Q1 2021 Tempur Sealy International Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Tempur Sealy first quarter 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised that today's conference may be.
We recorded if you require any further assistance. Please press star Zero I would now like turn the conference over to your Speaker today, Aubrey Moore Investor Relations. Please go ahead.
Thank you operator, good morning, everyone and thank you for participating in today's call. Joining me are Scott Thompson, Chairman, President and CEO, and Bhaskar Rao Executive Vice President and Chief Financial Officer after.
The 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 1095.
Investors are cautioned that these forward looking statements, including the company's expectations regarding sales EPS net income and adjusted EBITDA and anticipated performance for 2021 and subsequent periods involve uncertainties.
Actual results may differ due to a variety of factors that could adversely affect the companys 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 Companys SEC filings included but not limited to annual reports on the form 10-K, and the Companys quarterly reports on form 10-Q under the heading special note regarding forward looking statements <unk> risk factors.
Forward looking statements speaks only as of the date on which it is 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 discussed.
In the press release as well as information regarding the methodology used in our constant currency presentations, we have posted the press release on the company's Investor website at Investor Day, 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 Amit.
Good morning, and thank you for joining us on our 2021 first quarter earnings call.
Our thoughts continue to be with those around the world, whose lives have been impacted by the global health crisis.
Want to say a sincere thank you to our entire global team, who continue to work hard every day to ensure the safety of our employees and customers.
I'll begin with a few highlights on our record first quarter financial performance and a discussion about our future growth.
<unk> will then review our financial performance in more detail and finally, I'll conclude with an update on our long term initiatives and some thoughts about capital allocation.
Update on our current market trends.
We're very pleased to report a very strong first quarter.
With global net sales up 27% year over year.
Or over 50% as compared to the first quarter of 2019.
We delivered strong performance across our North America, and international segments with growth growth across all of our brands channels and price points.
Strong sales performance was driven by industry strength.
Successful company initiatives and.
And our overall outperformance within the market.
This resulted in first quarter adjusted EBITDA of $230 million, an increase of 52% and a record adjusted EPS of <unk> 64 cents, an increase of 88%.
GAAP EPS increased 121% versus the prior year.
Notable adjustment to current quarter GAAP result is related to our early payment of our 2023 bonds as we moved to capture lower long term interest rate and extended the duration of our debt.
Yes.
Our first quarter results were robust and would have been stronger if it had not been for constraints once again by industry wide supply chain challenges for both inner spring and chemicals.
I'm glad to report that the inner spring shortage that we've been dealing with over the last three quarters is now behind us.
Our major inner spring supplier has done a great job normalizing from supply chain.
Oscar will discuss our supply chain and more detail in a moment.
Looking ahead, we are optimistic about our prospects for future growth as we see various tailwind fueling our business over the long term.
First the industry has exhibited consistent long term growth and we expect this to continue.
For the last 45 years the U S. Mattress industry is average mid single digit annual growth.
Looking at the industry today I believe it's never been healthier as a result of significant retail rationalization over the past few years domestic store counts have returned to a more appropriate level and the remaining retailers have shifted their focus more towards customer service and professional sales processes.
They've also learned to compete online while also modernizing their marketing approach all resulting in better retail profitability.
Not only are we seeing more rational behavior from traditional retailers, but were even seen many of the bed in the box startups being forced to focus on profitability.
A big change from a few years ago when they instead they were focused more on unprofitable sales growth at almost any cost.
In recent years, there's been a surge in the number of units imported and sold below cost, resulting in an uneven playing field for domestic manufacturers. The U S. Government has taken various anti dumping actions, including most recently decision to assess tariffs on imports from seven countries.
Trees.
As a result important data over the last three months show Theres been an average year over year decrease of about 50% and bedding units imported to the U S. Implying 5 million annualized units no longer being imported today.
With a strong industry.
In Iraq, and the rationalization of import units there is an opportunity for domestic manufacturers to capture those incremental units needed to fill the demand.
While these are typically lower end units, which represents an ideal opportunity to leverage our fixed cost structure.
We believe that Sealy the number one mattress brand in America, and our OEM business are both well positioned to take their fair share of this opportunity.
Second consumers have been increasingly willing to invest large larger share of their wallet in the home furnishing category.
For the past several years consumers have leaned into health and wellness and sleep quality is squarely in the middle of this emerging wellness trend we.
We saw this benefit of this trend emerge pre pandemic as consumers began to migrate towards higher price point, but this trend has really accelerated as a result from the pandemic.
