Q1 2020 Earnings Call
Ladies and gentlemen, please remain on your lines. The Tempur Sealy first quarter 2020 earnings conference call will begin momentarily once again, the Tempur Sealy first quarter 2020, <unk> earnings conference call will begin momentarily. Please remain on your lines. Thank you.
[music].
Ladies and gentlemen, thank you for standing by welcome to the Tempur Sealy first quarter 2020 earnings conference call.
At this time all participants are in listen only mode. After the speaker presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone.
If you require any further assistance please press star zero.
It is now my pleasure to introduce Aubrey more investor relations.
[music].
Thank you.
Good morning, everyone and thank you for participating in today's call.
Joining me in our Lexington headquarters are Scott concentrate Berman, President and CEO and bulk around executive Vice President and Chief Financial Officer.
After prepared remarks, well open the call for culinary.
Forward looking statements that we made during this call are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Investors are cautioned that these forward looking statements, including the company's expectations regarding sales earnings net income and adjusted EBITDA and anticipated performance for 2020 subsequent periods involve uncertainties.
Actual results may differ due to a variety of factors that could adversely affect the company's business.
The factors that could cause actual results 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 headings special note regarding the forward looking.
Okay and orbit factors.
Any forward looking statements speak only on the day when she was right.
The company undertakes no obligations to update any forward looking statements.
This morning's commentary will include non-GAAP financial information.
A press release contains reconciliations of this non-GAAP financial information to the most directly comparable GAAP information.
Except as otherwise known as discussed in the press release as well as information regarding the methodology used in our constant currency presentation.
We have posted the press release on the company's Investor website at Investor Dot Tempur Sealy Dot Com and have also filed it with the FCC.
Our accomplish our comments were supplement the detailed information provided in the press release.
And now with that introduction, it's my pleasure to turn it over to Scott.
Thank you Albert.
Good morning, Thank you for joining us on our 2021st quarter earnings call.
We are experiencing unprecedented global health crisis.
And our thoughts on all those people around the world whose lives.
Huh.
On today's call I'll begin with comments on a quarterly operation performance and then I'll provide you some thoughts regarding impact.
Cobra 19 on our operations in Boston will review in detail.
Quarterly financial performance.
Current trends and also provide you an overview of our balance sheet strength.
Liquidity position.
Finally, I'll conclude with some thoughts on why we believe Tempur Sealy is well positioned to manage through this challenging period and why we believe will emerge even stronger in the company on the other side at this global crisis.
First quarter 2020 is truly speed.
He was a record first quarter sales and adjusted EBITDA.
We're firing on all cylinders operation financially.
To mid March.
As compared to last year book sales and adjusted earnings grew double digits.
In addition, our leverage ratio declined significantly year over year, even after acquiring Sherwood Betty.
No 190 million stock repurchase.
Both our North America, and international segments grew constant currency sales across both wholesale and direct channels.
Performance was very broad based.
The strength across brands.
The fees and channel.
It should be noted that we achieved these regional results.
By the significant drop in sales in Asia.
Most of the quarter due to colder 19, as well as the negative impact and demand on our U.S. European operations exiting the quarter.
[laughter].
Turning to the reported results for the quarter.
Net sales increased 19%.
Adjusted EBITDA increased a solid 63%.
Adjusted earnings per share increased to be robust 148%.
This marks the eighth consecutive quarter of adjusted EPS growth.
I should also note that only 8% of its growth adjusted D. P. S came from share repurchase.
I should also note.
But if you consider seasonality you can see with the first quarter results.
We were on pace to deliver approximately 650 million adjusted EBITDA in 2020.
This gives you some idea of the strength our business model going into the crisis.
I'd like to highlight three items on the first quarter results.
New distribution has not increased to go do it or customer preferred products online store.
He was single largest rollout the company's history.
It was smooth wellpoint.
Strong execution by on T.
The new distribution gains were significant drivers I robust first quarter growth.
Hi, what Bruce quota.
33% growth.
Global direct channel.
In North America, our direction.
60% year over year.
Our global direct online sales.
5%.
Subsequent to the ended the quarter <unk>.
<unk> gross greatly accelerated.
Anything from store closure.
Lets call out the outstanding work by the team oversee the Sweet Outfitters acquisition.
When you acquired sleep outfitters out of bankruptcy in 2019 extreme significant same store sales declines and they were upgrading that significant loss.
Since then through improved merchandising mix advertising programs.
Oh, the team reinvigorated same store sales growth.
Police sleep Outfitters was on track for profitable year FY 2020.
Turning to the impact of dependent.
Third highlight the integration of Sherwood Betty.
This partnership with element family marks <unk> entrance into private label category, giving us a complete suite products ranging from Sherwood Nonbranded private label products to our well known branded products you couldn't keep repeating Stearns <unk> Foster <unk>.
