Q2 2020 Tempur Sealy International Inc Earnings Call
[music].
I've been thinking for standing by welcome to the Tempur Sealy second quarter 2020 earnings call. At this time, all participants' lines are in listen only mode. After the speakers present.
Station there'll be a question and answer session to ask a question. During this session you'll need to press star one on your telephone.
Please be advised to today's conference is being recorded if you acquire any further assistance. Please press star Zero I would now like turn the conference over to your Speaker today. This <unk> Investor Relations. Please go ahead now.
Thank you operator.
Good morning, everyone and thank you for participating in today's call.
Joining me in or Lexington headquarters, or Scott Thomson, Chairman, President and CEO, and Busker round 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 and adjusted EBITDA and anticipated performance 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.
The factors that could cause actual results to differ materially from those identified include economic regulatory competitive operating and other factors discussed in the press release issued today.
Doctors are also discussed in the Companys FCC filings, including but not limited to annual report on the form 10-K, and the company's quarterly reports on form 10-Q under the headings special note regarding forward looking statements indoor risk factors.
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 information, except as otherwise in the press release as well as information regarding the methodology used in our constant currency presentation, we have posted the press.
Relief on the company's Investor website at <unk> in the.
Tempur Sealy Dotcom and have also filed it with the FCC.
Our comments will supplement the detailed information provided in the press release.
And now with that introduction I will turn the call over to Scott.
Thank you all brick.
Good morning, Thank you for joining us on our 2022nd quarter earnings call.
Our thoughts continued to be all the people around the world, whose lives have been impacted by the global health crisis.
I'll begin with providing an overview on how weve strengthen our competitive position then BOSC or review in detail our quarterly financial performance.
Discuss several second quarter highlights ill review the balance sheet and liquidity.
Finally, I'll conclude with some thought about our long term business outlook.
Our second quarter global operations were dramatically affected by Koby, 19th the board of directors and I are proud of the company Swift response to the unprecedented challenges the worldwide health crisis presented.
We focused on the safety of our employees, while working tirelessly to continue delivering on our commitments to our retailers it supplier partners.
It was definitely a quarter of lows.
And high end.
Ending clearly on a high note.
Despite the remarkable amount of volatility in transformation within our industry.
We are reporting a second quarter net sales decrease of only 8% in.
In fact, U.S. sales grew 2%.
We're pleased to report adjusted EBITDA per our credit facility decreased only 3% compared to prior years, our leverage ratio improved to a record low of 2.8 times adjusted EBITDA down significantly from 3.7 times as of June 32019.
In short term liquidity expanded to over 600 million.
I want to spend some time discussing how we strengthen our competitive position in the marketplace.
And how we see the opportunity to continue our momentum in future periods.
Over the last five years, we've focused on finding problems and addressing them with an eye to creating long term value.
This is kept us nimble and guided our decision, making our investment in people products and processes.
These decisions created a solid foundation, which began to pay off in a big way last year.
We saw this trend accelerate into the first quarter of 2020, instead, the company up well to deal with the unforeseen worldwide health crisis.
I want to briefly touched some of the foundational elements that have improved our competitive position over the past five years.
First we've completed the largest launch of our all new innovative tempur products in the U.S. in our history. These products have done well in the marketplace.
Our product quality was evident when Tempur Pedic was awarded number one and customer satisfaction retail mattress segment in the JD powers 2019 battery satisfaction report.
Second.
Our multiyear investment into Sealy operations have resulted in high quality products high levels of service for our customers also improving or profitability.
After a strong your growth in 2019, we believe Sealy is now the largest betty producer in the United States.
Third we expanded our relationship with new and existing third party retailers through multiple new supply agreements.
Retailers, who recognize the investments we've made in our products brands customer service and manufacturing operations and we continue to receive inbound interest from retailers, who want to lean more heavily into tempur sealy family of products and brands.
In addition, our retail edge program has allowed us to provide cutting edge market insights.
In sales tools to our third party retailers.
The majority of these program. This program is focused on expanding retailers web based business and their understanding of customer trends. The program is working well as our legacy based retailers have ramped up their online business, which provides us more share in a growing online market.
Fourth.
Our omni channel focus resulted in rapid expansion in our direct channel diversifying distribution, and allowing product representation, where ever customer who want to shop.
We've experienced tremendous success within the direct channel today.
By the end of 2019, our full year global direct channel sales had nearly doubled during the two year period more recently this quarter has seen online growth rate over 125%.