As more and more consumers make the connection between a good night's sleep and overall health and wellness. We believe this long term consumer trend will drive higher sales prices and likely shorten the replacement cycle as consumers increasingly choose to replace their existing mattresses with the latest.
Technology.
In the first quarter, the average selling price of mattresses increased double digits compared to prior year.
Additionally, the bedding industry historic performance as correlated to consumer confidence consumer spending and housing formation.
The housing market has been very strong with average prices nationwide appreciating by about 11% in 2020.
And that strength continues in 2021.
Consumer spending is forecasted to increase significantly in 2021 supported by material household savings in 2020, the economic stimulus package and rising consumer confidence these economic indicators point to a healthy bedding industry going forward.
Third our competitive position has never been stronger.
In 2020, our North American business grew 21% well above the industry.
We believe our North American segment, 28% growth in the first quarter of 2021 is a clear sign of our ability to continue to gain market share.
As a result of investments we've made in our business over the past five years, we are clearly industry leader in every category channel and price point.
We expect these investments to further build our advantages in the marketplace per in the momentum of flywheel effect.
And enabling us to continue to drive sales growth.
Lastly, innovation is in our DNA.
A clear competitive advantage.
For example.
We're very excited to launch our entirely new product line for Tempur International in 2022.
The underlying technology of the new line that builds on the innovation, we've already been well received in North America.
We expect these new products to help us grow our market share internationally, where our share is currently low in most geographic regions.
We see international as a significant long term growth opportunity for our business with the Asian market, leading organic growth.
With that I'll turn it over to Bosker to walk you through the financial results in more detail.
Thanks Scott.
Before going into the details I would like to highlight a few items as compared to the prior year.
Gross margin improved 60 basis points to 44%.
Adjusted operating margin improved 330 basis points to 18%.
Adjusted EBITDA increased 52% to $230 million.
And adjusted earnings per share increased 88% to 64.
As Scott mentioned, our first quarter result, would've been stronger had we not experienced supply chain constraints for inner springs, and chemicals that are used across the entire bedding industry.
While the supply of inner springs greatly improved during the quarter the disruption from the winter storm in the Gulf is causing a temporary industry wide reduction in chemical availability.
This disruption is impacting commodity prices on what we believe is a short term basis.
These supply issues have impacted our north American Sealy and Sherwood businesses.
Resulting in a backlog remaining elevated throughout the first quarter and into the second.
In addition had we been unconstrained, we estimate sales could have been stronger by $80 million to $100 million during the quarter.
Based on our current outlook, we anticipate the chemical constraints will largely be resolved by the end of the second quarter.
These issues also caused our operations to run inefficiently.
<unk> this quarter's gross profit by approximately $10 million.
We expect the same inefficiencies will repeat in the second quarter.
In addition to working through supply constraints, we have also been managing a high inflationary environment for key betting input.
We implemented pricing actions in the fourth quarter of 2020 and again in the beginning of the second quarter of 2021 to mitigate the known commodity headwinds.
Commodity prices have continued to increase since our last update as the winter storm has pressured chemical prices, but we believe these increases are temporary.
We have chosen to absorb this short term cost increase for now.
But we will take price actions in the future if costs do not normalize.
Based on our current commodity outlook, we expect to be negatively impacted by approximately $25 million.
Predominantly in the second quarter, which will not be offset by price.
Turning to North American results.
Net sales increased 28% in the first quarter.
On a reported basis, the wholesale channel increased 23% and the direct channel increased a robust 74%.
North American gross margin improved 60 basis points to 41, 2%.
The improvement was primarily driven by brand and channel mix, partially offset by operational inefficiencies.
North American first quarter adjusted operating margin was a record 19, 6% an improvement of 300 basis points as compared to the prior year.
This improvement was driven by operating expense leverage and the improvement in gross margin.
Turning to international.
Net sales increased 23% on a reported basis.
On a constant currency basis international increased 14%.
We are pleased with our international performance during the first quarter.
Sales were driven by strong demand for our products in the Asia Pacific market and Europe performed well as shipments continued during the period despite COVID-19 lockdown.
Retail orders in Europe were strong during the period ahead of anticipated store re openings.
And in fact, we have seen a surge in consumer demand in the U K.
Since the stores have reopened.
As compared to the prior year, our international gross margin improved 90 basis points to 59, 2%.
The improvement was primarily due to favorable mix and productivity on our operations, partially offset by increased commodity costs.
National adjusted operating margin was 28, 8% an improvement of 670 basis points as compared to the prior year.
This improvement was primarily driven by improved performance of our Asia Pacific Joint venture.
Operating expense leverage and improvement in gross margin.