This acquisition provides expanded products offering a wide range of crisis.
No long term, we expect to leverage overall brand portfolio to gain additional distribution for sure wood products.
In total we delivered the highest first quarter adjusted EBITDA.
The company's history.
Bite the impact to cope with 19 global operations.
A robust first quarter results.
People are confident or underline structure in strategies are working.
We are uniquely well positioned within our industry to stand the headwinds associated with cobot 90.
Before BOSC reviews, the recent financial statements I'd like to provide no.
Actions, you're taking in response to cover Nike.
And it would still be economic downturn.
First and foremost.
I'd like to review the measures that we implemented to protect the health and safety burn.
Be restricted travel face to face meeting.
Loud employees to work from home where possible.
Oh, each one specific helped protocols applicable to our global operations.
Keeping our employees and customers safe and healthy.
During this time of uncertainty, it's a top priority.
We're especially proud of the work that Tempur Sealy, it's done to support a variety of different people an organization.
Need during this crisis.
Over short amount of time, our innovative R&D teams have developed mattresses.
Great phones and other related items for you.
Capital and other medical facilities.
We believe it's important that we do apart the health care in this pandemic.
Which is why were donating a substantial amount.
These specialized products.
Additionally, we are manufacturing personal protective equipment.
We are donated we're selling a cost in support of all the frontline workers were serving our communities during this global hardship.
Entire organization remains committed to our customers suppliers and shareholders. During these rapidly changing times.
The virus, it's been impact different regions at different times.
For example countries within our each operations showed the degree in stages the impact within one of our geographic regions.
Operations, specifically in Japan in Singapore growing the beginning of April.
Since the restrictions were an assay, we've seen orders declined year over year.
Meanwhile, Korea experience <unk> impact of chronic 19.
In March.
Then restrictions we looked good and.
In orders are now grown double digit year over year.
In total our Asia business, that's been consistent.
Just two weeks it was compared to see period prior years.
With a site to grow.
Well each country has its own government infrastructure and responses pandemic. The Asian market is an example that helps us understand how markets can we pope.
Good closely monitoring markets on a country by country basis, and using this information to make informed strategic decisions across our global operation.
In the U.S. consumers are shifting their shopping patterns online in response to limited access to brick and mortar stores.
As you know one of our strength powerful omni channel distribution model.
Well traditional retail has been very weak.
Oh, and or third party retailers wrecked online sales that performed very well.
As a result, we're leaning into our online channel.
Which is uniquely suited conserve our customers.
Our U.S. online business, driven by keeping eye Sealy and Tempur products for April.
More than doubled as compared to April last year.
We continue to adapt to this new shopping behavior I recently expanded distribution for online compressed into cloud products to the entire U.S. market.
The response online has been strong.
Despite the growth online.
We'll exclude a major reduction and total sales it's kobin nice he began materially impacting our business in March.
This required us to reduce our cost.
This is model had highly variable cost structure, which allows us to partially offset operational de leverage in the face of sales decline.
But we need to do more.
Team quickly implemented actions to further mitigate the financial impact by reducing head count.
Many non essential expenses.
Capital expenditures into spending share repurchase.
Yeah.
For example.
This week, we've implemented new actions regarding personnel.
And the U.S. These actions included a furlough impacted approximately 35% or salaried workforce would've expected 90 days.
And we suspended for one k. match for the balance of 2020.
In total.
Considered all leasing cost actions.
Yes, good night, we have implemented 300 million.
Annualized savings throughout our business helped mitigate the current sales decline.
Well, we expect near term financial results to be significantly impacted.
Kogan night.
We see our long term competitive position strengthened throughout the downturn.
The company has fully recovered.
Pass challenges due to a chronic brands superior product quality.
Powerful omni channel distribution.
Solid balance sheet and see management.
The demand for bedding products. It speaks numerous temporary headwinds throughout our history.
We believe the fundamentals of the industry or sale.
We constantly demonstrated an ability to adapt to changing environment.
With that I'll turn the call <unk>.
Oscar to walk you through the financial resorts results in more detail.
<unk>.
Thank you Scott.
Before going into the details I would like to call out a few financial highlights from the first quarter.
As compared to the prior year gross margin improved 260 basis points to 43.4%.
Adjusted operating margin improved a very robust 550 basis points to 14.7%.
Adjusted EBITDA increased 63% to $151 million.
And adjusted EPS for the quarter was $1.34 cents, an increase of 148%.
There are few items I want to call out before turning to the result.
The company's first quarter trends are bifurcated due to the material impact the cobot.
The business financial performance prior to the impact was exceptional.
We exit 2019, with very strong momentum, which continued into the first quarter as we experienced robust monthly trends in January and February with North American sales growing in excess of 30% as compared to the prior year.
This strong growth in January and February highlights the underlying strength of the business.
Our strong performance in the beginning of the quarter carried into early March.
