Q4 2020 Tempur Sealy International Inc Earnings Call
Ladies and gentlemen, and today's conference is scheduled to begin shortly please continue and standby and thank you for your patience.
[music].
Ladies and gentlemen, and thank you for standing by and welcome to the Tempur Sealy fourth quarter 2020 earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During this session you will need to press star one on your telephone.
Please be advised for today's conference is being recorded if you require any further assistance. Please press star zero and.
I would now like to hand, the conference over to your Speaker operating more Investor Relations. Thank you. Please go ahead ma'am.
Thank you operator.
Good morning, everyone and thank you for participating in today's call.
Joining me and our headquarters are Scott Thompson, Chairman, President and CEO and box Corral Executive Vice President and Chief Financial Officer.
After prepared remarks, we will open the call for Q&A.
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 company's expectations regarding sales earnings net income and adjusted EBITDA and anticipated performance for 'twenty and 'twenty, one 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 and the Companys SEC filings, including but not limited to annual reports on form 10-K and.
The Companys quarterly reports on form 10-Q under the headings special note regarding forward looking statements and Orbis backers.
Any forward looking statements speak only as of the date on which it is made the company undertakes no obligation to update any forward looking statements. This mornings commentary.
Commentary will include non-GAAP financial information and the press release contains a reconciliation of this non-GAAP financial information for the most directly comparable GAAP information, except as otherwise discussed and the press release as well as information regarding methodology used in our constant currency presentations.
We've posted a press release on the company's Investor website at Investor Day at Tempur Sealy Dot Com and have also filed it with the SEC 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 Robert.
Good morning, and thank you for joining us on our 2024th quarter full year earnings call for <unk>.
<unk> continued to be with those around the world, whose lives have been impacted by the global health crisis.
And I see since here sincere. Thank you to our employees, who helped us manage successfully through this unprecedented time.
While also managing the challenges for the pandemic on themselves and their family.
I'm proud of the team's commitment and their efforts to ensure the safety of our employees and the cash.
Despite the challenging challenging operating environment.
I will begin with a few highlights of our financial performance.
And by an update on our competitive position, which is which we believe is strongest and the company's history.
And then we will provide an overview of our progress on ESG initiatives. Oscar will then review our Smith, our record financial performance and more detail and.
And discuss our 2021 financial guidance and finally, I'll conclude with some thoughts on <unk>.
And why we are very optimistic about the future.
And the fourth quarter, our global sales grew 21% year over year.
Sales growth.
And by broad based demand across geographies and channels.
Retail partners continue to win with our products and our online sales stood out once again and the U S with web sales doubling compared to prior year.
This strong sales performance combined with favorable companywide margins resulted in record fourth quarter, adjusted EBITDA and $240 million and.
And increase of 57%.
And adjusted EPS of <unk> 67 cents, an increase of 97%.
GAAP EPS increased over 200% for.
The prior year.
The other financial results. This quarter were strong we continue to face supply chain issues and consumer demand exceeded manufacturing capacity. These supply chain issues, primarily impacted our sealy and Sherwood North American operations and prevented our financial results for being even stronger.
And we're expecting these constraints to mitigate significantly by early second quarter.
For the full year global sales grew 18% to $3 7 billion.
Our adjusted EBITDA for the credit facility agreement grew 54% to a record 780 million.
And our adjusted EPS grew 94% to $1 90 for GAAP EPS grew 91% to $1 64.
Our growth has been driven by two factors.
The industry and our competitive position within the industry.
Solid underwriting underlying industry fundamentals and our strong product offering enabled reinvestment and advertising creative flywheel effect that benefits all players.
Our industry is also benefiting from consumers increased focus on home related spending which has accelerated as a result of the pandemic.
I would point out however that our North America sales grew over 20% and the two quarters prior to the pandemic.
Well and well above the industry level during that period.
This highlights that while we have benefited from the uptick and consumer spending along with the rest of the industry. The majority of our growth where current growth is coming from market share gains driven by our strong competitive position within the industry.
The investments, we've made and people processes for the past five years have resulted in our market leading position I'd like to highlight five key areas.
Product superiority brand strength and manufacturing efficiency and quality.
Omni channel distribution platform and substantial cash flow and fortress balance sheet.
And our business it always starts and ends with exceptional product when.
And when I joined the company in 2015, Tempur was known and it.
For its innovative products won't Sealy and Stearns <unk> Foster brands recognized for the rich heritage over the past five years, we've worked to merge the strength of both of these great brands to make each of them stronger.