Now turning to the balance sheet and cash flow items.
We generated record first quarter operating cash of $86 million.
At the end of the first quarter consolidated debt less cash was $1 7 billion.
Our leverage ratio under our credit facility was one nine times.
Down from 3.0 times at the end of the first quarter of 2020.
And slightly below our target range of two to three times.
We repurchased $313 million of shares in the first quarter utilizing our strength strong cash flow and our ample liquidity.
This brings our total share repurchases over the last 12 months to about $450 million.
For the full year 2021, we expect to repurchase at least 6% of shares outstanding.
Now turning to 2021 guidance.
We currently expect sales growth to exceed 20%.
And adjusted EPS.
To be between $2 50, and.
And $2 70.
A growth rate of 36% at the midpoint.
This implies EBITDA to be between $925 million and $975 million, an increase of $50 million at both the high and low ends.
We assumed full year gross margins are stable to prior year.
We expect gross margins to improve within our brands.
This will be offset by brand mix headwinds as sealy and OEM operational constraints ease following the second quarter.
This also contemplates our incremental investments in new innovative products and record advertising spend that Scott will discuss in a moment.
Lastly, I would like to flag a few modeling items.
For the full year 2021, we currently expect total capex to be between $125 million and $140 million, which.
Which includes maintenance capex of $75 million.
D&A to be between 160 and $180 million.
Interest expense between 50 and $55 million.
On a tax rate of 26%.
And a full year average diluted share count of 205 million shares.
With that I will turn the call back over to Scott.
Thank you Boster, great job to you and the team.
Our competitive positioning and record first quarter earnings are a result of our commitment to our long term corporate initiatives. These initiatives guide us in our action and jumpstart the flywheel effect that is powering the momentum at Tempur Sealy.
Our first key initiative is to develop the best bedding products in all the markets we serve worldwide Inc.
Credibly proud of the fact that temp repeat it Stearns <unk> Foster and Sealy products lead the market in each of their respective categories.
And our business long term success starts and ends with products and.
In both of our product portfolio and our innovation pipeline has never been stronger.
Tempur has successfully address the two biggest reported issues associated with poor sleep sleeping.
Sleeping heart and snoring.
Over the years, we've addressed the first difficulty of sleeping heart with our proprietary cooling technology.
To address the second issue Snoring, we developed the Ergo smart base sleep tracker.
This past quarter, we completed the rollout of the smart base to our North American third party retail partners.
Leap tracker is the only sleep system on the market with technology that automatically detects and responds to snoring.
It also monitors key health metrics and since personalized sleep analytics and coaching to consumers via a personal app.
Retailers continue to tell us they are thrilled with the consumer response to this product, citing improved asps.
And adjustable rate attachment rates.
As an additional benefit the sleep data from this product brings us closer to the consumer and provides critical insights for our research and development processes.
Turning to Sealy the number one mattress brand in the U S. We're proud of the achievements of our Sealy brand.
It was rated America's number one selling mattress brand last year and was most recently voted America's most trusted mattress brand.
In 2021 brand Spark American Trust study.
We continually innovate and invest in the products and this year, we are refreshing the sealy portfolio with the launch of the new models across our essential after Peter can posture plus line lineups.
The updated Sealy mattresses offer superior support and include our Sealy Cheal Chill and surface Guard technology.
We expect to complete the rollout of the essential imposture Pudic mattresses in the second quarter and to begin shipping the higher end posture PD plus line in the back half of the year.
We're excited about these new products and expect they will further extent Sterne <unk> lead as the number one brand mattress and U S.
Our second key initiative to support our global brands with compelling marketing.
Robust order trends combined with the strength of the market has driven us to increase our 2021 advertising investment.
Additional $50 million to a projected $450 million.
This will be the largest advertising investment in the Companys history.
Provide even more momentum.
Our growth in the future.
Consumers demand from brand is strong and our consumer research shows record levels of purchase intent and consideration.
<unk> advertising.
Our best in class sales force.
Our data driven media investments ensure our products remain top of mind for consumers throughout their purchase journey.
A portion of our 2021 advertising dollars is being dedicated towards Stearns <unk> Foster brand.
The brand is celebrating its 175th anniversary this year and we have a new campaign that highlights the brand's heritage and high quality products.
We believe the amplification of the brand story will raise consumers' awareness and consideration for luxury innerspring and hybrid products benefiting third party retailers and the company.
Our third.
Key initiative is to optimize our powerful omni channel platform.
Wherever the customer wants to shop.