Despite a slowdown in Asia.
Thereafter, we saw significant declines as cobot began to have a material impact in North America and Europe.
At the end of March we disclosed in our market update the trends in the U.S. in Europe were sharply declining.
But orders trending down over 50%.
Orders continue to fall and bottomed out down 80% during a few days in early April as compared to the prior year.
Since then we have seen trends improve and month to date April is down 55% as compared to the prior year.
During the quarter. We also took a charge of $12 million in connection with a customer bankruptcy unrelated to the impact of koby 19th.
Our North American gap first quarter results were impacted by this onetime charge.
Going forward, we did not expect further charges related to this customer.
Turning to North American results.
North American net sales increased 25% in the first quarter.
On a reported basis, the north American wholesale channel increased 22%.
And the direct channel increased 60%.
Excluding sleep outfitters, the direct channel increased 20%.
The new distribution gains were a significant driver of our robust wholesale channel growth.
The direct channel include the acceleration of online in late March.
That Scott previously mentioned.
North American gross profit margin improved 330 basis points to 40.9% as compared to the prior year.
This improvement was primarily driven by favorable fixed cost leverage on higher unit volumes.
Lower commodity cost and decreased four model expenses.
North American adjusted operating margin improved 510 basis points to 16.9% as compare to the prior year.
The improvement in adjusted operating margin was primarily driven by the improvement in gross margin and operating expense leverage.
[laughter].
Turning to international.
Net sales decreased 1% on a reported basis.
On a constant currency basis International net sales increased 2% was positive growth in both the wholesale and direct channels.
The first quarter International results include a materially impact of coated.
Our operations in Asia began to feel the negative impact as a pandemic in February.
As the virus began to spread throughout the region.
When you consider what the international group has dealt with in the first quarter. We're very pleased with these results and the resilience of flexibility of our business model.
As compared to the prior year, our international gross margin improved 230 basis points to 55%.
The improvement was primarily driven by operational improvements.
Favorable country mix and lower commodity costs.
International adjusted operating margin improved 250 basis points as compare to the prior year.
The improvement was primarily driven by gross margin and favorable operating expense leverage partially offset by the performance of the Asian joint venture, which is concentrated in China.
Turning to the company's global for foreign.
Adjusted operating income was 121 million.
And adjusted EBITDA was 151 million, 63% from last year.
This is the fourth consecutive quarter of year over year double digit adjusted EBITDA growth.
The increase in adjusted EBITDA was primarily driven by fixed cost leverage on higher unit volumes.
Decreased four model expenses.
Lower variable compensation and lower commodity costs.
Commodities were slightly better than expected for the first quarter.
Going forward, we would expect on a per unit basis to continue to see that favorability.
Given the uncertainty from the crisis, we do not currently have 'cause good visibility to estimate volumes and that's the potential total commodity benefit to future EBITDA.
Adjusted EPS for the quarter was $1.34 cents up 148%.
This growth was almost entirely driven by improvements in operating performance.
Now moving onto the balance sheet and cash flow items.
We generated operating cash flows from continuing operations, a $15 million in the first quarter and spent $26 million in capex.
As a reminder, we expected capex in 2020 to be elevated to support the investments needed and our ERP software.
We're pleased to report that our Sealy U.S. ERP system went live in April.
This was a very heavy lift and we're proud of the outstanding efforts of our team.
In collaboration with other cross functional departments.
There are still more work to do there, but this is a good start.
I would like to turn to our liquidity position.
At the end of the first quarter net debt was $1.7 billion.
Our leverage ratio under our senior credit facility was 3.0 times.
Down significantly from 3.8 times during the first quarter of 2019.
And is in the middle of our target range of 2.5 to 3.5 times.
This is after spending $39 million for the acquisition of Sherwood.
And repurchasing approximately $190 million or shares during the first quarter 2020.
[noise] accelerated our share repurchase based on our conviction in the long term prospects of our business and are declining leverage levels at that time.
It is important to note that the reduction in our leverage ratio from the prior year was driven by increased operating profit.
And to a lesser extent by our decision to pay down debt in 2019.
Going forward, we anticipate that our current leverage will be a significant competitive advantage as we entered this downturn.
Well take a moment to give an overview of our debt and liquidity position.
The company is well positioned to withstand a prolonged period of severe sales decline.
We have no near term debt maturities, but the first being a 2023.
We have approximately $300 million liquidity, including $197 million a cash on hand as of March 31st and approximately $100 million available under our revolving credit facility.
We expect to generate operating cash flow in 2020.
Based on our current expectations in this very dynamic situation, we do not see any material issues with our debt agreements.
Although we do anticipate our debt to EBITDA ratio to temporarily increase above our target ratio in 2020.
We believe that our current liquidity is adequate based on our current and expected market conditions.