Tempur, we introduced an entirely new formulation for the Tempur.
Material and.
Connection with the largest most successful tempur pedic product rollout and the company's history and for.
And 2020 for the second year in a row Tempur Pedic ranked number one and the U S. Mattress satisfaction report by J D power.
We are honored to have earned this distinction for the third time and for years Tempur Pedic changed the mattress industry several decades ago with the introduction of our revolutionary sleep technology, and we expect to continue to be a leading innovator and mattress industry and the future.
Tempur has successfully addressed the two biggest reported issues associated with poor sleep sleeping heart and snoring.
Over the years, we've addressed the first difficulty of sleeping heart with our proprietary cooling technology.
Good day to address the second issue Snoring, we're rolling out the only sleep system on the market could feature snore detection and response with the Ergo Smart base sleep tracker Smart base has state of the art sensors that monitor the consumer's heart rate breathing room night sleep cycle and since.
Personalized sleep analytics and coaching to the consumer smartphone he asleep trap tracker app.
Retailers are telling us for this product is a game changer driving a S P and adjustable base attachment rate.
I should also point out that the new smart base provides us valuable and.
And use your highlight about their sleep behavior is proprietary data will bring us closer to the customer and drive further product development and insights.
And our international.
National business, we are developing a new line of Tempur mattresses with both in consumer and third party retailers and mind.
These new models are expected to closely mirror innovation that we've met with met with success here and the U S. While also substantially increasing the addressable market for the Tempur products internationally.
The team has made significant progress and we expect to begin targeting and this expanded addressable market in 2022.
For the last five years, we've introduced innovative new products from Sealy included and the award winning Sealy hybrid which is allowed to sealy to reclaim its position as the number one and bedding brand and North America.
This year and North America, we are refreshing, our sealy portfolio with the launch of new models of the past repeated plus cost repeated and central product lines. These models offer superior support and features Sealy chill and surface Guard technologies, making this product the ideal choice for the consumer.
<unk> for high quality sleep.
To make the new product rollout as seamless as possible. We're launching this refreshed and two phases over the course of 2021.
We've already started shipping the essentials and the posture PD and expect to complete that rollout and the second quarter. We will then start shipping the high margin Sealy posture, PD plus line and the back half of the year.
We've received great feedback from retailers and consumers on the full line we expect this launch.
To further our gains and market share and extend extend sealy lead as the number one mattress brand.
America.
The second area that I'd like to highlight is our brand strength Tempur Pedic was the original direct to consumer mattress company with a marketing model focused heavily on TV advertising. However over time, the ways in which consumers engage the media has changed.
Over the past few years, we've updated our advertising model to focus more on digital and social media channels that allow us to reach the modern customer.
This improved media mix combined with compelling messaging has proven to be a powerful combination to ensure that our industry, leading brands remain top of mind for the consumer.
Over the past year, we've seen significant increase and consumer consideration and purchase intent.
In fact, and according to recent consumer survey Tempur Pedic boasts the highest intent to purchase score since we started tracking it in 2017.
Our global 2021 marketing plan is to aggressively support our innovative bedding products through investing significant marketing dollars to promote our worldwide brands.
Expect to spin a record amount of marketing dollars and 2021.
And for Tempur, Pedic, Sealy and Stearns <unk> Foster.
Our record investment across TV and digital media ensures our products are always top of mind for consumers wherever they are on their purchase journey.
The third area that I'd like to highlight is manufacturing efficiency and quality.
And a multiyear journey to optimize manufacturing inefficiency and.
Across art, Sealy and Tempur plants.
We've made significant investments and our people facilities and supporting structure as a result, our operations have a solid foundation and making us the preferred provider of premium differentiate bedding products.
Fourth our powerful omni channel distribution platform.
As we all know consumers buying habits and expectations have evolved.
For a brand to be relevant today consumers expect the brand will have an integrated omni channel presence today, we had a more balanced distribution footprints in North America, and we did just a few years ago led by a diversified group of strong retail partners and a rapidly growing direct business.
On the third party retail front, we continued to build momentum as we selectively add to our footprint and in fact, we recently added new distribution to several established retail chains.
At the same time, we've been focused on building our own direct to consumer channel, both online and with brick and mortar retail stores.
The development of our E Commerce business has been particularly important.
[noise] tumors have grown more comfortable shopping for bedding online.