And solid brick and mortar store performance once the stores reopened.
Our U.S. direct business is expected to be over 300 million this year.
Ranking it in the top 10% all U.S. bedding retailers on a standalone basis.
Unlike many other DPC competitors are direct to consumer business is highly profitable.
Decreasing customer acquisition cost and significant cash flow generation for the company.
Fifth with targeted product, we rapidly expanded our presence within alternative distribution channels, particularly with online retailers on time only retailers.
It is still very early this rollout we're pleased with the momentum in the profit that we've generated.
Six we pivoted our media strategy in the U.S. to include online channels as we follow customer trends.
This change in our media mix allows us to optimize our strategies for consumers early and late in their shopping process, while continuing to drive high interest in our brands and products.
Seven we completed several opportunistic tucking acquisitions, including Sherwood, Betty and sleep Outfitters, which are expected to have high return on invested capital.
Further our vertical integration.
Hey.
We strengthened our balance sheet improved our cash flow in Boston, we will discuss our financial strength in more detail shortly.
Finally, the night and most important component of our business are committed capable people who have strong shared values, we have a culture to deliver for our customer all over world and from that grow shareholder value.
The foundation, we've built over the last five years is rooted in adaptability and prudent capital allocation.
This positions us well to address unforeseen disruptions in the market due to covert 19.
Which had a peak impact on our business in the early part of the second quarter. Our proactive response has maintained our optionality for our business the fog of uncertainty.
Early in the second quarter.
We took material actions to adapt to an expected depressed long term sales outlook.
However.
We were met with a sudden surge in demand beginning in may as consumer started to shop for Betty and good all over the world.
We worked quickly to ramp up our operations to support the robust sales environment. The strong demand for betting in general and our products specifically has continued into the third quarter.
Unabated.
Second quarter sales could have been stronger.
But both we and our suppliers had reduced capacity early in the quarter in response to the falling demand in our U.S. Sealy manufactured operation was unable to keep up with the increased demand for our products as a quarter progressed.
The Tempur Pedic manager manufacturing process is less labor intense, yes fewer component than the sealy process and that is not is impacted by the current issue.
Our U.S. order bank at the end of the second quarter was twice as large as compared to the prior here.
We're still in the process of ramping our U.S. production capabilities to meet the heightened demand and we expect to continue experience capacity constraints on U.S. sealy products through the third quarter.
We believe in important driver of the robust sales wave is the recent shift in consumer spending habits as consumers are focused on in home products versus travel and entertainment.
The duration in magnitude of this trend is well is the continued acceleration in sales. We are seed leads us to believe that our sales trends are not only do to pent up demand for government stimulus, but we are likely experiencing a new favorable long term trend.
We are well, but we're well positioned to benefit from this new environment.
Our research points to the fact that consumers have become omnichannel shoppers and our powerful omni channel platform is well positioned to capitalize on the current market as consumers can find our products wherever they wish to shop.
Our research shows that 90% the consumers shop online at some point in their mattress buying process.
You might find it also interesting that our research on consumers before the virus indicated that three out of for online buyers visit a brick and mortar store before buying a mattress online.
The point is that our customers our omnichannel buyers and we are built to serve that kind of customer.
We estimate about 25% for U.S. sales are purchased directly online through either our own E commerce or through existing third party retailers, which is up from the time before Cobra 19 reach the U.S.
We also continued to work with our third party retailers to improve their online presence through our retail edge program. So that we can continue to help customers shop for our products, both online and offline.
During the second quarter, we saw a number of new saw a number of new customers on our own websites more than doubled versus prior year also seen a healthy level repeat sales.
We believe our ecommerce business is truly best in class.
The high level of customer loyalty and engagement.
One benefit of the current operating environment is more efficient spend for media total advertising spend was down 16% our second quarter net sales were only down 8%.
We believe we're getting more for money in advertising on a national level and expect leverage on advertising to continue into the third quarter.
Additionally, our digital customer acquisition cost continues to fall.
Our direct team continues to optimize for profit and are capitalizing on the recently reduced digital advertising cost in the marketplace.
This makes the third quarter in a row of falling cost to acquire a customer.
Proving we're not buying volume, we're chasing unprofitable sales.
Our second quarter adjusted EBITDA shows how strong our competitive position is within the industry.
We're pleased with the quarter to achieve adjusted EBITDA per our credit facility of 110 million.