The largest pillar of our omni channel distribution strategy as our third party retail partners. We continued to build momentum as we've added to our diverse third party retail footprint and now include over 225000 retail doors.
This broad footprint insurers that consumers can easily find an experience our products in person.
This is critical to our research and our research shows that about 90% of consumers want to touch and feel of matches before they bought.
We have strengthen our retail relationships with our retail edge program.
Wells are in depth sales training innovative advertising solutions market, leading consumer insights and robust logistics and manufacturing capabilities.
To ensure our products are present, where and how and when customers want to shop, we continue to expand our own direct to consumer channel.
Both online and with brick and mortar retail stores, our direct to consumer channel had a great quarter.
And our company owned stores, we saw increased traffic as more consumers felt comfortable shopping in store and this resulted in double digit same store sales growth.
Our web sales grew over 100%, which includes robust triple digit growth on a compressed bedding products likely comparing favorably to others in the industry.
At the same time, we experienced favorable customer acquisition cost compared to the first quarter of 2020.
I wanted to note that our web sales are still growing at a strong rate even as we begin to lap the triple digit growth rates in prior years.
We do expect web sales growth rate to diminish as 2021, the comps getting very hard.
Our worldwide direct business is on a run rate of over $600 million and is highly profitable in fact over the last three years, our direct business has grown an annual compounded rate of 35%.
Another one of our market expansion initiatives is grow our share of North American OEM bedding market business.
We believe the OEM market is a sizable opportunity as the recent enactment of anti dumping duties.
Disrupted the market.
We're well equipped to take advantage of this disruption and service the market our OEM business performed well in the quarter run slightly ahead of our expectations.
Our fourth key initiative is to drive increased profit.
We have been and remain committed to balancing top line initiatives with expense control and operational improvements to optimize profitability.
This has enabled us to deliver record earnings in the quarter and positions us to drive earnings growth over the long term.
Turning to capital allocation.
Our business generates a significant amount of cash flow as demonstrated by our first quarter operating cash flow of $86 million and cumulative cash flow over $600 million over the last 12 months.
We've taken key opportunistic capital structuring actions to optimize our balance sheet.
Over the last few quarters, we extended the maturity of our long term debt by six years and lowered our annual run rate interest expense by approximately $23 million.
We also reduced our target leverage ratio range to two to three times.
And we've chosen to stay slightly below the range as we manage through the global health crisis.
We view, our financial strength and flexibility as a competitive advantage.
Under our capital allocation strategy, we run a balanced approach supporting the business returning value to shareholders via share repurchases and dividends and on an opportunistic basis acquiring businesses that enhance our global competitiveness.
Over the last 12 months, we've allocated capital as follows capital expenditures over $100 million returned to shareholders approximately $460 million.
This includes investing over $445 million in share repurchases, which is approximately 6% of our shares outstanding during the period paying $14 million in cash dividends.
Given the progress we've made.
And confidence that we have in our long term outlook, we did accelerate some of our share repurchase this quarter.
I also want to briefly touch on our latest order trends.
In the U S current orders at celebrated relative to the first quarter on a two year basis, which we view as the most useful compare to given the COVID-19 impact of the prior year numbers, making the comps unreasonably low <unk>.
This acceleration is built upon our prior momentum and likely also firming economy.
A robust housing market and fiscal stimulus related to COVID-19.
We anticipate the temporary lift from COVID-19 relief checks is now behind us.
Our international trends are volatile as markets reopen and close and reopen.
Company wide, we are internally targeting second quarter sales growth of approximately the first quarter at about 50% versus the second quarter of 2019.
I'm proud.
How the entire team stepped up to meet the challenges.
Denmark has presented over the last 12 months.
There've been a lot of ups and downs during the unprecedented period.
But the groundwork that we'd laid over the previous year has established a strong foundation and it's allowed us to become even stronger.
The team and I are incredibly excited about what the future holds.
With that operator will you. 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.
So it's all your question press the pound key please limit yourself to one question. Please stand while we compile the Q&A roster.
Our first question comes from Peter Keith with Piper Sandler You May proceed with your question.
Hi, good morning, and great results guys.
Thank you you may have just maybe just answered my question with your the Q2 sales guide, but what it did want to ask was the guidance raise was rather significant.
Uncharacteristic for you guys. This earlier in the year to take up guidance that much plus you also highlighted $25 million of input cost headwinds and $50 million of extra outspend. So the.
Context. So the question is what's what's giving you the confidence to raise the guidance by this much so far early in the year that may have changed from a couple of months ago.
Sure. Thank you for the question.
Basically everything I mean look.
