Q3 2020 Tempur Sealy International Inc Earnings Call
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Ladies and gentlemen, please standby your conference call. It will begin momentarily once again, ladies and gentlemen, thank you for calling feature many airlines are conference call. It will begin momentarily. Thank you for your patience.
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Good day, ladies and gentlemen, thank you for standing by welcome to the Tempur Sealy third quarter 2020, <unk> earnings Conference call. At this time, all participants are not listen only mode. After the opening remarks, there will be a question and answer session.
To ask a question you will need to press Star then one on your telephone keypad.
If you require any further assistance. Please press Star then zero at this time I would like to turn the conference over to Mr. object, albeit more. Thank you ma'am. Please begin.
Thank you operator.
Good morning, everyone and thank you for participating in todays call.
Joining me in our Lexington headquarters or Scott Thompson, Chairman, President and CEO and bunker, our executive Vice President and Chief Financial Officer.
After prepared remarks, we will open the call for Q any.
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.
Third our caution that these forward looking statements, including the company's expectations regarding sales earnings net income and adjusted EBITDA and the anticipated performance of 2020 and subsequent periods involve uncertainties.
Actual results may differ due to a variety of factors that could adversely affect the company's business.
The factors that could cause actual results to differ materially from those identified include economic regulatory competitive operating and other factors discussed in the press release issued today. These factors are also discussed in the company's SEC filings included but not limited to annual reports on form 10-K.
The company's quarterly reports on form 10-Q under the heading special note regarding forward looking statements and or risk factors.
Any forward looking statement speaks only as on the date, which it is made the company undertakes no obligation to update any forward looking statement.
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 discussed in the press release as well as information regarding the methodology used in our constant currency person.
We've posted the press release on the Companys Investor website at Investor Scott 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, it's my pleasure to turn the call over to Scott.
Thank you operator.
Good morning, and thank you for joining us on our 2023rd quarter earnings call.
Our thoughts continued to be with those around the world, whose lives have been impacted by the global health crisis.
I'm proud of the team's success in providing employees and customers a safe environment, while dealing with in mitigating an array of complex issues caused by the global health crisis.
I'll begin the call with an overview of the quarter with some highlights then Bosco will review our record quarterly financial performance in more detail finally, I'll conclude with our thoughts on long term capital allocation.
The quarter was very strong.
In the third quarter Global net sales grew a record 38% year over year, despite the material impact of supply chain constraints on operations.
Our results reflect the continuation of solid broad based industry trends and our worldwide leadership position.
The third quarter sales growth.
A 38% exceeded our internal target, primarily driven by an over performance of Tempur pedic in the U.S. and a quicker than anticipated recovery in our international operations.
Sales would've been higher in the quarter, if not for the continued supply chain constraints impacting sealy and Sherwood in North America.
Today, the industry, specifically Tempur Sealy are squarely in the middle of people rethinking their priorities in life.
One impact of COVID-19 has been people increased focus on their health and wellness, while simultaneously spinning in greater amount of time at home.
We believe this focus on health wellness and quality of life is.
It's going to remain a priority for consumers in the future and that our products will continue to resonate with those seeking quality sleep as part of their overall wellness plan.
COVID-19 has caused so many disruptions in noise in our day to day lives, but sometimes it's hard to see some shifts in the market.
Let me take a step back.
The domestic bedding industry is in the healthiest position I've seen.
It is now structured for sustained profitable growth.
The days of an economical retail store expansion is behind us.
The number of retail doors had been rationalized improving average sales and profit per store.
The days of significant unfair dumping of overseas product in the market is also behind the industry.
We expect new anti dumping actions to reduce the number of mattresses coming in from overseas and benefiting domestic manufacturers.
The days of new startups focused on an economical land grabs has been mitigated and their strategies has moved to becoming profitable entities.
At the same time legacy retailers and manufacturers have become skilled in producing profitable internet sales.
These dynamics in addition to worldwide consumers focused on the category, providing attractive backdrop for our business.
It's important to remember that we entered the year and the strongest competitive position in our history.
Having made significant investments in our brands products people and manufacturing operations.
As a result, we reported record sales and earnings in the fourth quarter of 2019, and the first quarter of 2020, the two quarters prior to the pandemic.