As we've discussed before we see our financial strength is a powerful competitive advantage any thinly capitalized industry enhances our operating and strategic flexibility.
The last six months of heightened the importance of this attribute.
To this end, we're lowering our targeted leverage ratio for the second time in the last 12 months.
Our new revised ratio of net consolidated deadening to adjusted EBITDA target is now two to three times.
Reduction in our leverage target is not due to any market concerns.
It is strategic move.
To provide us with industry, leading flexibility you.
You can clearly see from our recent performance at the company's business model and experience executive key can handle economic volatility in still generates strong cash flow.
We believe this lower leverage ratio will benefit our share shareholders over the long term.
Lastly, due to our strong adjusted EBITDA performance in the fourth quarter 2019.
And the first half of 2020.
It is now possible you by the ended the third quarter 2020, we may achieve the trailing four quarter adjusted EBITDA in an amount equal to or greater than 600 million needed to trigger the threshold payout under our aspiration all long term incentive comp.
Yes.
As a reminder, the aspiration plan was put in place five years ago to motivate the company approximately 150 top leaders to turn around the business in a difficult changing industry.
The threshold target of 600 million represents a 44% improvement in trailing four quarter adjusted EBITDA from the time the plan was put in place.
The current aspiration of plan will terminate Decemberthirty, one 2020, and we do not anticipate adopting a similar plan in the future.
If the plan is triggered the company would incur noncash stock compensation expense.
In order to ensure that we have adequate time, the third quarter financials to undergo additional review.
We plan to host our third quarter earnings call slightly later than usual.
With that I'll turn it over to Boskovich review, our financials in more detail.
Thank you Scott.
Before going into the details I'd like to briefly expand on the trends we experienced through the quarter.
We exited the first quarter with accelerating negative trend as Covance began impacting our north American market.
In early April the trends reach the worst at down 80% during a few days.
We then saw sales trends improve throughout the remainder of the month and we ended April down 55% as compared to the prior year.
Heading into May we anticipated that the April trends would continue to modestly improve throughout the remainder of the quarter.
However business conditions improve quicker than we anticipated in the U.S. and by Memorial Day week, we began to experience positive year over year trend in the U.S.
The reopening a brick and mortar stores the acceleration of our ecommerce business in the improving global trends drove the sequential improvement from April to May to June.
The inability to foresee this rapid change of volume has caused some inefficiencies in labor and shipping costs, that's pressuring gross margin.
We are still experiencing these cost as we ramp up.
We had and we continue to spend whatever we need to service our customers.
Turning to the financial results.
Please note.
That we have adjusted $25 million of charges during the quarter. These charges were in accordance with our senior secured credit facility and the subsequent financial details have been adjusted for these items.
I want to call out that $8 million of those charges were an operating margins from covert costs associated with temporarily closed company owned retail stores and salesforce retention costs.
Of those $8 million and charges 6 million were in North America.
And $2 million were in international.
The impact on EPS for the second quarter was 11 cents per share.
Before going into the segment details I would like to highlight a few items as compared to the prior year.
Adjusted gross margin declined 280 basis points to 40.6%.
Adjusted operating margin was 11.7%.
Adjusted EBITDA for the credit facility decreased slightly to $110 million.
And adjusted earnings per share was 79 cents.
Turning to North American results.
North American net sales decreased 3% in the second quarter.
On a reported basis, the north American wholesale channel decreased 6% and the direct channel increased 27%.
The direct channels growth was driven by robust web sales trends up over 140% versus the prior year.
Partially offset by the headwinds in our own retail doors as most were closed during the period.
Since those stores have opened again trends improved and we now are seeing same store sales positive year over year in July.
North American adjusted gross profit margin declined 220 basis points to 38.6% as compared to the prior year.
The decline was principally driven by product and brand mix, partially offset by decreased four model expenses and lower commodity costs.
As anticipated, we experienced negative brand mix in the quarter as sealy recovered more quickly than temper.
During the second quarter some retailers redeemed.
Essential and we're able to remain open throughout the quarter.
Those retailers have lower average selling price versus our fleet average, which benefited sealy trends, creating a temporary pressure on our average selling price and margin during the second quarter.
Tempur trends were negatively impacted as all of our Tempur retail stores were closed during part of the quarter and most retailers focused on volume, which emphasize sealy over high price Tempur products.
While we expect these temporary headwinds to average selling price from product and brand next to still be present in the third quarter. We believe that they will lessen substantially as tempur sales trends have improved and are running ahead of ceiling.