However, given the uncertainty and the nature of this crisis, we have initiated discussions with our commercial banks to secure incremental liquidity in the form of a variable rate term loan.
Were working to obtain this additional liquidity within the next 30 days.
Our ability to repurchase shares will be limited under this new short term loan agreement.
As mentioned, we expect our second quarter financial results to be significantly impacted by the challenges associated with coded.
Our second quarter to date consolidated net sales trends reflect a decline of 55% compared to prior year.
The trends, where the worst in early April and have recently improved.
As Scott outlined earlier, there are many things that we have done to react to the current environment.
This includes reducing expenses by $300 million on an annualized basis with approximately $225 million across the last nine months to 2020.
These reductions are primarily an advertising.
Personnel, including a furlough, 35% of U.S. salaried employees.
Other staffing related items and variable compensation.
The vast majority of these items will benefit our cash and liquidity position for the year.
With about $5 million being stock comp amortization.
We have also reduced our planned capex by approximately $25 billion for 2020.
As we have delayed non essential projects.
Despite these cost actions, we would expect significant headwinds to near term margins.
Within recent trends, we have seen a reduction in average selling price as consumers are purchasing lower priced products. During this crisis period.
In addition, we expect de leverage as fixed manufacturing costs are spread over fewer manufactured units.
This will create the leverage and gross and operating margins, resulting in an expected operating loss and negative on adjusted EBITDA in the second quarter.
Going forward, we anticipate operating income in the third and fourth quarter being dependent on the pace of the sales recovery in the markets impacted by cobot 19th.
Lastly, I'd like to flag, a few items for modeling purposes.
For the full year 2020, we currently expect DNA to be between 130 and $135 million.
Total capex to be between 75 and $90 million.
Which includes maintenance capex of $70 million.
Interest expense of $90 million to $95 million.
A tax rate between 29 and 30%.
And a dilutive share count of 53 million shares.
With that I'll turn the call back over to Scott.
Thank you Bob scripts.
In the team doing a great job this quarter.
[noise], we're living through unprecedented time.
It's forced us to reassess business outlook near term.
However, it's important for us not to lose sight of the tremendous progress it was underway prior to co goodnight.
And the momentum that we've built as a company.
Tempur Sealy market, leading vertically integrated global company.
It is had exceptional growth.
We believe is that growth direct reflection of the focus and passion, we have on a long term initiatives.
You'll recall a four key long term corporate initiatives are.
First developed the highest quality bedding products in all the markets that we serve.
Two.
Promote worldwide brands with compelling marketing.
I mean.
Optimize our powerful omni channel distribution platform.
Fourth drive increases.
EBITDA.
Well focus on these four initiatives has allowed us to achieve our recent results and it's positioned as well as we head into this crisis.
Britain elaborate on them today.
I'd like to highlight a few reasons why I feel confident.
But we're not not only can weathered the storm, but do we can actually emerge even stronger on the other side.
We had very strong momentum entering the crisis with North America sales up 30% in January February.
And accelerating tune in Europe, and Asia prior to covert 19.
<unk>.
Our omni channel distribution model allows us to reach.
Tumors wherever they want to shop.
And with a robust growth E commerce businesses operate even when physical stores for shut down.
We have the best products in the industry.
Have invested heavily in our technology global manufacturing.
Yeah, My contact brand spanning all price points.
Focus on the luxury SEC.
Good solid balance sheet and liquidity.
Most importantly.
David talented and dedicated team of people in history overcoming significant challenges.
Finally, before I open up the call food Cumin I.
Im pleased to announce it varies members executive team joined me Repligen.
Donations to chair.
And that the board of directors have elected to forego Gordon.
For the remainder of 2020.
The company's chosen.
You contribute these funds Tempur Sealy Foundation.
The United way.
Red Cross.
Conversely, We foundation supports charities, providing critical service to children.
In need and family.
During this time of uncertainty I'm proud to see the action Tempur Sealy leaders reflected with the collective responsibility, we feel because the company quarter.
With that operator.
Please open the call for questions.
Certainly as a reminder to ask a question you will need to press star one on your telephone.
To withdraw your question press the pound keep.
And we ask that you please limit yourself to one question.
Please standby we've compiled the Q1 a roster.
And our first question comes from the line of Bobby Griffin with Raymond James.
Good morning, everybody. Thanks for taking my questions and congrats on a good first quarter really impressive.
Thank you My my first my first question I'll, just go out and ask the fall off with it is can you maybe just talk a little bit about the health of your wholesale distribution network in particular, the small and medium sized business customers and then as the second part to that can you talk about what you're hearing from these customers around expectations and plans for the Memorial day.
Weekend.
Sure and and I've seen your question is targeted in U.S. retail customers I'll speak to the U.S.. If it's not just a few back up.
Look Oh, U.S. customer as retailers I got hit hard they were having a very good January and February that concludes the smaller retail customer that you're talking about.