Although we're certainly benefiting from the current market trends the lion's share of our performance is from our market position.
Investments and our long term strategies.
As we all know consumer buying habits and expectations are evolving.
For a brand to be relevant today consumers expect that the brand will have an integrated omni channel presence.
One of our long term initiatives is to optimize our powerful omni distribution platform and be where ever consumers want to shop.
Our execution on this initiative has positioned us well to meet their expectations.
We believe our dedicated network of third party retailers is key to our distribution footprint and will continue to be an area of growth going forward at the same time, we've been focused on building our own direct to consumer channel.
Tempur Pedic was the original direct to consumer bedding company and today, we continue to expand both online and with high end brick and mortar retail stores the trend towards online purchases accelerated during the pandemic and we believe the consumers will continue to lean in digitally to digital digital channels.
Our direct channel web sales grew over 100% in the quarter, while driving higher EBITDA margin in an already very profitable distribution channel.
Our robust sales trends include over 200% growth on our compressed betting offering which compares favorably with others in the industry.
We've also built out our network of high end Tempur Pedic retail stores that offer consumers a differentiated low pressure sales experience and serve as a brand halo in the market. They operate elevating our brand throughout the entire market.
We've opened six new stores in the third quarter and expect to have over 75 stores by the end of 2020.
Our most recent opening was our Manhattan flagship.
Our 71 location that is located in the Bloomberg building.
Turning to the third quarter profitability adjusted EBITDA was a record $279 million almost double that of the prior year, making this quarter the most profitable quarter in the company's history.
We realized outstanding free cash flow generation.
Resulting in a record low leverage ratio of 1.9 times adjusted EBITDA.
The company has grown trailing 12 month adjusted EBITDA for seven quarters in a row.
And achieve trailing 12 month adjusted EBITDA of 694 million this quarter, a 47% increase over prior years. This.
This performance triggered our long term aspirations incentive comp plan, which applies to approximately 150 of the company's leaders.
The aspiration aspirational plan was put in place five years ago to motivate the company's leaders to drive the business towards meaningful growth during.
During a challenging period in industry.
With that I'll turn it over to foster to walk you through the financial results in more detail.
Thank you Scott before.
Before going into the details I would like to highlight.
Items as compared to the prior year.
Adjusted gross margin improved 300 basis points to 46.9%.
Adjusted operating margin improved 540 basis points to 20.1%.
Adjusted EBITDA increased 86% to $279 million, which is a record high for any one quarter in the company's history.
And adjusted earnings per share more than doubled to $2.94.
The increase in adjusted EBITDA was primarily due to higher sales volumes and fixed cost leverage.
These benefits were somewhat offset by plant inefficiencies due to the supply chain issues previously mentioned and various bias virus related items.
As a reminder, our businesses flexible and our cost structure is highly variable as evidenced by our ability to quickly reduce cost in order to maintain profitability in the second quarter. When we were uncertain of the outlook.
Our confidence sequentially improved in the third quarter, we brought back virtually all of our expenses that we had previously cut.
Those costs, we are incurring now reflect the forward looking confidence we have about the business as we make the investments necessary to grow over the long term.
Commodities were slightly higher than expected for the third quarter as prices have increased off their record lows over the past year.
We now expect to experience headwinds going forward.
To offset these commodity headwinds, we recently announced a price increase across all of our us brands, including Sealy Sterne.
Stearns <unk> Foster and Tempur Pedic.
We expect this price increase to fully offset the commodity cost inflation. We are now participate we are now anticipating in 2021.
Turning to North America.
Net sales increased 43% in the third quarter.
On a reported basis, the wholesale channel increased 44% driven by broad based demand across existing and new distribution.
The direct channel increased 35% driven by strong web sales, partially offset by muted performance at our company owned stores.
Some of which were closed for a time during the third quarter in.
In addition, virtually all of our stores operated below capacity due to reduced hours to comply with local government directives and landlord requirements.
The 43% growth in Orca North America is exceptional given that sealy at Sherwood supplier issues restrained sales growth.
The primary driver of the supply chain bottleneck is a spring shortage, primarily and encased innerspring component.
We expect the supply constraints on these products to continue the next few quarters.