North American adjusted operating margin was 14.3% and excluding cobot 19 charges was 15.4% and.
And improvement of 150 basis points as compared to the prior year.
This improvement was primarily driven by lower operating expenses as a result cost actions during the quarter.
Partially offset by the decline in gross margin.
These results include an incremental bad debt expense of $7 million principally related to the bankruptcy of one department store in the us during the quarter.
When you taken when you take this into consideration you can see why we're especially pleased with our expense management practices over the past few months, which resulted in expanded operating margins by mitigating the unprecedented impacts of the pandemic on our business.
Turning to international.
Net sales decreased 30% on a reported basis.
On a constant currency basis international net sales decreased 27%.
As a reminder, our international products are priced at the upper end of the luxury market.
In the west we have products across a wider range of prices, which is very different than our international go to market approach.
Given our concentration internationally in the luxury market, we expect it and have seen slower recovery of sales trends.
There was a wide variation or performance between different regions in the second quarter.
Our Asia business, which was first to be impacted by the pandemic and experienced large declines in February and March rebounded nicely in return to growth during the second quarter.
Outside of Asia, Our international business was challenged due to the timing of the global bottleneck that conditions generally improve throughout the quarter.
All major markets are now open for commerce are experiencing varying degrees of improving sales trends.
As compared to the prior year, our international adjusted gross margin declined 150 basis points to 53%.
The decline was primarily due to fixed cost deleverage on lower unit volumes and decrease royalties, partially offset by favorable country mix.
So.
Total adjusted operating margin was 14.6% and excluding cobot charges was 16.6% a decline of 370 basis points as compared to the prior year.
This decline was primarily due to fixed cost deleverage on operating expenses.
Increase bad debt expense and the decline in gross margin.
These declines were partially offset by the performance of the Asian joint venture.
Turning to the company's global performance.
Excluding Kobe charges adjusted operating income was $78 million.
Adjusted EBITDA for the credit facility was $110 million.
And adjusted EPS was 79 cents, which clearly demonstrates the flexibility of our business model.
The slight decrease in adjusted EBITDA for the credit facility was primarily due to fixed cost deleverage on lower unit volumes, partially offset by expense management, principally in other selling and marketing and lower for model expenses.
Commodities were slightly better than expected for the second quarter, and we expect favorable commodity costs to continue for at least the next few months.
We believe that in the third quarter, we will experience about $5 million to benefit from commodities, including the impact of tariffs.
The U.S. government recently ruled in favor of extending the anti dumping actions to an additional seven countries, which we deal which were deemed as dumping products in the U.S.
We believe these activities could materially benefit demand for us made value price mattresses.
These actions are designed to limit the import at extremely low price products. So we expect there could be a bit of a tailwind for the industry as it may raise the opening price points in the us market and provide some benefit to our U.S. Sealy Sherwood and comfort Revolution businesses.
Our supply chain has been impacted by the rapidly changing environment.
Some materials in the production of bedding products are being used to be used for making personal protective equipment at the U.S. government has mandated that domestic suppliers of the material redirect capacity for such use.
We have taken certain steps, including pricing actions to partially mint mitigate the impacts as our supply remains constrained on these items.
Now moving to the balance sheet and cash flow items.
We generated second quarter record operating cash flows from continuing operation of $155 million.
And spent $23 million on Capex during the second quarter.
Our record operating cash flow was driven by our focus on disciplined cash management.
I would like to further discuss our liquidity.
At the second quarter consolidated debt less cash was $1.6 billion.
As Scott pointed out our leverage ratio under the credit facility was 2.8 times down significantly from 3.7 times at the end of the second quarter 2019, and is within our new target range of two to three times.
As a reminder, we entered into a 200 million dollar 364 day term loan in May which increased our liquidity during a time of great uncertainty.
We ended the quarter with over $600 million of available liquidity, which included $147 million of cash on our balance sheet and over 400 million available under our revolving credit facility.
I want to touch briefly on our accounts receivable.
Going into the quarter, we recognize some of our customers were under financial strain for mandated shutdowns, which could expose our a are.
As of June Thirtyth.
2020, despite the substantial volatility in the market our accounts receivable aging was consistent as compared to the prior year.
This was an especially good sign to me that the broader use bedding market has held up much better than we expected and their credit risk and return to normalized levels.
As we have discussed on previous earnings calls.
Our variable cost structure naturally Lexus.