The economy worldwide continues to recover from the health care crisis.
We've become I guess more comfortable that we can operate in an environment where stores open and close.
I think most everything we see compared to last time, we reported to you feel stronger.
If you look at North America sales increased two.
<unk>, 2028%.
Great number.
And as the stores opened we didn't see a slowdown in the online business like we probably we did did expect.
So no.
It feels good and from a guidance raise standpoint, we try to keep the guidance in the middle of the fairway.
Yeah.
And the strength of the underlying business was such that we felt like we needed to move the guidance up.
Thank you and our next question comes from Curtis Nagle with.
Bank of America, you May proceed with your question.
Thanks, very much good morning, guys.
Good morning.
Good morning, Scott.
Maybe taking kind of a focus a bit more on the long term here. So.
The numbers right now are just off the charts.
Really really strong but.
Just how are you thinking about.
Revenue and earnings growth over say the next few years, what do you think a sustainable rate of growth and kind of what's the balance I suppose in terms of.
North America versus the rest of world. It sounds like international is getting a lot more focus here and he's got to do.
Product launches that could be a pretty big.
How should we think about that.
Sure Great question.
Look look international probably has a larger opportunity over a qualified the five year period, our balance of share internationally is relatively small and I think you can see from our prepared comments.
We're focusing on international over the next few years, it's going to it's going to take it's going to take a little while I think when you talk about core growth rate look we've been studying consumer spending on household because obviously the question we get a lot is called the share of wallet shift.
The world is experiencing and I guess the best data we have been looking at is from Goldman on their consumer spending and the household category and to me. It was interesting I think last year in 2020 total spend and home category was 314 billion and certainly was up from.
2019 by about four 5%.
Which is which is good it wasn't up as much as I thought or at least as much as the chatter.
Sealy from investors.
If you go look at that data, we were really on an upward trend for the past eight years.
And spend on home and it was growing from a dollar standpoint of about 2% a year. It ticked up ticked up a couple of hundred basis points in 2020.
We will take it up a couple of hundred basis points, and then compare it to our north American growth of 28% growth. So I will say, yes, we got a little bit of a tailwind from shift of wallet, but the lion's share of what you see from a performance standpoint is clearly the impact of our advertising and the quality of our products.
Our new growth initiatives, whether it be an OEM or direct it's driving and so that gives me confidence that those initiatives will continue to bear fruit.
And we don't really just add a little bit of a sugar high.
If you look at a percentage of disposable income.
Ticked up a little bit too during the period, but it is still.
Secondly, less than in the U S. We spent in home in 2008 2007 2006. So I think there is a more solid foundation for the industry.
The other thing.
That we're seeing within the industry is healthy the retailers can advertise.
And certainly drive market.
You've seen that we define the addressable market is 50 billion.
Worldwide. So I think we've got plenty of room to growth.
In various areas, including quite frankly, just the deployment of our cash flow whether it be in share repurchase.
Being some kind of acquisition or some other growth initiatives.
Thank you. Our next question comes from Bobby Griffin with Raymond James You May proceed with your question.
Hi, good morning, everybody congrats on the Great results Scott I, just wanted to touch back on the international clearly exciting.
I'm here for the company for growth for the next couple of years, you've talked a lot about the product investment is there any other kind of capital investments, we should be considering are on the expense side as well too.
To really fund that growth going forward for the next few years from a distribution standpoint production standpoint, or even <unk>.
People and people on the ground standpoint that we should consider in the model.
I don't think I don't think so Bob can you help me with that because I think as the sales come.
We'll obviously be adding some people.
The minor as far as priming from an advertising standpoint from a production standpoint the plan.
Over there has enough capacity.
Meet our objectives.
So I don't think so obviously like always as we've talked about in our capital allocation. We will continue to look at acquisitions that can help us both from a retail standpoint and from a supplier standpoint worldwide.
And we will continue to look in that area, both domestically and international.
Thank you. Our next question comes from Keith Hughes with Truth. You May proceed with your question.
Thank you my question is on international as well.
Fantastic results there in the segment.
As you look at the rest of the year with the international segment will be above.
And the company growth for the year about 20% you've talked about are still a little bit below.
No.
The International group.
Group is going to be below the consolidated group North America will drive the.
A larger portion of the growth rate.
In 2021, and I think what we're highlighting for you as initiatives that will hit in early.
2000, 2022 right Scott.
Okay. Thank you.
Thank you. Our next question comes from Seth Basham from Wedbush Securities. You May proceed with your question.
