approach improved tempur sealy overall sales and profitability potential.
Our last long term initiative is to drive increases in EBITDA.
We think our current report on our financial performance and our 2020 guidance range is evidence of our passion for driving increases in EBITDA.
Lastly, before opening the call up for questions.
Oh sure a quick update on current trends.
In North America, our current trends are slightly ahead of our initial expectations.
With both brands growing.
Internationally Europe has started off well.
In Asia as you would expect has been soft in total international is slightly off our expectations.
With that cop operator, please open the call for questions.
As far as I understood ask the question you need to press star wanting your telephone.
Withdraw your question press the pound key.
We ask that you. Please limit yourself to one question you may recall for any additional questions.
Your first question comes from Michael Lasser, Yes. Your line is open.
Good morning. This is a little nice what are you on for Michael Lasser. Thanks, a lot for taking your question.
How much office sales lift was received in the fourth quarter from the floor model sales and can you talk a little bit about sell through that you're seeing thus far.
Mattress firm at full price and then along those lines what does the thought process behind the wide guidance range for 2020 or some of the key unknowns and what would have to happen for you.
Yeah.
Thanks.
Hey, Scott I'll I'll try to answer the five questions I'd be glad you probably four of them then take a hard when can push them over to Bob sicker.
First of all you asked about individually sale through mattress firm it and we're not going to talk about an individual customer I think what I'll say is that we're very happy with our our new distribution, both at big lots and mattress firm and you can see from our comments about how helping quarter started.
Then we said North America was slightly ahead of our expectations. So from that you can read through probably a pretty good answer.
One of the other questions you embedded in there was the wide guidance range I think we have lot of 75 million dollar range. This year were normally we've been running about a $50 million range.
We widened it out a little bit because there is little bit more uncertainty in the uncertainty has to go with what we talked about last quarter, which was we need to see how this new distribution kind of feed into the marketplace in North America, and we also need to see how that these two large new customers what price points they sell beds at four of emerge.
And dicey issue within each each of those companies and whether they sell towards the top into the merchandising bracket or the lower end.
Those two variabilities certain played primarily in widening out the range and then quite frankly, there, there's obviously a little bit of drama going on in Asia.
And we didn't really put it in the guidance, but it certainly gave us a little bit of what comfort you have a little bit wider wider range of Scott what were the other questions. I think the question about sales lift in the fourth quarter or what I would say is without get this aggregating the revenue the way to think about it is oh, if you think about the number of stores that.
The new distribution had it was a it was a sizable launch.
And not only what that the launch than we had the full valued backs talk of to fill the inventory.
That said, we did say as we thought about the fourth quarter that temper the underlying business. It did exceed our expectations and lastly, I'd say I would expect we tighten up the range fairly quickly during the year as we as we learn more about the distribution.
Thank you.
Our next question comes from John Baugh Stifel. Your line is open.
Good morning, Thank you.
Two questions.
Hi, Susan.
Breaking up sorry can't hear you.
Third the.
For the Tempur stores in 2000, I can't can't hear the question broke up.
Operator, I think we've got to move another question, we're not we're not able to hear what is always asking us.
Our next question comes from Bobby Griffin with Raymond James Your line is open.
Bobby Griffin Your line is open please check your mute.
Yes. Good morning, everybody can you hear me Alright, Yes, Hey, Bobby Good morning. Thanks for taking my question. This is a two part question Scott your favorite, but I guess I guess first can can you help us isolate some of the incremental or kind of discrete items that hit the hit the piano this quarter like a new product launch and incremental stock comp and quantify.
Hi, those and then secondly, maybe to go off the first question that kind of look at it a little bit different way what in context. The 400 million that you talked about for all the new expanded distribution how much of that if you had to estimate shifted into the fourth quarter and then we can just adjust that in our models with the 50 million 30 million or anything like that.
Yeah basket can do that from a seasonality standpoint, you can you can adjust the 400 for him and the big Big rocks in the fourth quarter.
That affected probably be the discount at four models, yes, and then the we had a very big hitting comp yes. The two things that jump out at my mind when she walking through those yeah, absolutely. So just just circling back to those when you think about what happened during the quarter. Obviously, we had a large expansion from a distribution standpoint that.