The trend towards online purchases and the accelerated during the pandemic and we believe that consumers will continue to lean in to the digital channel.
In fact, 20% and where sales occur online either through our own website or through third party retailer website. This percentage has increased tenfold over the past five years.
We've also built out and network of Tempur Pedic branded retail stores that offer consumers, a differentiated high and low pressure sales experience.
These stores serve as a halo elevating our brand throughout the entire local market and 2020, we opened 21, new stores and currently operate a total of 78 locations in the U S.
Our Manhattan store is performing well and is on track to become our highest grossing grossing sales store.
Over the last five years, our direct to consumer business has grown from 3% to 13% and where our total sales.
And in addition to representing a meaningful component sales our direct business is also quite profitable and in fact, we believe that we have one of the fastest growing most profitable direct to consumer bedding businesses and the world.
Finally, like highlight our substantial cash flow and fortress balance sheet over the past year, our leverage ratio and has declined from two nine times to one seven times.
This is one of the lowest and debt levels and our industry and <unk>.
And we and our retail partners view it as a competitive advantage.
The improvement and our leverage ratio has been due to increased earnings power combined with debt pay down.
Last quarter, we announced and update to our long term capital allocation plan, which we remain committed to.
Our updated plan includes investments and business.
Share repurchase capacity for strategic accretive acquisitions and for the first time since 2008, the quarterly cash dividend.
As we set our 2021 capital allocation strategy, we are targeting to repurchase 6% of our shares outstanding would increase the allocation to share repurchase from 3% to 6%. This year, because we believe our stock represents the most compelling investment opportunity and the <unk>.
Current environment.
This does not change our long term plan and demonstrates our flexibility and our capital allocation strategy.
Before turning the call over to Bosker I'd like to highlight our ESG initiatives, which reflect our commitment to our communities and our environment and the past year. We've made the following progress first we established the goal of achieving carbon neutrality for our global wholly owned operations by 2040.
And achieved a 28% reduction and greenhouse gas emissions for you.
<unk> produced at our wholly owned manufacturing and logistic operations compared to prior year.
Third and improve the percentage of waste recycled and North America of our wholly owned manufacturing operations to 91% and 2020 compared to 85% to 2019 force established ESG metrics for executive leadership compensation.
And in 2021.
Fifth we've contributed over $100 million and products stock and cash to charity organizations over the last decade, and finally, we expanded our global employee head count by 21% and 2020 for sure.
I'd also point out last month, we published our 2021 corporate social values report, which recaps. The 2020 progress in more detail and you can find that on our webpage with that I'll turn it over to basket and walk you through the financial results in more detail.
Thank you Scott.
Before going into the details of the quarter I would like to call out a few financial highlights.
As compared to the prior year gross margin improved 160 basis points to 45, 9%.
Adjusted operating margin improved 470 basis points to 18, 9%.
Adjusted EBITDA increased 57% to $240 million.
And adjusted earnings per share for the quarter was <unk> 67, and an increase of 97%.
Before we discuss the results by segment I would like to briefly touch on the change are importing that better aligns with how we manage our global business.
Historically, we have reported Mexico, and the international segment and during the fourth quarter. We began to include it in our North American results.
For ease of comparison, we have recast our segment financials to reflect this change and made it available on our Investor Relations website.
Turning to North American results.
North American sales increased 21% and the fourth quarter.
On a reported basis, the north American wholesale channel and increased 19% and the direct channel increased 30%.
The stronger than expected North American sales were broad based across channels and retail partners.
North American gross profit margin improved 150 basis points to 43, 4% as compared to the prior year.
This was primarily driven by favorable for model cost and fixed cost leverage on higher unit volume.
These improvements were partially offset by brand mix for new Sherwood OEM sales, which are a slight headwind to gross margin rate.
North American adjusted operating margin improved 450 basis points to 29% as compared to the prior year.
The improvement was driven by operating expense leverage as well as the improvement and its gross margin. This.
This was partially offset by incremental advertising investments.
Turning to international.
Sales increased a robust 26% on a reported basis.
The largest quarterly growth rate for the international segment and the Companys history.
On a constant currency basis international sales increased 18% with the direct and wholesale channels experiencing similar growth rates.
The stronger than expected international sales were broad based across Geos and channels.
As compared to the prior year, our international gross margin improved 150 basis points to 59, 9% driven by fixed cost leverage as well as operational efficiency gains.
This was partially offset by increased commodity costs.
International operating margin improved 120 basis points to 29, 8%.