This quarter, we estimate that there are over $100 million in customer orders that were either canceled or reduced due to allocation.
Our orders received outpaced our component supply, which resulted in our US order bank at the end of the third quarter being quite a bit higher than the end of the second quarter.
In fact, we entered the fourth quarter with our largest order bank in the company's history.
North American adjusted gross profit margin improved 290 basis points to 45% as compared to the prior year.
The improvement was principally driven by fixed cost leverage and productivity on higher unit volumes brand mix and commodities.
North American adjusted operating margin was 23.9% and improvement of 630 basis points as compared to the prior year.
This improvement was primarily driven by operating expense leverage and the improvement in gross margin.
Turning to international.
Net sales increased 12% on a reported basis.
On a constant currency basis international net sales increased 10%.
We were very pleased with our international performance during the third quarter as it ended the period above our expectations.
We remain mindful that certain international markets are now experiencing new restrictions related to co bid that are expected to cause some headwinds in the fourth quarter.
As compared to the prior year, our international gross margin improved 570 basis points to 58.8%.
The improvement was primarily driven due to favorable mix fixed cost leverage and productivity on higher unit volumes and lower commodity cost.
International adjusted operating margin was 29% and improvement of 940 basis points as compared to the prior year.
This improvement was primarily driven by improved gross margin and operating expense leverage. This includes the cost actions, we took last quarter.
We have one international transaction to report this quarter and although relatively small it is very important to our long term plans for sealy internationally.
We have acquired the Sealy distribution rights and assets to manufacture market and distribute sealy and Stearns <unk> Foster branded products in the United Kingdom.
We entered into a 50 50 joint venture with the objective of developing repositioning and significantly expanding the sales of CD products in one of the largest bedding markets in Europe.
We expect the joint venture we report a small operating loss for a year or two but I expect we will look back year from now and be thrilled with the results now moving onto the balance sheet and cash flow items.
We generated a record third quarter operating cash flow of $328 million.
To put that into context, our operating cash flow for this quarter was greater than any cash flow in any previous full year.
With strong cash flow from operations and liquidity above our target as part of our capital structure and liquidity management process, we decided to redeem $200 million of the $450 million 2023 senior notes.
The transaction is expected to be complete in the fourth quarter and rule to result in annual interest savings of approximately $5 million.
We continue to monitor the overall bond market and its understanding of our improved financial strength as we consider future refinancing activities.
At the end of the third quarter consolidated debt less cash was $1.3 billion.
As Scott pointed out our leverage ratio under our credit facility is 1.9 times down significantly from 3.2 times at the end of the third quarter of 2019.
And slightly below our target range of two to three times.
We're not issuing official guidance today, but I would like to offer some thoughts on our near term expectations, excluding any material and unforeseen changes in the operating environment.
As a reminder, we were shipping large amount of four models and back stock inventory in the fourth quarter of 2019, as we expanded into new distribution, which represents a headwind to our fourth quarter compare.
Our internal target for the fourth quarter 2020 include net sales growth in the low double digits.
With adjusted EBITDA growing high teens as compared to the prior year.
Turning to the Aspirationally plan.
We exceeded the trailing four quarters adjusted EBITDA threshold of $650 million by delivering adjusted EBITDA of $694 million a growth rate of 47% compared to the same period last year.
Since the high end of the plan was triggered approximately 825000 restricted stock units were included in third quarter share count.
Resulting in a dilution of about 1.5% of shares outstanding.
This will also result in a noncash amortization charge of $50 million for the year.
Of which $45 million was incurred in the third quarter.
This does not impact EBITDA.
Based on our fourth quarter expectations. Our performance will also trigger the maximum payout of our annual variable compensation.
And stock based compensation programs.
We expect to record additional expense related to these compensation plans in the fourth quarter.
Our financial results this quarter, including amortization reflect a true up of these items in line with our improved outlook.
We would expect 2021 compensation expense to decline as targets adjust and the Aspirationally plan expires.
Lastly, I would like to flag a few items for modeling purposes.
For the full year of 2020, we currently expect DNA to be about $155 million.
Which excludes $50 million of amortization related to the aspirational plan.
We expect total capex to be between 110 and $150 million.
Which includes maintenance capex of about $770 million.
Interest expense of $75 million to $80 million.