With that was really a few parts that came around slotting the news flooding in new mattresses as well as the channel fill and then the sell through with the sliding a new mattresses, you're going to have some floor models with that and then we have been talking about the incremental stock comp sorry, the variable compensation or the bonus plan that we took and that was.
Approximately for the quarter about $18 million as it relates to how you think about the 400 million with 18. The Delta that is the that is the Deltic is zero the prior year okay.
As you think about the $400 million is what we called out on a 12 month basis, and just think about starting that in the fourth quarter and as you think about that is the 400 million included the channel sale on the floor models et cetera, So think about that as the sales surge in the fourth quarter and then as you get into the first quarter and through the rest of the.
Here is that would be ramping.
Next question.
Question comes from William Reuter with Bank of America. Your line is open.
Hi, Hi, good morning, I just in terms of you mentioned that there was one customer bankruptcy during the quarter I was wondering whether the if there any comments or thoughts on the health of the remainder of some of your smaller independent customers.
Sure Great questions. The first thing I would say is managing our credit profile Leo is part of what we do everyday what I would like to highlight is on a year over year basis, our agings have have improved materially and as it relates to the Matt. One is we've taken all associated charges with that particular.
Their customer.
And you don't believe it'll impact revenues going forward that is correct impact.
Thank you. Our next question comes from Brad Thomas with Keybanc capital markets. Your line is open.
Hi, good morning, Congrats on a nice momentum.
See if I can squeeze in a two parter myself here.
A question we get it.
It is about how to think about the gross.
Potential for the business as we get passed all of this incremental distribution. So I guess Scott was hoping for your latest thoughts on maybe how to think about what the revenue growth rate of the business should be as we look out to 2021 2022 is that mid single digit is at high single digit.
And then if we could just get little more color on how you all we're thinking about advertising this year potentially.
Given the momentum into business right now and the prospect of AD cost, maybe going up as we get closer to the election. Thanks.
Okay may work on that a little bit.
You know I mean first of all this just cut the aggregate.
To sum up some of the things in the quarter.
Don't Miss that we had growth internationally.
It had nothing do with new distribution in North America.
Certainly we have growth in DTC, which of course has nothing to do with new distribution. If you look at the base business.
We had growth in the base business in North America X.
The new new distribution.
So there's quite a bit of underlying growth.
On top of the distribution when I think about it yeah I have a tendency kinda back up a little bit and just look at where we are from a competitive standpoint, it look at our competitive advantages in each market.
And I got to tell you know when I look at our competitive advantages and the improvements we've made over the last three or four years.
We're very optimistic that our competitive position and all the markets that were in has been strengthened.
And in some markets has been strengthened significantly so when you get the underlying growth rate, which you end up with is okay. What puts the economy and what's going on in that particular market and I don't have a growth projection, but I think what I would tell you that I think I could support.
Pretty aggressively is that our competitive position in the bedding market in the world has never been better.
Never been stronger and we've never been more in control of our destiny.
As it relates to advertising, what we did call out in the prepared material is that 2020 would represent a record advertising year for us and a couple of things are helping us with that is obviously with the with the new distribution. It allows us to invest in some share of voice as well as the overall growth of the business.
Thank you. Our next question comes from Seth Basham with Wedbush. Your line is open.
Thanks, a lot and good morning <unk>.
Morning.
Congrats on a great quarter. My question is regarding the upside to your sales expectations in the fourth quarter. So I don't know if you can quantify but directionally how much of it was from your base business versus being some new relationships as a follow up as you think about a 2020 do you expect that base business in the wholesale North America segment to grow as.
Much as it did in the fourth quarter of 2019.
Yeah, the upside surprise within the base business in the fourth quarter Tempur space as you remember we've talked about before.
The new distribution feeds into the market, whether there's any cannibalization.
And if you if you look at my prepared remarks closely there is a sentence in there. It says basically it's early but based on early indications we are not seen any cannibalization and the Tempur brand and in fact, one plus one might be slightly more than two.
On the Sealy side, we aren't seeing any cannibalization, but it's not as clear because there's more factors that impact.
I will call to mid price point, but we're not seen anything that looks like cannibalization in either brand. So.
Based business grew in the fourth quarter expectations. During the year I would expect the base business is going to continue to do relatively well.