Driven by operating expense leverage which include cost reduction and.
And improved gross margin performance.
Turning to the company's global performance.
Adjusted operating margin was $200 million and adjusted EBITDA was a record $240 million up 57% from last year.
The increase and adjusted EBITDA was primarily due to higher sales volume.
Lower for model and launch costs and.
And expense leverage.
These benefits were somewhat offset by higher advertising investment.
Regarding commodities.
Input costs for a slight headwind and the fourth quarter, but largely in line with our expectations.
We have a history of taking price on products to offset industry inflation.
Most recently, we have implemented pricing actions during the fourth quarter that are fully mitigated the anticipated input cost headwinds at that time.
However, as we've entered 2021 and.
Input costs have continued to increase beyond our initial expectations.
We continue to monitor these costs and expect to take additional pricing actions as needed.
The adjusted tax rate was 22%.
Driven by a favorable change in tax legislation that is not expected to occur in 'twenty one.
The result was and adjusted EPS for the quarter of 67.
Up 97%.
Now moving to the balance sheet and cash flow items.
We generated record operating cash flow of $157 million and the fourth quarter and record full year cash operating cash flow of $655 million.
The cash cycle was favorable by 10 days and the fourth quarter versus 2019.
This was principally driven by improved days payable and receivables.
At the end of the fourth quarter net debt was $1 $4 billion.
Our leverage ratio per our credit facility is one seven times down more than 40% from the same periods and prior year.
Over the last two quarters, we redeemed our 2023 senior notes in full.
And last and over the last few weeks, we have upsized, our revolver by $300 million.
We expect this will lower our cost of debt, resulting in an annual interest savings of approximately $18 million pre tax.
We continue to optimize our debt structure against our long term capital allocation plan.
You might find it interesting that and the current market, we could issue bonds and an effective rate below 4%.
Our 2026 bonds are not callable until later this year, but we expect further interest savings and cost of debt has fallen.
The company also repurchased $130 million of shares and the fourth quarter.
And over $330 million of shares for the full year 2020.
The board has also authorized an increase of our share repurchase program.
Bringing the total available.
Under the repurchase authorization to $400 million.
Yes.
Looking ahead, we have several growth initiatives, including expanding our share of the North American OEM bedding market.
We estimate that the OEM market is about 20% of the total U S market.
We are using and we're using our manufacturing expertise to drive sales.
Diversify our sales training and capture manufacturing profit and embedding bands beyond our own.
We began leaning into this new sales stream last year and sold about $150 million of OEM products and 2020.
Looking forward, we believe that and five years the run rate of this business could exceed $600 million of annual sales.
Yeah.
And in order to support our OEM business and other growth initiatives, we plan to invest an incremental $150 million of Capex by 2023.
We expect this will increase our U S port capacity for Tempur material.
Specialty and base volume by approximately 50%.
And 2021, we expect total capex to be between 125 and $140 million.
Now turning to our 2021 guidance.
We pulled guidance in early 2020, as we ran into a very uncertain world due to COVID-19.
Based on our ability and manage the business through the current conditions and the resiliency of our model we are comfortable with re establishing formal guidance.
For the full year 2021, we currently expect sales growth between 15 and 20%.
With EPS to be between $2 30, and $2 50.
This implies EBITDA what would work.
Will be between $875 million and $925 million.
We expect to achieve this from double digit sales growth driven primarily in North America.
Stable gross margins.
And share repurchase activity.
Our expectations consider gross margins improvements within our brands.
Brand mix headwinds as Sealy and OEM operational constraints begin to ease and the second quarter.
Investments and new innovative products.
And record advertising spend.
Lastly, I would like to flag a few items for modeling purposes.
For the for year 2021, we currently expect D&A to be between 160 and $180 million.
Interest expense to be between 55 and $60 million.
The tax rate to be about 26%.
And the full year average diluted share count to be 207 million shares.
With that I'll turn the call back over to Scott.
Thank you Bob for a great job.
And we open up for Q&A I want to share a few thoughts on why our team is confident that we will continue to deliver shareholder value over the long term.
First we fundamentally believe the bedding market and a stable growing industry with high return on invested capital and the business with non profit.
We believe the importance of mattresses and consumers' lives and will continue to accelerate and.
Tumors connect overall health and wellness with a good night's sleep.
And as the population ages and more consumers make this connection we believe they will continue to prioritize their mattress purchases.