Thanks, a lot and congrats on the strong results. My question is around the Sealy and Sherwood businesses first of all the pressures that you're seeing there from a commodity standpoint are they primarily confined to those businesses relative to Tempur. Pedic. Secondly are the sales he left on the table the $80 million to $100 million, primarily in those areas and do you.
Expect to capture them pretty much entirely in the second quarter.
Okay. Thank you.
I mean first of all let's talk about the constraints that impacted sales call it $80 million to $100 million of foregone sales in the first quarter in North America, net primarily would would've been in Sealy and Sherwood and maybe a little bit in OEM I think it's interesting. If you added those sales to our North America.
<unk> sales number they probably but I don't know nine or 10% growth.
Right on it is that rather than 28% if you're going to do an adjusted sales I guess unconstrained I guess, we've been getting close to 30%. So I guess I'd make that point to start with on commodity increases look the commodities get everything they don't hit just the sealy ensure with brand they certainly hit the Tempur brand.
Also.
We had plenty of supplies from a chemical standpoint from <unk>.
Tempered tempur is build to fill.
Build to stock rather than build to order what else within this question basket.
How does that 80 to 100 going to come back I don't know I mean.
<unk> I think we'll learn a lot more over the next few weeks as other people reported their earnings certainly we were constrained from.
Because of the inner spring some in the first quarter, although as we sit on the prepared remarks, our major supplier did a great job from the inner spring standpoint, we think that's behind us, but it still was disruptive force in the first quarter and in the chemical event was really an event from the freeze.
It was a mess.
In the first quarter, and we're going to feel the effects of it.
Some some in the second quarter, Inc. Bosker called out that impacted our plants also from an efficiency standpoint, and so all of the first quarter first quarter was a good quarter, we're very proud of the numbers, but it certainly wasn't goldilocks I mean, we had sales we missed.
Had plant inefficiencies.
Our pricing increases.
Increases didn't come into effect until April one so we were eating commodities in the first quarter part of Europe was closed quite frankly for most most of the quarter, we got customers on allocation.
And so all of the numbers are good we certainly don't think that it was goldilocks abide by any means.
Thank you. Our next question comes from Jonathan <unk> with Jefferies. You May proceed with your question.
Quarter. Thanks for taking my question Scott.
Got you mentioned the sleep data from the smart base, bringing it closer to the consumer and with the rollout now complete could you elaborate on that a little bit more what's surprising you in the data and how is that informing your latest thoughts in terms of innovation efforts to solve consumer pain points beyond.
Temperature and storing it in the future.
Yes.
Great long term question, but I'm going to have to kind of kick it for few quarters, because we have launched it.
Base the base is doing better than we expected in the marketplace and our retailers are extremely happy with increased attachment rates and increased.
ASP.
We are just now gathering the data.
And our partners are analyzing the data and so it's a little early to really.
Point to any particular insights.
But we're thrilled about.
Getting closer to the customers and I think over time.
Be able to answer that question, probably more crisply theyre not going to answer today.
Thank you. Our next question comes from Brad Thomas with Keybanc Capital markets. You May proceed with your question.
Alright, Thanks, Great quarter here My question was around.
Asps clearly a lot of favorable drivers that you have in <unk>.
Terms of ASP, but a question that we're often asked us.
How much price you are taking and how much that might.
I'll open up the risk to demand destruction competitive pressures in the future and so Scott I was hoping you could just talk a little bit more about the different drivers of ASP between mix and attachment rate and how youre feeling about the trends in price right now.
Sure I mean.
A couple of things one AFP was very strong and NSP was strong last quarter.
The health and wellness quality products and quite frankly, a great job the retailers are doing.
Out in the field explaining customers to benefits.
Quality bed, rather than lower quality quality bed.
Whole industries, obviously pushed some price through from a from a.
Commodity from a commodity standpoint, so that's part of it but I think really the health and wellness factor is probably the bigger driver.
From an ASP standpoint from a competitive standpoint.
I guess I don't really feel that too much.
We're at all price points. So we can we can play at any price point with a suite of brands and we can pick and choose where we want to put those price points within the family of the company, which gives us quite a bit of optionality.
From a competitive standpoint.
Either.
I don't feel a lot of.
Pressure I guess from from from others, and I think others are being.
Being rational in their pricing, we've seen pretty much everybody moving price up as commodities move up.
As called out in his prepared remarks now we do have this what I'll call. This short term hit in commodities, but on that we chose to not pass that on because that commodity increases on chemicals is directly related to weather event.
And based on history, when we look at hurricanes or other events those kinds of things have a tendency to spike and then come back very quickly and so that's a price increase that doesn't seem appropriate to pass onto our customers.