And as you can see from our numbers robust growth and I think in general, but they say, they're probably having won the best quarters the data.
In recent years.
When they got hit hard like we did in late March.
So and then got closings and very confused governmental regulations.
Statewide and locally and there was certainly a period of total disruption as they were trying to figure out what to do.
And then over a few week period.
These retailers are very creative.
Very talented business people, they began to adjust and we could see it feel it.
They began to really lean into online, which before they might have had a web page, but quite frankly, they weren't committed to it when they were forced to close their brick and mortar stores they became committed to it.
And it is not unusual for us to hear stories of retailers with two three X their online sales out of coming off a small base. So he doesn't nearly cover their brick and mortar loss, but I do think they've learned something I think there will be better retailers for and I do.
Thanks.
We can now 100% committed.
To the Internet. They also became more creative.
In setting up appointments with customers with when even though they had stores closed they began to schedule personal appointments.
They found that be very success I think that's a a technique that will continue in the industry.
Even after this crisis.
Well, what they're healthy is maybe that's a very difficult analysis, obviously, but there's a lot of players are small you don't really know their capital base.
But what I would tell you is certainly our collections in receivable.
Yeah in March and so far in April have been relatively stable and we haven't seen any large one unusual actions had been a little bit softer. So I'd expect our days to extend but not materially so I'm going to say right now they feel okay. The smaller ones.
But I don't think they're going to be able to take a crisis that goes you know 90 days, but maybe with the current opening of the stores.
A little but a good news that we've been getting.
There will be fine.
Thank you.
Your next question comes from the line of Keith Hughes with Suntrust.
Thank you.
Congratulations on the quarter as well my question is on the April numbers, you've talked about revenue declines seen so far.
Is there a substantial differences amongst your brands and amongst your price points on how difficult business than here in April.
Sure.
Let's let's do this to brand first because it's relatively easy if you adjust our distribution for our new distribution gains in other ways as the new distribution is heavily sealy compared to temper then there's no difference in the performance of the brands.
In the U.S. and as you know overseas, we're generally more just kemper weighted so I'd say from a brand standpoint, we're not see anything significant between the two brands. After you adjust it for distribution changes.
When you go to within the brand and we'll call it merchandising mix.
I talk about it within each brand the merchandising mix there is pressure.
To go down from merchandising mix standpoint, we're generally seem the lower ASP products performed better both in Tempur.
And in Sealy.
Some of that's probably economic consumer confidence, but I think the lion's share that is really a distribution issue.
Because if you if you study distribution of our products before the crisis it would be very obvious that the asap.
And on online situation is lower than that A.S.P. on the in store brick and mortar ARIA say assisted sale.
So yes, what we are feeling that what I don't know is what's going to happen as brick and mortar stores open which is really important part of the question.
Which is what's gainspeed going forward.
I don't know depends on how the brick and mortar stores.
Perform but obviously with it with online you can get some pressure from a merchandising mix standpoint.
Thank you.
Thank you and our next question comes from the line of Curtis Nagle with Bank of America.
Good morning, Thanks, very much for taken a question.
So.
One of the turn to teach you see on online.
Obviously doing very well at the moment.
[music].
I guess does it kind of current environment, maybe change your thinking on GT. She did you guys had been.
I think investors in the category over the past few years, it's done real well, both online and stores.
You know, but maybe the world is shifting there a little bit more maybe you guys want to have a little bit more control of the supply chain. Do you think you use this is where the opportunities word but try to me even heavier into it or how should we think about that and how should we think about sealy you know and DTC.
Okay. Thanks. Thank you. Thank you for the 14 questions [laughter], Let me see it let me talk Med D DTC for for a little while.
First let me let me go to Asia.
Asia had Sars.
So they've been through this before.
And so we studied what happened after a Sars and Asia to see there been any changes in customers.
Shopping online or so they're really there really wasn't so I think that there are clearly during a short term period, while the stores are close there's no question the online business has exploded.
As I said.
After March 30, Onest, our online business is more than doubled.
And just about every retailer I've talked to in the U.S. and quite frankly overseas online has has done very well I think it told the stores are open we don't really know what that looks like but our research tells us whether it be in Asia after sars or whether it be the current research we have.
Although we don't have anything.
It's this fresh.
But 80% plus the customers want to try out of bed before they buy it. So I think that maybe there is some shift there. So maybe it goes to 75% customers one of tried before they buy but I'm not currently a believer that it's a huge shift I think right now.
Most of what we're feeling is people wanting a bad and looking for alternate distribution I think their preference will still be go to store and I suspect, it's probably a gift that once the stores open we'll probably give some back from the internet standpoint, but but it probably accelerated the trend.
Now when you talk about DTC that obviously includes online and brick and mortars, I just kind of talked about online.