Third we have a track record and delivering differentiated products from the original tempur material over 30 years ago to now the Ergo Smart base sleep tracker.
These products have all strengthened our competitive position and all stemmed from our commitment to being a consumer centric innovator for them.
Total global addressable fleet market.
Sure.
We expect to further strengthen our dominant competitive position.
For consumers and retail partners, we would.
The preferred provider of premium differentiated bedding products, while our powerful omni channel strategy allows us to adapt to consumers behavior.
Lastly, we believe that our robust cash flow and.
Fortified battled balance sheet positioned us to manage through difficult operating environments and provide the flexibility to take advantages of industry and market opportunities.
Before we open up for Q&A I wanted to briefly touch on our latest sales trends.
And the U S sales trends have accelerated from the fourth quarter.
The Asia Pacific market sales performance has also accelerated.
All our European markets are dealing with significant restrictions on retail activity related to COVID-19.
And total international sales have decelerated on a worldwide basis. We currently expect for first quarter sales growth to approximate the fourth quarter growth rate of 20%.
With that operator.
Please open the call up for questions.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone.
And I'll have Joe your question press the pound key.
Please limit yourself to one question you may re queue for any additional questions. Please standby, while we compile the Q&A roster.
Our first question comes from Curtis Nagle with Bank of America. Your line is open.
Awesome, Thanks, very much for that.
Question so.
And maybe as much as you can.
Brake parts.
Some of the bigger pieces of the revenue guidance really strong.
Up to 20%.
How much is that is capacity, adding how much of that share gains pricing mix and.
Kind of guidelines in terms of how to think about that would be really helpful.
Yes first of all and thank you for your question first of all I'd say, yes, we expect all of that.
Certainly we've had we continue to get share gains and in fact, if you look over the past 18 months.
I'm sure that our share gain has been the largest share gain and betting history, and we continue to see and <unk>.
Not just better velocity of our products and our current retailers, but we continued to win.
New distribution and the U S.
We certainly have seen good acceleration as we talked about on the prepared remarks.
And both the Tempur pedic product and the Sealy products and the Sealy product has been constrained primarily and the U S and that'd be sealy and Sherwood product, mainly due to inner springs issue now I suspect that probably.
In the fourth quarter, and it's hard to computed exactly because we had some customers on allocation, but we probably lost $100 million or so and sales and sealy in the fourth quarter we.
We expect going forward for that situation to clean up and.
Call. It by the end of the first quarter beginning of the second quarter, we are expecting not to be in a constrained environment from a component standpoint, so we're expecting an acceleration and see and see and sealy.
Thank you. Our next question comes from Peter Keith with Piper Sandler Your line is open.
Yeah.
Hi, Thanks, Good morning, Great results guys.
Thanks, David mentioned net at the end of your prepared remarks that consumers are recognizing the need for a better mattress to get a better night sleep and I was hoping you could opine on and what has caused that great a lock and how you guys compete into it because it seems like it could be a pretty powerful driver for for the Tempur brand going forward.
Yes. Thank you look we saw ASP growth.
In the quarter.
And we look at it and you got to step back from a couple of things and and first of all it's clear there's health and wellness.
It's been going through the world clearly the pandemic has accelerated.
And that trend and we see it all over the world, but you also have an aging population in the developed nations and generally when you see that we also see more concern about sleep betting surfaces and better asps.
So I think you've got you and I won't call the health and wellness trend accelerating plus you've got and an aging population and I think it bodes well for what I'll, just call high and bedding, which does certainly play into.
And the Tempur Pedic brand and the Stearns <unk> Foster brand.
Thank you. Our next question comes from Bobby Griffin with Raymond James Your line is open.
Good morning, everybody. Thank you for taking my questions and congrats on navigating a very challenging year.
Thank you I.
I guess, Scott I wanted to maybe unpack the guidance just a tad more clearly a lot of moving parts and macro and economy is probably the hardest to predict but when you look at commodity supply chains and maybe some of the other aspects, which one of those are the biggest variables are wildcard for this year for for the EBITDA guidance and have you assume some wiggle room.
Where if the supply chain doesn't come back to a 100%, but by <unk> or commodity has run a little bit you have some you know some leisure some.
Cushing inside that guidance.
Sure Charlie but the guidance was put together like we always put it together we try to put it in the middle middle of the fairway and certainly there is some upside and the guidance and there's a there's some risk risk and the guidance and we've continued to try to put it in the middle of the fairway.