And a tax rate between 25 and 26%.
And finally, a diluted share count of 54 million shares or approximately 216 million shares adjusted for the impact of the fourth one stock split that we announced this morning.
This is before any potential repurchase activity.
With that ill turn the call back over Scott.
Thank you BOSC are great job.
I'd like to take a moment on behalf of the board of directors in the leadership team to thank all of our outstanding employees third party retailers pliers licensees in joint venture partners for their contributions this quarter. The results reported are due to the hard work and dedication of the entire Tim Tempur Sealy team.
Team and our strategic partners all over the world.
I'm, especially proud of our dedicated global workforce, who continue to deliver exceptional results. Each day in spite of supply disruptions the pandemic.
And the general health uncertainty in their lives together.
Together, we've weathered everything thrown our way by remaining focused on our four key long term corporate initiatives.
As a reminder, our four initiatives are as follows.
First develop the highest quality bedding products in all of the markets we serve.
Second promote worldwide brands with compelling marketing.
Third optimize our powerful omni channel distribution platform and fourth drive increased EBITDA.
These long term initiatives are focused on serving all bedding consumers in the marketplace with the highest quality products and services.
In further pursuit of our first and fourth objective about 12 months ago, we began applying our skill set to the bedding OEM market in the United States. This diversification will drive incremental sales and allow us to capture manufacturing profits from bedding brands beyond our own.
Think of this as mining miners kind of strategy.
Besides its profitability on a standalone basis.
It makes our whole business stronger as we create additional synergies and level.
The workload in our plants. This strategy is consistent with our willingness to invest in new streams of business over the last few years, such as our expansion of our company owned stores with Tempur Pedic sleep.
Sleep Outfitters and soba.
Our highly successful own web page and alternate.
Retail partnerships and our expanded private label opportunities via the recent Sherwood acquisition.
We're looking forward to sharing more details, but the teams expected growth in this category of Betty market in two in early 2021.
Turning to long term capital allocation.
The board of directors and the executive management team have been working on optimizing our long term capital allocation plan for years.
Our strategy to this point has been focused on four areas.
Investing in operations.
Repurchasing shares.
Repaying debt taken on in the Sealy acquisition.
And making small tuck in acquisitions.
Over the last five years, we've allocated approximately 1.5 billion of capital pursuant to our strategy, including about 400 million on capital projects, including expanding manufacturing in standing at DTC retail stores $75 million on strategic tuck in.
Issuance $860 million in the repurchase of 13.2 million shares of common stock at an average price of $65 a share or about 20% of the company.
And 100 million reduction in net debt, which combined with our robust adjusted EBITDA growth resulted in a leverage ratio, reaching a record low.
We've consulted with financial institutions studied valuation data stress tested our cash flows under different market conditions and carefully considered alternatives to develop our new capital allocation plan.
I'm pleased to share the following details of our go forward plan, which we feel is balanced and will over time drive further shareholder value.
First we will continue to spend approximately 7 million 70 million annually on maintenance Capex and will consider additional capital projects based on expected returns.
Investing in people product and processes will always be our number one priority.
Second we plan to initiate a quarterly cash dividend beginning early 2021.
As we believe it's appropriate to return a portion of our cash flow to shareholders in the form of a reliable dividend.
We are currently targeting a payout.
Equal to approximately 15% of net income and we expect to provide additional details on the dividend amount and exact timing in early 2021.
Third we will resume our share repurchase program targeting annual repurchases of at least 3% for shares outstanding.
The board has authorized an increase of about $170 million to our share repurchase program, bringing the total share repurchase authorization to $300 million.
Finally, we will evaluate acquisition opportunities with a focus on strategic tuck in acquisitions similar to those we've completed the last few years.
In addition to our new capital allocation program.
We also are announcing a four for one stock split which will be effective as of November 24th 2020, as we adjust the price of the stock to increase the diversity of our shareholder base.
Turning to ESG.
It is our belief that as a good corporate citizen, we must serve all of our stakeholders, including our people our community and our environment and we're proud of our initiatives to date and we plan to continue focusing on this area.
Beginning this year, we will source, 100% renewable energy for our us and European manufacturing operations.
We will now utilize energy sources from wind farms across the us to power our domestic facilities.