During the quarter, we implement it further cost reductions with a focus on preserving cash and improving our liquidity position when we felt it was needed.
These reductions were primarily an advertising personnel other staffing related items and variable compensation.
At the business trends improved the variable expenses increased in line with revenues and as we felt more confident in our outlook. We bought back most of the discretionary expenses as well.
We now expect most of our income statement line items to have a similar rate to sales as they had historically.
In short, we're playing offense not defense, which changes our cost outlook.
We're not in a position to issue full year 2020, adjusted EBITDA guidance today, but I would like to offer color on our near term expectations, excluding any material unforeseen changes and the operating environment.
Our trends for the third quarter to date have accelerated from the second quarter across all geographies and all brands.
Given the improving trends, we have an internal target for global net sales to be about 25% positive in the in the third quarter as compared to last year.
This takes into consideration our capacity constraints and would imply that by the end of the third quarter adjusted EBITDA could possibly reach the Aspirationally plans low end threshold of $600 million on a trailing four quarter basis.
This would be a remarkable result in the third quarter as it would be a 25% year over year growth.
As a refresher the aspiration of plan is tied to challenging performance targets.
The plan is triggered when the company cheese between 606 $50 million of adjusted EBITDA on a trailing four quarter basis through the end of 2020 as determined by the compensation Committee of the board.
If the threshold is triggered then between 550 and 825000 restricted stock units will best.
Resulting in a noncash onetime charge between 33 and $50 million.
And a dilution of one to 1% to 1.5% in the quarter their performance target has achieved.
There will be a true up in the fourth quarter, it's a trailing four quarter adjusted EBITDA achieved is greater than in the third quarter.
Lastly, I would like to flag a few items for modeling purposes.
For the full year 2020, we currently expect DNA to be 135, and 140 million.
Total capex to be between 100, and 110 million, which includes maintenance Capex a 70 million.
Interest expense of 80 to 85 million.
A tax rate between 28 and 29%.
And a diluted share count of 53 million shares.
If we triggered the Aspirationally plan, we would expect DNA would be higher by at least $33 million.
The tax rate would be unfavorably impacted as this noncash compensation charge would not be deductible.
And the share count would also increase.
With that I'll turn the call back over to Scott.
Thank you BASCO great job.
Tempur Sealy is a market leading vertically integrated Omnichannel global company with solid fundamentals and a growing category.
We believe we're well positioned to deliver above market performance as we focus our passionate on our long term initiatives.
Our four key long term corporate initiatives include first developed the highest quality bedding products and all the markets we serve.
To promote worldwide brands with compelling marketing.
Three optimize our powerful omni channel distribution platform.
And fourth drive increased EBITDA.
These long term initiatives helped us whether one the greatest challenges in industry has ever faced and position the company not just to deal with the crisis, but to emerge even stronger on the other side.
I'd be remiss, if I did not think our world class workforce and outstanding third party retailers suppliers licensees in joint venture partners, all who have made tempur sealy resilient and successful.
There are few items in particular that gives me confidence about the future.
First our go to market approach around the world is diversified and is proven to follow the customer wherever and however, they want to shop.
Second our pivot into compressed products has been promising realizing solid growth, both with timber cloud and cocooned by Sealy.
These products have been highly successful driving additional direct channel growth in generating interest in Tempur Sealy products within a new segment of consumers.
We continue to invest in this growing portion of the market and it purchased over 25 compression machines for our network to assist us in providing the most convenient and highest quality product to the consumer.
Three sealy has become the number one brand in the us.
Which speaks to market share gains a high level of quality value in the industry.
Our new Sealy plant in Dallas, Texas is on track to open in the fourth quarter to help support further growth.
For our recent acquisitions have been very successful.
On the manufacturing side, our acquisition of Sherwood Bedding company has gone well.
Provides a powerful entry into the private label and OEM market.
Sure. We team has plans to expand the manufacturing capabilities with a new Sherwood plant in the northeast and to increase the square footage in an existing facility in Florida.
Additionally, they have leverage tempur sealy strong retail relationships as well as sure with strong product lineup to expand their balance of share for OEM products at existing distribution.
On the retailer side I want to highlight our acquisition of sleep Outfitters from bankruptcy has been very successful.
Does it seem seamlessly integrated their retail store base into our operations and they are now contributing to our financial performance.
The recently increased Tempur Pedic us media spend is supporting the recovery of premium betting in the us market in helping all retailers we've ASP.