From a component standpoint, we've got pretty good visibility now from.
From a component standpoint.
And that's been a tough one the last couple of quarters, but it has certainly gotten better here recently and so we're feeling much better about the component side.
And the commodity side as you know the business model is such that commodity get passed through to the and customer there may be a delay of a quarter or so but we've shown great success over time of passing those commodity increases on with most recently, what and the fourth quarter basket and we had the last.
This increase will look with the current commodity environment I would expect that we will probably have some additional price adjustments in the first half of the year.
So I don't think that's a big risk of the forecast and the model is is to pass that pass that through.
I would tell you that from.
For my experience standpoint, now with the pandemic.
And we feel much better about being able to operate and operate well in the environment all over the world, We see particular countries close and reopen and close and reopen.
So I think we've got a pretty good handle on what the consumer does.
During closing and right after closing and anything short of a hard retail close quite frankly.
Pretty good pretty good business during a hard closing that particular country.
Certainly soft for a while but when it comes out of closing certainly very robust sales.
So I think we put all that together and felt very comfortable.
Kind of reinstating our guidance because the environment is not as uncertain as it was this time last year.
Thank you. Our next question comes from Keith Hughes with Trust. Your line is open.
Thank you a question on the revenue guidance for 'twenty one.
Obviously your U S and North America is going to be a strong what kind of framework and we are looking at for international is that business expected to be up in 'twenty, one will be a little weaker than that given what's going on in Europe.
Yeah.
We're expecting it to be up I think what we were trying to be very transparent and ive looked like Asia is very good Asia, all the way back.
China is performing.
Debt at best it's ever performed.
And so I, just look Asia Asia's back.
Barring something unusual we don't see any issues, there and expect a very good growth.
When you get to Europe, a little more challenging up until recently and see from the fourth quarter, obviously from the international numbers, even Europe Europe had a very strong quarter, but they are currently and lockdown.
Assuming they come out of Lockdown.
And it'll be fine, but we expect the international market to grow and the first quarter EBIT, even experiencing the lockdowns in Europe, but I do think that probably 'twenty 'twenty two will be the big year for international because we'll have considered what we will expect continued growth in Asia and then we've got new <unk>.
<unk> launches coming into the.
The EU and in the European market in 2022, so a little bit of investment year.
And Europe in 2021, but again, we expect growth in.
And international segment for the for the year 2021.
Thank you. Our next question comes from Seth Basham with Wedbush Securities. Your line is open.
Thanks, a lot and congratulations on an outstanding year.
Thank you.
I just wanted to follow up on some of the earlier questions just helping us understand what gets you guys the confidence and the sales outlook and what's driven the acceleration and U S sales and first quarter to date and is there anything related to new distribution and more penetration with existing accounts like mattress firm.
Backlog for adoption or any other variables that we should consider and a different relative to recent trends.
Sure and all.
I'll try it again and then we'll pass over to Bosker see if you can do a better job on and since we're not getting and not communicating maybe clearly look first of all for some of the new distribution.
And it got we got it in and then it got a little bit disrupted because of the pandemic.
And usually new distribution takes a while to take hold so look all of the new distribution that we've gotten over the last 18 months all those accounts are performing very well.
We continue to have some reasonably good size.
Floor shifts.
In the U S and it's about it's about product.
And certainly about execution and it's certainly our investment and advertising as you might remember for what was it was probably may may of last year kind of and the middle of the pandemic.
We made a decision to start investing heavily and advertising to help drive the industry and help the industry work through.
The pandemic and those investments.
<unk> has been very good and they show up not only and our sales, but they show up and our brand health.
Stats that we did we look at additionally, our look our retail stores are doing well if you look at our direct to consumer business worldwide. It's about a run rate of about $500 million as we sit here today. If you go to North America, I believe our North America direct to consumer business.
Is now probably into the fourth or fifth largest bedding retailer.
And the U S that continues to be a very good growth segment and then we'll look we stepped out and to private label and OEM businesses, which are completely new sectors.
The Sherwood acquisition is performing very well from a private label standpoint.
That growth has been very good and it's performing above pro forma and above our expectations and.
And recently and we're working on the OEM area.
And it's just getting started but thats incremental business.
And Thats doing well and we would expect it to continue to do well.
Boston.
I don't think so.
Thank you and our next question comes from Bob <unk> with Guggenheim Securities. Your line is open hi, good morning.