Additionally, we have committed to achieve zero landfill waste for us and European manufacturing operations by the end of 2022.
We also expect the installation of solar panel technology at our largest manufacturing facility in Albuquerque, New Mexico to be completed in the first half of 2021.
The solar panels will generate an incredible amount of clean energy in fact.
The amount of solar energy they are capable of producing is sufficient to power all of the plants assemblies line.
Turning to our social initiatives.
Our operating performance has allowed us to increase our workforce by about 20% or approximately 1500 employees. Since this time last year.
And the increase of our stock price has benefited our Tempur Sealy foundation by driving its asset up over to $4 million.
As a reminder, the Tempur Sealy Foundation supports charities assisting children and their development. The foundation also benefited this quarter from over 500000 in cash contributions from employees and the company's payments funded by our directors waiver of their board fees.
Our progress on sustainability initiatives job creation community service and maximizing shareholder returns is our game plan going forward.
The combination of strong operations healthy tailwind of consumer eager to spend on their homes and a balanced and disciplined capital allocation strategy has positioned tempur sealy to meet these objectives of our stakeholders for years to come.
I said this five years ago and I believe it's more today execution is where most value creation takes place.
Lastly.
A comment or two about 2021.
Clearly 2020 is going to go down as one of the strangest years in most of our lives.
Until we get this COVID-19 issue behind us it is difficult to give guidance. However, we are committed to providing you with timely updates and additional comments on the general trajectory of the business as they become available.
Robust sales trends that we've experienced recently have exceeded our expectations, which has resulted in significant earnings.
Okay, and maybe I'll just ask a question around the the price increases that you highlighted just been some chatter in the industry that the the price increases by you and and even others are a bit bigger than normal I was wondering if you could comment on that and is there potential that some of the increase is exceeding that of the commodity cost inflation.
Oh, Thank you for the kind words, you know when you look at the price increase obviously most of it is commodity base, but I'm sure. If we bench market against other seeley and temporal probably see the temper sealey price increases, it's probably the largest price increase in.
In the company's history in total.
Whether or not it is more than covers commodities hard to tell because obviously commodities as an estimate I think what I would call out is one it demonstrates the industry.
Manufacturing is still has pricing power.
And we are the business model is to pass on commodity increases the other I think call out it might be it might be a little bit different. This price increase is the normal track is we incur the commodities expenses and have a negative in our operations for a quarter or two.
Before it gets passed on through to retail on the customer.
This particular situation is the price increase is coming in with what possibly take one quarter lag. So it's it's considerably faster into the marketplace.
Place.
Then previous price increases and now I guess, the other thing I would point out is it's heavily loaded towards entry level pricing.
Which will as you probably know the lower lower value bedding has lower margins and it should be healthier for the entire industry.
Thank you. Our next question or comment comes from the line of Gcu's from true a securities. Your line is open.
My Congratulations Wellington outstanding numbers on the fourth quarter, there's clearly going to be a gap year between the price increase in the raw material inflation can you give us any sort of feel or how much that's going to impact.
The EBITDA on the fourth quarter.
Sure a great question.
If you think about it out a year over year basis is we do expect some headwinds from commodity a way to think about it would be in and around $5 million on a year over year, perhaps slightly ahead of that.
Thank you. Our next question or comment comes from the line of Curtis Negro from Bank of America. Your line is open.
Mister <unk> you may be down mute your phone.
Guys.
Good morning, How're you doing good.
Good morning.
So just a quick one on I guess, it's not officially guidance, but with the comments.
For high teams EIT ago gross relative to.
Low double digits sales growth.
I dunno, it just looks a little lights I'm, assuming it's pretty conservative just considering.
Terrific results you guys are putting up the leverage the product mix of all that sort of stuff. So maybe you could contextualize it a little bit.
Well, let me talk about in general and then I'll I'll, let foster probably really answer your question is I Dodge it.
When we look around the World ages doing very well.
Asian market is dealt with health crisis, very well business feels normal growing double digits.
Very impressive operations from an Asian perspective, if you go over into Europe, Northern Europe orders look good.
And then southern Europe has been a little choppy and recently got some information on some closure so.
Baked all that in too.
You know what I'll call at the top guys, who caught our targets.