And six lastly, our margins cash flow adjusted EBITDA during the period were above our expectations and compare favorably within.
And outside the industry.
Over the last five years.
We've had tremendous we've made tremendous progress and strengthening the foundation of our company.
With the strong foundation in place and a healthy tailwind of consumers eager to spend on their home Tempur Sealy is now positioned to grow sales and earnings.
The years ahead with that operator, please open the call up for questions.
Okay.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key.
At this time, we do ask that you only ask one question. So we can allow everyone in the queue to ask a question today.
Just one moment lottery compiled the culinary roster.
Our first question comes from the line of Curtis Nagle with Bank of America. Your line is open.
Good morning, guys. Thanks, very much for taking my question.
Yes, so just wanted to quickly I guess touch on mix and a gross margin.
Thank you so you'll have less capacity constraint tempur Sealy, obviously sales are going to be extremely strong in the quarter is pointing to that more stores opened including enrolled.
So I just I wouldn't we what should we expect a pretty decent improvement in North America gross margin due to the.
Mix factors.
Kurt.
We would expect gross margin expansion in the third quarter you hit it right on is that if you compare to the first quarter, we should see improvement and obviously on a year over year basis, just reiterating some of those things. You said is that we would anticipate product brand mix to dissipate as we get through the as we get through the third quarter as well as we will have a bit of a commodity.
Tailwind for US and then some of that de leverage that we Solomon second quarter that should dissipate as well so you're spot on.
Thank you and our next question comes on line of Bobby Griffin with Raymond James Your line is open.
Good morning, everybody Oprah will do a wants dancing on them graphs on managing through a difficult quarter. Scott I have one of your favorite two part questions here, but all I was just curious if you could spend a little bit on as the business start to recover what what kind of did you see in the wholesale trends by account size.
In the U.S. and then maybe compare and contrast that to kind of the trends in international wholesale I know, there's some investor worry about just a different sizing the fragmented nature of the bedding industry with small businesses and stuff.
Yeah.
Thanks for your question Missy, if I can kind of help you with that in the U.S.
In general I would say the larger retailers came out of the box faster.
They were little bit quicker to lean into online.
Little bit more.
Okay, we're aggressive in their advertising and so we saw the bigger retailers came out faster and then probably I'm Gonna say 30 to 45 days later.
We saw what I'll call the all other in our terminology.
Like someone turn to switch on almost.
Started coming out of the box and by the time you got to the ended the quarter and into July I would tell you that both the larger retailers and they all other we're about equal as far as the strength of which they came out of the.
This particular trough.
Internationally manages all over the board by country I don't think Theres anything from an international standpoint, where there was any difference between the large retailers in the small retailers coming out of the box.
Internationally. It is clearly by country and all relates to to the virus.
Thank you.
Your next question comes from the line on the tool not slightly.
Your line open.
Okay.
Good morning, Thanks, and thanks, a lot for taking my question Scott at this point what is keeping your visibility with respect to sales so over the balance of the third quarter I understand that July is very strong, but what's giving you the confidence that this would continue in August and September and then along those lines is a continuation of July trends, what's baked into your guidance of 25% San.
Schools are are you expecting tends to decelerate in August and September instant hit the 25% Mark. Thank you all right. Thanks. Thanks for your question, Yes, Let me let me first of all clear as we sit here today I mean this is a very broad based.
Order trend that we're seeing.
July to date, we're experiencing order growth in every country in the world we operate.
So I mean, it's not just us stimulus checks or something that we are seeing order growth in every country in July.
I think thats when the when most important things that I would tell you that gives us confidence also if we look outside of our category you look at furniture and home furnishings.
Look at home development look at RV sales I mean, there's clearly a huge.
Wave of discretionary income that is moving between I'll call. It travel and entertainment for lack of a better way to say into other categories and we're benefiting from that.
We've got it extremely large back order.
Which is unusual for us so we've got the orders in house, we have literally turned down tens of millions of dollars of orders because were capacity constrained and I don't think we've ever turn down orders in our history. So we're we're turning down some orders in the U.S primarily in the ceiling.
Side of the house.
So when we look at things, we have pretty good visibility to the third quarter and in the the Im I caught guidance in the 25% to give you some perspective.
Most of the risk in that number has to do with capacity constraints not demand.
Demand feels very strong everywhere, we look now we don't have.
Long visibility because I think I'll, obviously, that's going to be dependent.