And just wondering if you could just maybe elaborate a little more on as you look at 'twenty, one the marketing and a level or the dollars that you were thinking and and I guess, just sort of the trends on what you're seeing from like the cost of advertising sort of how you are spending those dollars.
Sure I'll start and let Bosker finished.
First I guess the point I should make is if you look at the direct online advertising, which is something I always like to talk about because when you talk about online growth you really should talk about advertising too because they go hand in hand anybody can buy business.
But cost of customer acquisition cost and the U S.
Again fell and the fourth quarter.
And so advertising efficiency and our direct business continues to improve.
For our media mix standpoint.
No.
You are going to be obviously, a little heavier TV and last year.
A good bit of digital a good bit of social.
Going to lean into Stearns <unk> Foster brand and.
And and a little bigger way.
But from a dollar and point it will be the largest dollar investment.
The company has ever made and advertising on a rate basis posture. How are we doing a great day. So the way I think about it is is that it's all about brand product channel really got to be out there to support those brands. So our thinking is on a rate basis on a year over year would be up how's.
However, it is not only about debt are now, but and investing for the future. So we want to make sure that we're and the hearts and minds of the consumer where they are and the mark to purchase a mattress and certainly we need to be supported the new Sealy launch.
And that we have coming in and we're in the process.
Thank you. Our next question comes from Brad Thomas with Keybanc capital markets. Your line is open.
Thanks, Good morning, and congrats on a quarter and our momentum and the business.
Yes.
My question was around how to think about the cadence of sales through the year here in 2021.
You gave commentary on <unk>.
It would seem to me that <unk> is set up to be very strong against an easy comparison and with the momentum that you have.
Any more color on and how to think about how good <unk> could be would be helpful. And then as we think about lapping. These these really strong growth numbers and <unk> are you expecting growth are there any quarters for at this point for might be thinking about a negative number for revenues.
A good question, Brad So the way a way to think about it without getting into personally and the quarters.
And get a way to think about Q1, perhaps consistent with the fourth quarter and you're spot on as you think about to Q.
And the way, we think about it is really <unk> and <unk> together.
Perhaps there was some pent up demand that when we exited two junior debt, perhaps spilled over and <unk>.
So what I would expect is that second quarter be a nice growth year or sorry for nice growth quarter.
And as I think about from a full year standpoint sitting here today, we would expect.
And every quarter.
And I think one thing people might be missing is the strength of the distribution wins.
Got got muted by the virus.
And as as the virus issues cleaned up.
And those distribution wins.
We have really done well and they set a very solid foundation.
For the growth that youre seeing and the forecast.
Thank you. Our next question comes from and Laura Champine with loop capital. Your line is open.
Thanks for taking my question.
You've talked in the past about the growth opportunities at Sherwood, which seem significant do you think that impacts overall, ESP and 2021 or are the new product introductions.
Strong enough you think to lift asps overall this year.
And Sherwood and an individual business unit and we're expecting significant growth, but its size is such that it's not really material that it would impact the ASP numbers overall ray Bosker every day.
It's a new growth leg, but I don't think youll see it and and ASP for.
Or really even and gross margin.
Thank you. Our next question comes from a total muscle Maheshwari with UBS. Your line is open.
Good morning. Thank you so much for taking my question Scott Your EBITDA margin starting to go back to 2012 levels, which is why and I believe you had acquired Sealy.
Going forward do you believe margins can expand further from here and if so what will drive those gains.
It's more for next three to five year outlook that you have.
Good question a tool you know the way as I think about margins and how we manage the businesses that we're always looking for incremental EBITDA and as we as I think about it is we said this and the prepared material is that we would expect project product margins to increase within products as well as brands and how those mix is really <unk>.
Up to the consumer if you think about specifically in 2021, one of the items that we pointed to is that we expect sealy to become.
Rained and the second quarter and beyond so that will give us a bit of a headwind from a brand mix standpoint. However, also we called out is is that we would expect to invest and advertising, which is from a go forward standpoint healthy from a brand standpoint.
So as I think about our margin opportunity I would.
Continue to believe that there's opportunity from a tempur standpoint also from a direct standpoint and that should that should buoy, our gross margins and operating margins. However, most important thing is driving incremental EBITDA.
Thank you. Our next question comes from William Reuter with Bank of America. Your line is open.
Hi, good morning.
And so even.
With the more aggressive shareholder friendly activities with the EBITDA growth, you're still going to be well below your target range of two to three times. This year are you expecting that there's additional M&A or are you doing this out of an abundance of caution just given the uncertainty of what 2022 or 23 could look like.