And then North America has been certainly solid.
The reason, we call it targets or whatever it is with the virus around you're just not sure what's going to hit your next.
But in general we feel very good about.
The fourth quarter and the trends going into the fourth quarter and as I think by asking you called out in your your area, we went into the quarter with the largest backlog.
In the company's history. So we go into the fourth quarter very strong on the other side tough compare are tougher compare I would say because we were loading in new distribution and so got a little bit of got a little tougher compare because we did have a load in from last year basket I'm missing anything I'm not much to say incremental of that the only thing I.
Would I would call out as we do remain capacity constrained from a springs perspective, and we had that contemplated and how we're thinking about the fourth quarter and that's something we're not in control, which always makes it difficult to do a forecast.
Thank you. Our next question or comment comes from the line of Bobby Griffin from Raymond James Your line is open.
Thanks for taking my questions and congrats on another date quarter. Thank you quickly I just I just want to see Scott I understand you don't want to give detailed by account, but can you help with maybe put in context of 43% North America growth on an organic basis.
And then including your new distribution wins, and maybe help separate that out where we can get a good field, maybe what the industry was doing in the third quarter.
I can I can work around that a little bit obviously, we're benefiting from some large distribution gains from last year.
But I got to tell you we have growth, obviously very strong growth online, which we called out specifically with our compressed bedding growing over 200%.
Our online business over 100%.
A little bit of of headwind from our stores, because we were very conservative on the reopening of.
The stores.
And certainly the industry group X X any distribution gains.
We saw good growth.
In the the non new distribution gains.
So I don't know if you if we look at our numbers. Obviously, we study the competitors numbers, obviously, we get some information from the component manufacturers.
I Dunno BASCO would probably haven't aligned on a number but I'm going to say.
Industry up 10.
Maybe 10, 12% maybe something in that area. That's obviously in precise gifts.
And we need some more public companies to report.
And I need a little more information on the imports, which I expect will start coming down very rapidly, but up in the third quarter I'm sure where there was a lot of imports.
Pushed ahead in front of the care of but yeah, that'd be a guess Bobby if that helps.
That's helpful. And then you would think you outperformed that 10 to 12 guests from Ah without X new distribution.
I think if you look at the whole industry.
It kind of depends on how you cut the industry clearly the online segment group, probably faster than the brick and mortar.
And we have probably more business in brick and mortar then the online. So it's been how you cut the industry. Yes, we grew faster that's why we put up the call that 200% number.
From a compressed betting market cause I think that market grew very rapidly. So I'm expecting people, who have concentrations and that that smaller segment might have higher growth rates, but when you look at total.
I don't I don't think there's any question that we out grew the industry in total.
Okay. Thank you Scott Thank you bye.
Thank you. Our next question or comment comes from the line over to market sorry from UBS. Your line is open.
How confident are you that sales quotes can be solid as your lap these big numbers, especially in the back half of next year. If I asked this question it another way.
Think the current strength is putting forward demand from future periods, which are simply make it harder for you to crochet and some meaningful yes, you've got these numbers. Thank you okay.
Okay.
Great question.
I said solid because we really feel strongly about it if I used the words.
Feel solid it means we have a high degree of confidence just just in general the only caveat.
Kind of put around that is.
We're assuming there is not a global recession, okay, and we're assuming Paul.
Steve trend in health crisis.
If you take those two off the table.
We would I would tell you that we feel very confident that we'll be able to comp.
The current performance and it doesn't feel to us that we're pulling forward demand and the best market I guess I can point to is the China market.
Markets reopened we're not it just doesn't feel like we pull forward demand. It just it just clicks and and comes.
It comes on so it may be housing formations.
It may be just a permanent or semi permanent change in disposable income and the share the wallet that we're going to get.
But in a prior life I was in the car business, where we did pull forward demand occasionally because of high incentives from the manufacturer or something.
And you get this spike when he comes off this that is not what we're seeing in any of the markets around the world.
I'm on the typical.
Yeah.
You may want to meet your phone others on the car commerce for a follow up call and they want to meet your call I'm not sure who is on the phone, but we might learn something we're not supposed to and so brilliant 621.
Hello.
Okay anyway, that's the answer that question operator or are we still on.