Some of the health care issues worldwide, but we've got what I call very strong visibility in the third quarter, which is why we felt comfortable giving you some perspective.
A tool just to answer your second part of that question. What I would say is just as a reminder, we did start our new distribution and the back half of the third quarter not going to necessarily parse up the quarter, but just be mindful that it did start in Threeq you have 2019.
Thank you.
From the line Peter Keith with Piper Sandler Your line is open.
Hi, good morning, everyone. Congrats on the rapid recovery.
I wanted just maybe you have a follow up question to last comments about capacity constraints and your current approached advertising and Scott I think you'd said you're playing more offense are you leading into advertising as much as you want right now or are you stock that because of some up supply constraints that you've talked about no.
We're playing the long game I mean, you can make an argument that we could pull back on tempur advertising.
Make a little bit more money in the third quarter.
And do that kind of stuff, but look we we're we're advertising big time on temper and leaning into.
Our media.
Really for the force foreseeable future and Thats what were seeing.
Over the last couple of months is the temper growth rate has come up significantly and now is actually growing faster than than seals.
We think it's important for us to help lead the industry kind of out of this trough and helped push Asap because it has a huge economic benefit for our retailers and we kind of look at that as part of our responsibility as largest bedding company in the world.
Thank you. My next question is from the line fashion with Wedbush Securities Your line open.
Thanks, a lot and good morning, and congrats on delivering very strong quarter and then.
Good question I have is just around mix you mentioned a leading the.
Industry out from an ASP standpoint, but can you comment on within the temper.
Brands are you anticipating seeing.
Sps move higher on a year over year basis, and your mix these favorable to gross margins for the balance of the year.
Within the Tempur brand.
Within the Tempur brand.
I would I would expect we'd have positive positive product mix within the Tempur brand, what we're seeing right basket.
Absolutely. So if you think about what happened in the second quarter, specifically is that retailers were coming back now as we sit here the third quarter. The vast majority if not all of our retailers are back at the Salesforce in house. So when you think about it the train Salesforce is back and now versus a volume focus will be focused on higher.
Price products, specifically on the Tempur side and that should help us ASP not only within tempur, but in sealy as well.
Our next question comes from the line of Keith Hughes of Suntrust. Your line is open.
Thank you.
You look towards the third quarter with the 25% you discussed earlier.
Would you still expect North American sales to come in in excess of others, you're going to be a catch up here with the international given the weak second quarter.
Yes, we would expect North America to be stronger.
But we'd also expect international be positive that's right.
Okay. Thank you.
Our next question is from launch.
Jim Cline with loop capital your line is open.
Thanks for taking the questions. So.
It's really about what's happening industry wide you mentioned some concerns around supply chain constraints impacting sealy can you give us more color on what components are being impacted and how that's how you expect that that supply.
To come back.
Online and will that potentially drive up the pricing of those components, which might offset some of the tailwinds that you see on on Cogs on the on the Tempur side.
Okay. Thank you. Thank you for your question. It look I think we're benefiting from two things I think we're benefiting from our competitive position and being positioned correctly.
Going into this and then you're you're absolutely right. We also have an industry tailwind.
They were writing when you go to the capacity constraints in will go down supplier.
Issues. The supply chain is is operating well, but I would have to say, it's a little bit fragile.
Wasn't built for quite this sales surge that the industry is going through so so there are some hiccups in the supply chain.
Probably the biggest choke point in North America, right now would be in the area of Springs, and that's mainly pocketed springs.
Working very closely with our supply partner.
There.
There has been some price increases.
They were passed on.
Relative to.
The springs here in the third quarter.
I think that takes care of but we'll see but it depends on what goes on in the future, but it's possible that there might be minor price increases in inner spring beds going forward.
And as a reminder, ladies and gentlemen, you asked a question. Please press star and the number one on your touched on telephone.
Our next question comes from the line of Brad Thomas with Keybanc capital markets. Your line is open.
Hi, good morning, and nice results here.
Wanted to follow up on the topic of E Commerce, Scott gave us a lot of interesting tidbits here.
On the call this morning.
I was hoping you could talk a little bit more about your learnings over the last few months and how your outlook for cloud and could soon have a vaults given the strength you've been seeing and how you think you might be able to further enhance the ecommerce offering.
Of the Tempur Pedic brand in particular, thanks, great great. Thank you, it's one of my favorite topics.
First of all the Tempur cloud has been an absolute home run works perfectly.