And we'll continue to be very competitive there and expected to grow and its wildly profitable channel and you know probably one of the best online.
Bidding companies in the World now coming from almost a ground start.
When you go to the stores the temperature order all closed.
I suspect we will get about half of them open by May 15th the stores that are closed are generally on the west coast and in the North east for obvious for obvious reasons.
We're still growing there's we're still working on growth there so.
The store timber stores are moving forward the pace of opening stores is going to be a little delay not because of strategy or any change by us, but quite frankly, the real estate market is a mass right now she might guess and it's hard to do build out in those kind of thing so probably will probably be a little bit slower on opening stores, but again.
That's an execution issue in real estate strategy issue.
The sleep.
Outfitter stores there they are closed and I suspect a you know will get those opened here in the next.
30 days or so.
Probably exception of Kentucky.
And that strategy hasn't really changed based on how they performed what their return on invested capital is will will depend on the pace of which we want to expand that.
And we are selling through more beds online CBS Healy specifically.
Generally I think the retailers are doing that job really well E. Tailers, who are selling a lot of sealy beds online.
And there's not a lot of margin there so I want to spend too much too much effort. There. So I guess to long winded answer too I don't really think anything changed I think we want to be wherever the customer wants to be.
But if we see the customer wants to be online or wants to be more direct.
They will allocate capital there, but I think we'll just continue to manage it where we have.
Thank you.
Our next question comes from the line of William Route or with Bank of America.
Good morning, you referenced a potential capital raise it sounds like it was give me some sort of secured debt.
I guess have you thought about the size of that and then in that context, when you've been planning for liquidity and different scenarios. After that rates. How long would you feel like you have sufficient liquidity, even if the crisis where to extend that's it. Thanks.
Great question, maybe clear on the capital raise as we say capital raise I.
Kind of like Flinch, because it sounds like some kind of equity instrument and that is not we're not thinking about anything related to equity from a capital raise all we're doing is a traditional bank line.
With our basically our bank syndicate.
Do you consider normal business. It is a term debt item, it's about $200 million.
LIBOR plus two into rebates straight debt nothing exotic.
And quite frankly, just proving that were bankable.
Asset in this marketplace to I'd, probably money that we probably would not expect to use under most scenarios. So good.
Normal business and if we weren't in a weird a world where again, we probably wouldn't even talk about it it seems like we need to talk about it in the world oriented so normal straight debt.
30 days Oscar ish, yes, close that's correct called call 30 days.
With the only thing.
A different in that straight debt, we're talking about as compared to our current lending arrangement of any material difference is we did restricts the Mt stock buyback during the period.
Which quite frankly, we we thought was very appropriate and we were going to do it anyway. So that's the capital raise.
How long how much money do we have depending on how long the crisis.
Goes on.
If that becomes im kind of a medical question you tell me if I don't have any sales then cash burns pretty quickly. If you tell me we have reasonable sales quite frankly, we produce cash and I think wells I don't think we expect based on what we know today.
And again, it's medical dependent as opposed to a product dependent or operator, we'd expect to produce operating cash flow.
In 2020.
So I think one of the strengths of the company, it's a very cost structure, which Oscar talked about in his section. If you give us some kind of reasonable sales number even though down.
We will not eating cash we will still be generating cash. So we don't do the analysis of course, when you run out of money.
Like some companies because quite frankly don't expect to burn significant amount of money other than the second quarter, which we expect second quarter to be very bad.
But after that we expect as these stores opened around the world.
To be position, we're generating operating cash flow gearboxes, that's very fair I, just incrementally not to be repetitive, we have about $300 million and liquidity 200 million of that as cash 100 million availability on the revolver as Scott mentioned, we've got operating cash flow for the balance of the year. So we feel we feel good about where we're at and that before.
The the call it the insurance liquidity that we're getting from the banks.
Thank you and our next question comes from the line of a tool well I swore sorry, yes.
Good morning, Thanks, a lot for taking my question Scott is clearly a mix shift down to nor SPD bad. So so do you think even Oscars. The stores do opened in recessionary conditions prevail haggen bidding will simply be slower to rebound, but then the entry level that you have any constant at least what you're seeing currently in.
And experiences that you've had in past recessions and then have a quick follow up from one off from for me from previous comment you said did you start burning cash when there's a reasonable level of seats decline what level of stat.
If you could quantify thank you.
Okay I'll I'll start then I'll, let Bob could take the hard part of the question.
I can't really tell you based on where we are right now where with the Asap.
Issue is because again I've got a distribution issues because the stores aren't open and we're just from the stuff through through online. So current information is not helpful to answer the question if I look at past recessions okay.
It is normal for ASP to go down during during those periods and then work their way back up.
I suspect that this is the same thing, but this is a really strange period pay when it when I look at it.
Individual consumer as more money in their pocket because gas prices are way down and that's normally a big big impact on customers. It got huge government checks company.