And I guess, how should we think about that.
Yeah, Great. Great question look I think I think with the pandemic.
And we thought it would be prudent to run kind of day lower end of leverage until some of that uncertainty is cleared clearly we're running below target with.
And we will probably run below target here for a little while longer.
And then like always we will continue to look at opportunities, whether it be and share repurchase.
Or whether it be and M&A.
And the current market of M&A, it's difficult.
And then there's a lot of money out there and it's hard to get to normalized earnings considering the pandemic, but will continue to be active and I think over the next two three years.
Theres, certainly some and M&A activity that you should expect from us and as the market Normalizes, we'll continue to look at our leverage ratio.
Thank you. Our next question comes from Carla Casella with Jpmorgan. Your line is open.
Hi, and on the growth of the OE business globally and in all to get to that and are there any key manufacturers today that you can call out that you're you're manufacturing for our brand standard.
Capturing par.
I didn't know if you had for private brands.
There's no M&A activity and that area, we need to to successfully.
Reach our goals.
Remember, we have had a significant call out on future Capex last quarter to stand up some new manufacturing facilities, but we can do all of that.
Internally.
As far as calling out <unk>.
Pivot labels.
Private labels would be for some of the largest retailers that you've heard of.
And then some of the OEM brands, we generally keep that keep those quiet, but there. They are the ones that you you've heard of and the marketplace and we continue to talk to others.
It's a great business and the standpoint, it allows us to spread our fixed cost.
And so we're going to we're going to continue to move forward and that area.
Thank you. Our next question comes from Jenna Giannelli with Goldman Sachs. Your line is open.
Alright, Thanks for taking my question.
A follow up and bill given the strength and the balance sheet and low.
Leverage where it is have you given any time and granted you have access to the markets as you pointed out but have you given any thought and youre on your rating and whether it might make sense to you.
Or is that a goal or desire at some point and the future.
Yeah look I think Scott.
And I'd love to Dubai, one rating and probably would rate as a little differently and we currently are but they won't let me do those things, but certainly I would I would argue that we are reduced and rewriting.
And as far as investment grade I don't think there's I don't think there's any strategic reason and why we need to be.
Investment grade.
So, but but certainly we think our current ratings as probably needs a little bit more.
Thank you. Our next question comes from Keith Hughes with Trust. Your line is open.
Yes, just one follow up on the product launches you had outlined several on the Tempur pedic launches and 22, well that would be both in Europe, and North America and do you have any feel for price point, what you'll what you will focus on refreshing and loans.
That would be 22 would be international.
And in International and you May know Tempur.
<unk> is not just premium and he is like Super premium and the international market.
And it's part of that launch.
Try to increase our addressable market internationally. So it's more in line with the market we're going after in the U S. So that's a 22 temporary arch and internationally.
And.
And the initiatives you've got Sealy.
In the U S.
Thank you. Our next question comes from Peter Keith with Piper Sandler Your line is open.
Thanks for the follow up I, just wanted to dig into a bit more on the raw materials. So we're certainly in an environment, where there is.
Pretty strong inflation with both chemicals and steel.
And you guys are kind of downplaying the impact I guess could you compare to 2018, we chose a year. When you saw the dual inflation dynamics, so that was a $50 million to $60 million EBITDA headwind.
It's different today, that's allowing you to minimize the overall impact.
First of all I would probably pushed back a little bit on downplaying, we totally agree with you that we've got an inflationary environment and.
Most of the inputs.
And our business and therefore, it became crosses downplaying at.
Apologize.
Might've heard is a greater confidence and the ability to pass through the price increase more rapidly.
And a few years ago, we might have to wait a quarter or two before we get it passed through and.
And the current environment, because the inflation is so great and the market's so good I think what youre hearing is our confidence that we can push through the price increase quicker.
And not have the negative impact.
And our our financials for a quarter before we pass it through but we're certainly expecting that there is a pass through to the and consumer.
And the first half of this year that.
And that should mitigate the impact on our financial statements.
Thank you. This concludes the question and answer session I would now like to turn the call back over to Scott Thompson for closing remarks.
Thank you operator to the over 9000 employees around the world. Thank you for what you do every day to make the company successful for our retail partners. Thank you for your outstanding representation of our brands for our shareholders and lenders. Thank you for your confidence and Tempur Sealy leadership team and the board of directors.
<unk>.
That ends our call today offering thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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