Yes, Sir next question or comment comes from the line of Brad Thomas for Keybanc I'm working on my speech.
Go ahead. Thank you. Thank you.
Hi, Thanks for taking the question congrats on that.
Execution momentum here.
Thank you and to follow up on that question about.
About thinking about 2021.
Obviously.
There's easy comparisons to see some quarter, she will sales perspective, and tougher in other quarters and I was hoping we could just step back in and I'd be curious Scott your thoughts on elements of difficulty in comparison challenges and comparisons and puts and takes US we fine tune our models for 2021. Thanks for look I mean, we've got.
Just kind of let's talk a little bit some of the growth vectors I mean, clearly we expect the online in total next year to grow.
Seeing lots of success in our compressed product.
Store openings are going to continue and they're going to want to be additive we called out.
<unk> initiative.
That is new and that's a new opportunity that I expect talk about more in the first quarter, but he is clearly incremental.
Are stepping into the private label business through Sherwood, we're expecting see strong growth.
In the Sherwood.
Area, if you go by quarter clearly.
The first quarter, we called out on that conference call that we were slightly impacted by the virus.
So maybe that's a reasonable compare their the second quarter is going to be an easy compare because that was just a train wreck everywhere all over the world.
In the third quarter this will be a hard compare.
But I think we can probably carpet and so when we look at it in total and that's why I called it out and our session.
It looks pretty good the other thing that we mentioned in the prepared remarks that you can't really see but hopefully this will help you a little bit.
Think about how our business went this year.
We we close factor got clothes, and scarily furlough people, we brought him back pretty sloppy quite frankly.
Then we had excess demand so that created enormous amount of overtime, which is very expensive for us that we normally don't run at that level.
Then we had this component issue, where quite frankly, we hired up I mean as I mentioned.
And we're up 20% in our payroll we hired up people to build more beds expecting we were going to get components. After we hired them.
We didn't get the components, so our labor factor in the third quarter relatively sloppy.
And put all that together.
There might be a little bit of extra sales in the third quarter, but there are a whole lot of covid related cost and component disruption cost underneath so we didn't get the leverage in the full profitability that we would normally get so so when I say when I put all together it looks like barring.
In a recession.
Or a unusually difficult health crisis.
That were expecting to get a little bit better.
It shouldn't be a problem too gross sales and EBITDA next year.
Thank you. Our next question my comment comes from the line of Lauren Champagne from Luke Capital. Your line is open.
Springs.
Firstly, what's the why behind that component shortage is it impacting your competitors as much as it's impacting.
TP X and then and then not too.
Distant past at Tpm's made it down springs is that something that you might need to look at again, just given the issues that you are clearly having with the supplier.
Laura is good talking to you. So the first part of that I'll take it and then turn it over to Scott as it relates to the challenges that we have on Springs number. One is yes that is a industry wide issue and a primary driver of that is there is material that in cases, a coil called in in case coil or becomes and in case.
<unk> and that product the input that material is being diverted.
To pull together PPE. Therefore, there is a shortage.
That item, therefore, putting constraints on not only us but across the industry.
And as we specifically called out is not.
Not only is when we expected to impact and the fourth is that we would expect that into 2021, perhaps at least the first half.
And then you asked about option Optionality going forward I'll look we've got we've got a great relationship with our primary spring manufacture.
Normally.
Outstanding from a quality standpoint and delivery standpoint.
They have run into some issues not caused by by their operations, but caused by the global pandemic.
We're exploring all options and looking at our flexibility and making sure that in the future that we have.
All alternatives.
In case, we have issues going forward, but will work closely with our with our current partner.
Thank you. Our next question or comment comes from the line of Carla Casella from J P. Morgan Your line is open.
Hi, Good morning. This is Darren Clarke on for Carla.
We just wanted to know how you think about Ah more normalized love Red and what's the right level and also if you have any interest.
And getting to an <unk> rating level.
Yeah.
Go back through the history of the company last few years, we've brought down are targeted leverage and we've kind of targeted two to three turns.
Today as I think we mentioned, we're running a little bit low that right now.
I think we'll continue to low to run a little bit below are targeted range as long as we've got this pandemic, we're working through and will continue to kind of study the proper proper leverage I don't see is wanting to be investment grade.