One thing to add there is that as you think about ASP.
The growth is not only price. However, it's the mix within Tempur and is the width mix within sealy as well, they're mixing up so the ASP increase is not purely driven by price, yes, I get to the point, we should call out, which we've done a few times, but it's a good watch out.
As you know in 2020 and this quarter.
<unk> brand was constrained.
So you know as it gets unconstrained, it's probable that the sealy brand would grow faster than tempur.
As we work off backlog and meet customer demand in that price point that we haven't been able to meet over the last nine months or so.
Thank you. Our next question comes from Carla Casella with Jpmorgan you May proceed with your question.
So the M&A environment, and whether that's changed at all given.
The supply chain that you I'm sure others have seen.
Yes.
The M&A environment, I guess changes every week.
Kind of an overview. So we're all on the same page.
Lots of opportunities in our sector.
Generally smaller companies both from a supplier standpoint retail standpoint, there's a lot of smaller players out there.
A lot of liquidity in the marketplace, so sometimes pricing isn't rational so we'd kind of we kind of pulled back.
Or kind of patient and opportunistic.
I would say everyone. If you talked about the supply chain, specifically, which is the direction of your question.
I think all of us.
Looking at our supply chain and making sure that we have the right relationships long term, making sure those those relationships are robust.
And we're continuing to aggressively look at our supply chain and make sure that we've got the right partners long.
Long term.
Thank you. Our next question comes from Atul <unk> with UBS you May proceed with your question.
Good morning, Thanks, a lot for taking my question.
How much did stimulus benefit the first quarter sales are you able to quantify that in any which way and then second.
Second part of the question is related to your guidance. So the guidance would imply nearly a double digit growth range in the back half of the year for revenues.
The second quarter was up 15.
You are lapping very tough comparison in the back half interest there is the possibility of consumers focusing less on home as the economy hopefully.
Opens by then.
So at this point, what's giving you the confidence that you can achieve that level in the back half. Thank you.
Let me see.
Very tactful and getting 12 questions on one is Bob who's been writing them down rapidly as you ask the questions.
The stimulus check book, we just wanted to call out there is no question that when stimulus checks go through the U S. Our retailers feel that almost instantly at retail.
Generally that's been lower end product. So I don't think it drives much from an EBITDA standpoint, but we certainly wanted to call it call it out.
My guess is and it's a guess you can't.
Look the stimulus checks probably helped a little bit the first quarter lets just say they go away and I'm not sure they're going away.
The improving economy should more than make up for the stimulus checks going forward is our expectation is continued.
Growth growth growth in employment.
What else was on his list of question sponsored back half back half growth.
It looks good right.
I mean, you know.
<unk>.
I guess barring some.
Event that derails the economy.
It looks like to us consumers in the U S and quite frankly worldwide or are in pretty day in good shape there.
Your savings rate was up quite a bit.
Interest rates continue to be in control.
Consumer confidence seems to be growing everywhere, we look.
So that all feels good in buckhead barring some event.
We don't see a problem there.
If you're worried about we'll call it the shift of wallet effect when I gave you some numbers a second ago.
We got from Goldman reports, but more importantly, probably from my perspective, as we look at economies that have been opened longer than they've gotten closer to what we'll call it normal whether that be China or that be Korea.
In these markets it is not.
Quite normal, but they are pretty close to normal we are not seeing a big pullback.
In furniture, and bedding expenditures and in fact, those markets are probably doing even better. So I guess, that's a long winded answer to say we do.
Don't see a lot of black clouds.
So what do we worry about we worry about what maybe we don't see you don't know, but from what we can see and know.
Things look pretty good to us.
Thank you. Our next question comes from line rule.
Bank of America, you May proceed with your question.
Hi, My question is about the $25 million number that you mentioned I think that was inflation for 'twenty, one as a whole but is that encompass more than just raw materials, including ocean freight et cetera, and then as we think about another round of price increases do you believe that a subsequent <unk>.
Round, we will make it such that there will not be gross margin pressure in the back half of the year.
Sure. Good question, so as it relates to the $25 million.
That is specifically.
What we have seen during the first quarter that will not be impacted or not be offset by price. During the second so let me say that again, the commodity increases for going from 'twenty to 'twenty, one or greater.
What we've seen in a while the specific call out on the 25 million is associated with a temporary inflation that we see that directly coming out of the winter storm that we believe is temporary and then therefore, we are not putting price out there to offset it the majority of that $25 million, we should see.
In the second quarter. However, all that said is that to the extent it hangs around a little bit we will consider price as we think about that from a go forward perspective.