We're not feeling any pressure.
As far as slot counts and I would expect that we will continue to have some wins.
And with new clients going forward, although certainly not very large compared to what we did last year, there's just not there.
Large customers out there, but I would expect the we'll have more wins for sure in the coming here.
Thank you. Our next question comes from Peter Keith was Piper Sandler Your line is open.
Hi, Thanks to good morning, and great results guys basket to part but related question. So the last couple of years, we've had a launch costs as a headwind.
Just looks like there's fewer products rolling out this year, so could you maybe give us.
Launch cost benefit in 2020, and then Directionally Oscar how should margins flow through the year based on the year on year trend. It seems like maybe a little bit stronger in the first half.
Moderation of backup.
Great question, let me take that and Scott you can clean me up as it relates to margin expectations. If I were to step back on a on a full year basis I would expect margins to be up on a year on year basis, and just when you think about sequencing a bet to get into that point is in the first quarter is we are launching the sealy brand with our new.
Distribution, so though up on a year over year basis, it would be a bit pressured when you look at it sequentially versus the versus the fourth quarter. So overall got a lot of nice tailwinds that are heading into 2020 thats going to help us from a gross margin expansion standpoint part of that benefit is launch cost of that that is correct and when you think about it.
Youre correct over the last couple of years, we've had some we've had some launches and in 2020, they're very nominal.
Next question. Thank you. Our next question comes from Keith Hughes Suntrust. Your line is open.
Thank you.
Question on mattress firm as we head towards the holiday weekend coming up give us some sort of idea how much of the launch is complete.
I think it as we did not training and stuff like that in terms of slots.
Sure I mean, all the temper launch.
It is complete.
All the Stearns <unk> Foster launch is complete and obviously the vast majority more than half of the Sealy launch.
He is complete now when I say complete that means the beds or on the floor.
There might still be some PLP that's in process.
It's certainly there is a robust training process that starts once that hit the floor and although our assays are probably been trained some.
Generally that takes to getting fully trained that maybe six to nine months of training.
So I expect that we will continue to ramp up but early indications are all very positive both for us and mattress firm.
Thank you. Our next question comes from Curtis Nagle with Bank of America. Your line is open.
Good morning, Thanks, very much for taking my question.
Just wondering if you guys could provide.
Update in terms of the initial.
EBITDA numbers for new distribution, which I believe were 75 200.
You know I know, it's still early days, but obviously things seem to be on pretty well so.
Any update on that.
I'm going to M&A answer that no [laughter]. So doesn't give you a chance to ask another question because that I don't want to disaggregate the business by customer.
Obama you got kicked off the line, but what I would say is is that 75 to 100 is the way that we that we originally thought about it and that's where we rank remained today at the end of the second quarter, we'll have a better visibility of what that May look like the one thing I wouldn't want to point out at that 75 to 100 is on a rolling 12 month basis, though.
So that effectively started in the fourth quarter. So as you think about 2020 think about the fourth quarter comp.
Thank you once again, ladies gentlemen, if you wish that's the question at this time. Please press Star then one and you touched on telephone. Our next question comes from Carla Casella with Jpmorgan. Your line is open.
Hi, Thanks, taking my question I wanted just digging a little bit more deeper on on China, and any impact you're seeing.
With your own or other competitors Hum either shipping delays are you hearing you're hearing anything about out of stocks are out of stock floor sets.
There are many of the retailers and that are well do you should we fear that after this is all over we could see and a step up in and dumping because of the product they can't get out of China now.
Okay, we see if I can work on some of that we we have a six plants in China, They run through the Asian joint venture.
About 1200 employees.
Currently all six plants are closed we expect open five of them here probably in the next week that gives you just kind of some status on the current company.
We do we are in very good shape from a product standpoint supply chain standpoint.
We only really important adjustable bases.
Long lead time got plenty of them in inventory have plenty of on the water. So we're not seeing any issues on being able to provide our customers the products.
Other retailers, who may be getting their products somewhere else.
They may have different supply chains, they might have different issues, but as far as tempur Sealy goes we're not seen any issues in the supply chain right now obviously, depending how long the issue is outstanding we could bump into something but right now we feel very good about it.
As far as how it might impact dumping I don't see any impact on dumping the tariffs pretty well.
China.