Hi density cities.
And it's an outstanding product.
The cocoon by Sealy, we've had it for a number of years and it has just continued to accelerate.
In the marketplace in now has become a significant bed in the box product.
In the marketplace I think I'm going to answer your question two ways, because you kind of focused on well called the direct business, but another I mean, we're working very hard with our retailers and during the shutdown, we're able to help them.
With their ecommerce business and the traditional retailer, okay that that everybody's been saying, it's going to disrupted everything I will tell you that the traditional retailers did an outstanding job during the shutdown online and we saw sales increases from the traditional retailers for.
X what they were doing.
Before the pandemic.
So a lot of the learnings.
Really happened in the traditional retailers and I think you'll see the traditional retailers now, making the proper investments in people and processes to be more competitive online and so we're we're thrilled with what we see from the traditional retailers.
From an online standpoint, and we're glad to help them at times in that process of course, we continue to work on our ability I think there's that business is going to continue to grow but I will say when the most interesting things that happened since stores have opened you would normally expect is the stores.
Open for the online business to kind of do a little bit of give back.
As customers are in store.
To date, what we're seeing both at our direct business and maybe even more importantly in our retailers business. Our third party retailer business is the online business is not coming down it's holding as they opened stores and that was a little bit surprising and it but it's an outstanding trend for.
The industry and proof to my earlier comment that this pandemic has forced the traditional retailers to get in the game.
And they have been very surprised both from a volume profitability.
And their ability to do business online as they were forced to.
And then next question is from Bob Dribble with Guggenheim. Your line is open.
Hi, good morning.
Just wondering if you could give us a little bit more color in terms of the commodity cost input costs.
How.
If you were opportunistic with some of your buys over the last few months and just sort of how your position I think you said there should be some benefit in the third quarter, but just a duration of the input cost input cost and commodity costs that your position for the remainder of the year absolutely. Good question. So as we think about commodities generally the way our contracts are low.
Nation shifts work is we have any way anywhere between 30 to 60 day lock as it relates to.
Future purchases, so with that as a as a backdrop is I would anticipate in the in the third quarter somewhere between $4 million to $5 million.
Upside on a year over year basis.
Thank you.
Our next question comes on line of William Reuter with Bank of America. Your line is open.
Hi, This is Marianne for buildings for taking my question.
We need implemented cost savings that we expect to generate 300 million of savings are you still moving forward with those given your strong results and had any of those actions taken on the floor demand really picked up.
Yeah, I can do some of that some of those actions were taken and then immediately reversed.
As I think you can probably tell from the prepared remarks.
Going into this we we thought we had a pretty tough road in front of us.
Very aggressive in getting our cost down.
Time, we got our costs down we realized groups, we need our cost to get up we need people we need advertising.
And the majority configure price and majority of those cost reductions were almost immediately reversed.
And now we are in the growth mode.
We're probably in the market hiring somewhere close to six to 700 incremental people.
To staff new operations.
So to probably at that would be a different business plan and we found ourselves in and when we did roll that out we did say that those cost were quite frankly cost we didnt want to cut into actually we're happy that we did that we've got to spend those spend the money brought people back from furlough.
And now are in active growth mode. The only additional thing I would call out in the prepared material. We did indicate that suppliers or our customers are number one priority. So in order to make sure that we get the supply where it needs to be is that we are investing from a cost standpoint to make sure that is satisfied.
And our last question comes on the line of Seth Basham with Wedbush Securities. Your line is open.
Hi, just hoping a touch a little bit more on capital allocation, obviously, I think target leverage ratio, but remind us with restrictions are as it relates to share repurchases and how you're thinking back share repurchases going forward you sure. We we have board authorizations for a large amount of share repurchase that I remember the exact number but we can look at.
Yup.
But we did put a that's kind of a safety net loan in the second quarter to put some additional liquidity into the company to 364 loan.
In that loan we agreed not to buy stock back until we paid back that long.
Quite frankly, we're probably not going to need that loan are not going to need that loan, but it's still outstanding. So before we could buy stock back we would need to pay off that 304 million.
200, 200 million 200 million dollar.
You know loan and then we would be back in the game, if we chose to buy buy stock back.
Thanks look I'm not showing any further questions I'll now turn the call back over to Scott Thompson for closing remarks. Thank you operator to the over 7500 employees around the world. Thank you for what you do everyday to make the company successful too.
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 that ends our call for today.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Okay.
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