So we've got we're going to have much unemployment, but its unemployment with people quite frankly that are making more money.
Beam furloughed than they were making working so I don't really know how to think about that because they're going to get these government checks that are that more than compensated for not working.
They certainly have lower entertainment costs I mean, they are not going out to restaurants. They are not spending money entertaining so that's going to be.
A lower Mount and I think the car sales are in real trouble.
And car payments and new car sales have generally been taken a big chunk of the consumers wallet. During this period. So when I kind of look at the customer I think okayed, what's really going on I think the retail customers going to have a lot more money in their pocket than most people perceive and certainly more money.
Pocketed than it ever had during a recession. So I think the issue is not a financial issue assuming that this recovery is relatively robust starting in the third quarter not second quarter, it's really consumer confidence issue.
I think the consumer confidence is bad it's going to take a little off the consumer confidence to get back.
To me that to all ties to your ASP question. So I don't know past recessions are really a good good good barometer. The last thing I would say it for retailers for betting to work at retail they have to sell high ASP selling a bunch of low ASP beds from a retail or whether there.
Online or whether they're in store is not business model that long term will be successful. So as encouraged is because we are about wanting to move asked yet the retailers, it's a matter of wife and debt for them to move the ASP and I think they will right now I think they're just they're just pushing volume out but.
Yes, they want to become a profitable.
And have sustainable business plan, they got to move A.S.P. up and it was the second part of the question box, which is that how long the how deep the sales decline as it relates to cash maybe I could take that sure. So the way I would think about that tool first thing is I've been around his business for a very long time, and what I would say as this is the most interesting.
Period.
We're currently going through and what I really feel good about is how quickly and how nimble. The company has been able to react if you look at it a $300 million of annualized cost cost out of the operations 225 that in the back half and that's a function of other team working aggressively but I would also say the variable cost nature.
The business model that we had in place when you think about how I think of how it takes a lot the model from a go forth standpoint. The right. There are many moving pieces that go into that type of analysis, what I would say is it that you'd be if I. If I think about the 300 million that we have from a liquidity the incremental that we're looking at.
From working with our existing banks. It is that we have severely depressed the model and we feel good about that.
Yes.
Thank you.
Next question comes from the line of John Baugh Stifel.
Thank you good morning, Congrats on a great first quarter jump right in April.
You mentioned down 50% could you help us a put in April in the context of a waiting for the.
June quarter, and what if you had the guess as a percentage of your wholesale or retail customers were closed during April where did you exit the mom.
In any guesses as to where you might be entering memorial day. Thank you.
Yeah, I mean, I play with that one for little while as you as you can guess it's.
It's pretty cloudy information, we kinda called it the fog of war internally as you kind of worked through these things, but look I suspect probably in the we're talking U.S. 'cause it take too long do the whole world, but in the U.S., probably 55% to 60% of the doors were closed.
Starting April correct and I suspect it that's probably pretty close to where we are as we sit here today, there's been stores opening some closings and you know it's dynamic.
I expect that had the next week.
Or so that number of closings ratio is going to change.
And we're getting a good number stores open certainly in Texas and some other markets that are open. So so that gives some idea of kind of the store in store closings.
As far as like I guess really volume is drawn kind of talk about April I think like on late March May March 27, there. So we announced the sales were down more than 50%.
And at that point, they were falling and that's that's a worldwide statement ultimately probably first week in April ish I'm going to say I don't have exactly we probably bottomed out at down 80% for a few days probably with some inventory burn off was in that number.
And then since then we've been working our way back up.
And you know month to date.
Probably 55 ish 50, 55% down.
And that's both a.
You asked statement and a global state local.
In North America, U.S. is doing much better.
In Mexico, and Canada, which are doing very poorly.
Right now.
Thank you.
Next question comes from the lineup Peter Keith with Piper Sandler.
Hey, good morning, its baddies greener on for Peter Thanks for taking my question.
Switching to the topic of customer house or is there anything you're doing or can do to mitigate impacting inventive other customer bankruptcies are distressed that you saw in Q1, yes.
Oh, Yes, I mean, I think as you as you know the way the industry is set up we effectively.
End up financing retailers.
We serve a little bit a little bit of a bank.
For the industry.
And you know over the years I think the history would show that were very good at that and we generally don't have a problem in that area. We work with big retailers and small retailers is just part of the core products the business worldwide.
Having said that certainly retail is under stress.
We continue to use our tools.
To work through it sometimes we shortened up.
The receivable as with to mitigate risk.
To the extent to that it's a risk that we see coming.
We have demonstrated I think very well.
We don't lose money in.
Manages situations situations that come out of the Blue light up did see that coming.
We have tendency to lose money.
Or at least not make profits last few beds, we sold.
So I think thing did I don't what they're getting more we can do a we work with them daily.