From that and anything is being imported is generally coming from Vietnam.
Our Mexico, Indonesia, or somewhere else and.
Give or take I'd say, there's imports were BOSC are generally flat crack is probably the last few months worth of worth of report right.
Thank you. Our next question comes from John Baugh Stifel. Your line is open.
Thank you apologies about the break earlier I will ask one question or simply.
We really didnt want to answer we were just we were just pretending like we couldn't hear you [laughter], yeah, [laughter], yeah, it's a real curve ball.
[laughter].
Paul.
Repeated stores in North America in 2000.
Is there a comp you mean, we had same store sales increases.
And on the stores.
That does that's what you're asking me, we estimate there to comp of any other.
Store retail to look at absolutely not it's a fairly unique retail format.
And is highly profitable.
Thank you. Our next question comes from Laura Champine Capital Your line is open.
Good morning, Thanks for taking my question, it's my understanding that even with your gross it sealy at big lots him with the acquisition of share would you're still seeing a you are up is that true and if you could ballpark what you expect to be lifted in eight you are in Q1 and for the full year for your business overall.
Oh I go look to members second mixture average unit sure what I would say as I can speak into the fourth quarter is absolutely. Our average sales price did go up principally when you think about it tempur was with stellar performance.
Driven not only by the underlying base business that we did see growth in it that mattress firm that was the cell and so.
Yeah are you are was up yes, it's up primarily because of brand mix correct, because it tempur brand grew faster.
And sealy, even with the new distribution correct.
Thank you. Our next question is follow some Curtis Nagle with Bank of America. Your line is open.
Great really appreciate you're getting back on so two real quick ones one just.
I had heard.
Perhaps you could be some motion in terms of more anti dumping activity I'm just not trying to countries and then just a quick one for you Scott in terms of just why why lowered the leverage targets. It sounds like you know just want to be enough.
Are maintained a strong capital position, but anything more you could you could say on that'd be great.
Yeah, I don't really have any comments on future anti dumping actions I'm not really the expert in that area and there is others, who are some I'll, let you go to them.
We continue to watch the situation closely.
But but thats about all got say up on the dumping issue.
And when it comes to.
You know cap capital allocation.
You know look we look we looked at lots of different and data and there's no question to us that when you look at data on stocks like Pete PBX, We think Theres a quick it's clear that the leverage ratio and the valuation multiple has have an inverse relationship. So we believe over time.
Im a lower leverage target is going to be a positive to stock valuation second really you know a lower leverage provides us great strategic optionality.
We might use that extra capacity at some point for opportunistic acquisitions like the Sherwood or upsize the stock buyback if there's a market disruption, but we also really like building in that it at additional strategic Optionality and I guess lastly, you know as we studied the industry.
We've looked through some things, it's very clear to us the industry worldwide is run on a very thin capital base and we see a strong balance sheet and cash flows as really a competitive advantage and to competitive advantage that we'd like to keep and we think ultimately will help support.
The higher multiple for the stock.
Thank you My last question is falling from Peter Keith with Piper Sandler Your line is open.
Hi, Thanks, a lot a actually it's a great follow on question Scott So on capital allocation.
Any thought to initiating a dividend I'm curious on on the board discussions there just because it's the cash flows are tremendous and as you point out the competitive positioning has never been better. So it seems like theres really good stability in the business looking forward.
Yeah, we talk about capital allocation as you would expect at every board meeting.
Robust discussion from board members.
Certainly dividend is always part of that that conversation.
As of today, there's there's no.
Indication that we'll be starting a dividend, but it's certainly always an option.
But right now when we look at it.
There, we think there's some reasonably priced acquisition opportunities.
And we also think that our stock continues to be a very compelling.
Investment, but we'll continue to have dividend on the agenda and as part part of the discussions.
Thank you and this concludes the question answer session.
Call back over to stop Thompson for closing remarks.
Thank you.
So the over 7000 employees around the world. Thank you for what you do everyday to make the company successful.
So our retail partners. Thank you for your outstanding representation of our brands to our shareholders and lenders. Thank you for your confidence in Tempur Sealy leadership team and the board of directors.
This ends the call today, thank you operator.
Ladies and gentlemen, just conclude today's conference call. Thank you for participating you may now disconnect.
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