As it relates to what's what's included in there. It is predominantly the 25 is predominantly associated with chemicals associated materials coming out of the disruption caused by the storms.
Thank you. Our next question comes from Laura Champine with Loop capital You May proceed with your question.
Thanks for taking my question, it's to dig in a little bit more on the supply chain issues, you mentioned that the Tempur brand.
Builds to stock, whereas the Sealy insurer would I think build to order, what's your normal practice for them.
Chemical purchases in terms of weeks of supply and is that changing at all as a result of some of the supply chain issues we've seen.
Sure.
First of all let me give the call out to our operations team that over the last few years.
They have requested capital expenditures to increase our tank size.
For just this kind of event to have more safety stock from a chemical standpoint.
So those investments were made at their request and certainly been helpful. During this period.
Obviously, you talked about day supply it obviously depends on demand and so demand varies from.
But I'm going to say that from a chemical standpoint, we probably have 30 days bosker gift would be kind of a general target in.
In chemicals, but then also we have inventory.
And.
Again, thank you operations, probably I guess it was may last year.
We went through and purposely upped the inventory from a day supply in anticipation of pretty robust coming out of lock up and so we've been carrying more inventory for tempur, starting I think like glass may your last June right.
And I'm going to say, that's generally north of 30 days. So so combine that works as a pretty good cushion for what would we would've probably plan on more like a hurricane event.
Thus tempur has been in stock and on shelf.
During during this period, where we've had constraints.
<unk>.
Inner spring from a chemical standard.
Thank you. Our next question comes from Jenna Giannelli with Goldman Sachs. You May proceed with your question.
Hi, Thanks for taking my question I know, there's been a few on just the supply chain, but one more if I can perhaps clarification, but.
The $80 million to $100 million sales headwind in the $10 million of gross margin that was helpful color.
In prior quarters has it been about the same or to a similar degree as we've dealt with some of the supply chain headwinds just as we think about as we start to comp out of that what the potential tailwind could be going forward. Thank you.
Sure.
I'm going to say the constrained sales I think we're slightly less I think we've been calling out about $100 million.
In the second and third quarter from a sales line again that sealy ensure wood products and it's probably more like $80 million to $100 million in the first quarter. So obviously slightly less from a sales standpoint.
Are we going to say the disruption in the plants has been worse this quarter than in the second and third quarter, because we got hit from a combination of the spring issue and the chemical issue.
And the chemical issue has been probably more.
Our difficult from a plant operations standpoint, that's right because it's disrupted tempur and sealy.
And quite frankly, it's hard to figure out what to do if you don't if you don't get the phone you need.
You need when you need it so it's been worse from a run sloppy or whatever you want to call the call out from an operational standpoint by probably several million dollars this quarter versus I would say about about $10 million versus what we what we've seen we've had the running sloppy implications as you called out Scott, but it was it was worse complicated by.
By the chemical shortages that we faced in and as we said is that we do anticipate those to go away as we get out of the second quarter, but I would imagine we will see a bit sloppy in the second quarter as well.
Your point really on the compare from first quarter next year.
<unk> got the constraint to sales you've got that running sloppy you got the price effects for the commodities that didn't go into play until April one.
Europe European operations were.
Clothes open closed opened which country.
And look it was very much fund for our sales group because we have some customers on customer allocation.
In North America so.
It does lead you to believe that there are some tail winds first quarter next year.
100%.
Thank you and our next question comes from Seth Basham with Wedbush Securities. You May proceed with your question.
I just have a follow up thinking about the incremental operating margins in the first quarter. Despite the inefficiencies you guys had very strong incremental operating margins.
The 30% how should we think about the rest of the year should we think about that.
Second quarter, given these commodity cost headwinds relative pricing being the lowest and then seeing acceleration again in the back half of the year.
Sure just just broadly speaking the way I would think about it as gross profit on a full year basis I would I think about it as stable as they think about diving into the second quarter, let's call. It we had a really nice first quarter just given all from the challenges, perhaps stable to slightly down on GP and as they think about again full year operating margin.
One of the items to consider as we always do think in the long term. So we do intend to continue to support our brands from an advertising standpoint, So we'll make that investment as we think about the rest of the year.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Scott Thompson for any further remarks.
Thank you to the over 9000 employees around the world. Thank you for what you do every day to make the company successful through our retail partners. Thank you for your outstanding representation of our brands.
Our shareholders and lenders. Thank you for your confidence in Tempur Sealy leadership team and its board of directors with that that ends our call today operator.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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