I don't think that the.
The cost.
Is probably worth getting all the way to investment grade, but I would like to position the company what I'll call conservatively financed so that we are in a position to take.
Take whatever opportunities.
Happen to come to market.
So the way to think about it is we've got to target a range of two to three times.
But we're probably going to run at the low end or a little bit lower than that for the foreseeable future, but no goal to be investment grade.
Thank you I.
Our next question or comment comes from the line or where you are reuter from Bank of America. Your line is open.
Hi, just a little bit of a follow up on that you mentioned, you're keeping an eye on the bond market you redeemed a component or a piece of the 20 threes I guess what are you thinking about for the remainder of those and I guess since you are running below your target leverage range. It would stand to reason that all free cash flow.
Will be used towards either.
One off tuck in acquisitions or shareholder from activities is that fair.
Latin that question, let me kind of unpack it a little bit.
Yeah No no.
It's a good question I, just Wanna make sure I responded to it.
Look first first of all we have redeemed a little bit of the bonds think about that is just a liability management and cost of capital issue and to the extent, we end up with extra liquidity.
In the balance sheet, then we're going to pay off the highest cost that.
Which at this time ended up being those bonds.
We hope with our continued strong financial performance and maybe a little more favorable leverage profile.
That our opportunity for new bonds will be repriced.
To a little more favorable level then we're we're currently sitting from a rating agency standpoint.
When it comes to free cash flow look at first goes to operations and whatever operations needs operations get.
Have a high return on invested capital project, we will funded because operation.
The company.
Then we're going to we're going to pay our dividend.
That we've talked about establishing.
And said what are called the lower end of payout ranges.
Then money goes to.
Tucking in acquisitions and opportunities like that to the extent they come up don't feel like we have to do any but to the extent they come up would get a call on capital.
Then you start talking about how much stock buyback. We've we've told the market think 3% or cash flows on a projection certainly would tell you there's extra cash flow there.
And that would be kind of a balancing act.
Between stock buyback.
I don't know if we would actually pay any more that off but we will continue to look at that based on what's going on in the world and the uncertainty in the world.
[noise]. Thank you our next question or comment comes from the line.
Your line is open.
Thanks, a lot and good morning, and congrats on an outstanding clear on routinely aspirational comp plan.
Mike.
<unk> has two parts first as it relates to the fourth quarter EBIT growth guidance, just confirming that includes additional incentive compensation from your hitting your annual targets and then second as we think about growth in the fourth quarter. Although you don't usually talk about individual customers that you have talked about having some perspective on my relationship with Matt.
Just turn at this point and if you could give us some color on how that expanding that'd be great are you gaining additional floor space and share within the store and how do you expect that relationships develop all the time.
Sure I'll take the first part of that yes, as we think about the fourth quarter and the guide or the thinking about high teen yes that does include the incremental compensation.
And then when we talk about individual retailers I'm going to I'm going to answer your question, but pivot into kind of a bigger question, which is and how are we doing with our large customers mattress firms certainly in an important customer, but we've got.
Quite a few large customers that are very important and quite frankly the trend line is the same.
I see the larger customers generally performing better.
Then the industry I see the larger customers, becoming very adapt at internet sales.
And that's positive for us and them.
And I see our relationship with all the larger customers positive.
And.
I guess I dunno, while back of Europe Sogo, we we think about our customers are positioning.
Not and number of beds that are on the floor or anything, but but total velocity because we want those beds to be productive for those customers as opposed to just trying to.
Fill up their store with our product I think thats healthier for us and it's healthier for the retailer.
And I think clearly from our numbers unaware 47% in the us or some 43 whatever it is.
Productivity of our skews and our large customers have been outstanding and I would expect them to continue to be outstanding.
Thank you.
It was our question and answer session and I would like to turn the conference back over to Mister Scott for any closing comments.
Thank you.
To the over 8000 employees around the world. Thank you for what you do every day to make our company successful to a retail partners. Thank you for your outstanding representation of our brands to our shareholders and lenders. Thank you for your confidence and temper Sealey's leadership team and its board of directors operator that in.
Our call today.
Ladies and gentlemen, thank you for participating in today's conference Fish concludes the program you may now disconnect everyone have a wonderful day.
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