But at the same time and any retailer Thomas phones heard me say the 100 times.
Not going to be your bank and financial equity capital your business. So we'll for a vendor and we get vendor economics.
But if they get in trouble to the point, where they need equity or I'm not going to take equity risk returns.
But I think look there's there are some segments that are more challenge than others and element called business models like department stores and that's a that's it that's a challenge model.
But we probably can't do much to help but those beds to the extent those those businesses are having some headwinds those beds are going to show up somewhere else in our distribution because we're so well distributed.
And quite frankly.
You know where they show up.
So many other channels doing much better job.
Working a customer to hire in bed.
And so actually it could be good for us long term if there's some shift.
In the channel.
It helps support specialty Betty versus some of the some of the other channels.
Thank you and our next question comes from the line of Seth the shop with Wedbush.
Thanks, a lot and good morning, and my question from one place Scott because I know your loved that the first is related to the last question your dancing around the Allison here.
You at retail customers, how do you cut off shipments to any material customers at this point in time and then secondly at Bostco rise you talked about your expectation for operating profit in the second half of the year what level of sales decline can you sustain tend to lever that operating profit. Thank you.
Hi, Good first part of the question first question is easy or have you cut off sales to any customer the answer that's always yes, [laughter] routinely okay. It at times.
If we have a problem with receivables.
We stop ship okay.
And we work we work through it and at times, we and this will do more often than not and we look at cash on delivery. So that they are actually stop shipping most part most high end up with okay.
We continue any more inventory to you send us cash and we do that routinely take your questions is there any material customer that we've stopped shipping.
Q1 doesn't come to mind, but but we are routinely working through.
Customer issues I time.
So I'm sure I'm sure. We've got people on we certainly have some people on cash advance.
Yes, I think about the rest of the year growth trajectory standpoint, as Scott mentioned. This is a this is not an operating issue. This is more of a medical matter that work that we're working with and I would just go back to the actions that we've taken from a cost standpoint about 225 million in the in the rest of the year.
And I wouldn't go get those costs. The some of those costs will be more in the.
Color in Q3 in Q4 timeframe so.
That's how we're thinking about that and I'm going to add on little bit because you've got a couple of questions on retailer help there seems to be a little more indigestion out there than that I, probably would think is warranted at this point I think it's I don't know to ask me kind like what do I worrying most about which is kind of common question.
I think the first one I mean, just to be very transparent he's really consumer confidence and if I were if I were to focus on something it would be consumer confidence and it would be.
We'll go out the health issues and the ability for brick and mortar stores to open and to stay open and I'm sure there'll be some more shelter in place.
Orders issued over time, hopefully they're small loans.
I think those would be that the two big issue retailer ill health would be in the top five but I don't want to leave the impression on called it would be the top one or two I think the other two I mentioned are by far.
More significant and more broadly speaking is is that if you think about the omni channel that approach that we have we are where the consumer wants to shop, whether it's through our own doors, whether it's through from an online standpoint or whether it's in a unique experience through our through our our tempur flagship add what we've been able to demonstrate before is is that.
If the consumer wants to consume interact with our product care, our media in an online area, where there for traditional retailer and as Scott always as it has also mentioned is is that those units are going to find at home.
We'll be there from a consumer standpoint.
[noise]. Thank you.
Our next question comes from the line of Brad Thomas with Keybanc capital markets.
Good morning, Thanks for fitting me in here part of my questions have been answer but I.
I guess, a clean up the model a little bit can you talk about how you all are thinking about marketing dollar expenditure going forward and Boston I know you said you couldn't give us a dollar figure on the raw material savings, but can you give us a little more flavor for directionally what percentage it seems like perhaps some of these.
Sure chemicals and you'll prices.
Feel inputs, maybe being kind of quoted down to here at this point.
Thanks, absolutely what I would say is it in the first quarter, we saw about eight or $9 billion that commodity benefit on a year over year basis.
I would anticipate.
Commodities would continue to come in so I would expect that on a per unit basis, and overall to be favorable on a year over year basis. So I think it's reasonable how you're thinking about it as it relates to our however, spending from an advertising standpoint.
As we're thinking about it today. It is very focused on online thats, where the consumer is and that's where we're investing our dollars as we have more visibility on on how these stores are opening up and what that looks like we'll start feeling in the market. What we what we want to do is is that we want to make sure that when the consumer returns to that retail footprint.
It is that were there and energizing that consumer to on their consumer journey.
Thank you.
That concludes our question and answer session.
I'll now turn the call back over to CEO, Scott Thompson for any closing remarks.
Thank you operator.
Employees around the world. Thank you for what you do everyday to make the company's successful.
Our retail partners. Thank you for your outstanding representation or brands.
Our shareholders and lenders.
Thank you for your confidence in Tempur Sealy leadership team and its board of directors.
Since the call today, Thank you operator.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
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