Q3 2021 Tempur Sealy International Inc Earnings Call
Ladies and gentlemen, thank you for standing by your pump costs or to get momentarily again. Thank you standing by your corporate costs are they getting them again.
[music].
Thank you for standing by and welcome to the Tempur Sealy third quarter 2020 earnings Conference call. At this time, all participants are in a listen only mode.
After the Speakers' presentation, there'll be a question and answer session.
Ask a question at that time. Please press Star then one on your Touchstone telephone.
As a reminder, today's conference call is being recorded.
I would now turn the call 30 hostess argue more ovens.
Of Investor Relations. Please go ahead ma'am.
Thank you operator.
Good morning, everyone and thank you for participating in today's call. Joining me today are Scott Thompson, Chairman, President and CEO, and Bhaskar Rao Executive Vice President and Chief Financial Officer.
After prepared remarks, we will open the call for Q&A.
This call includes forward looking statements that are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
These forward looking statements involve uncertainties and actual results may differ materially due to a variety of factors that could adversely affect the company's business.
These factors are discussed in the company's SEC filings, including its annual report on Form 10-K, and quarterly reports on Form 10-Q under the headings special note regarding forward looking statements and risk factors.
Any forward looking statement 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 also include non-GAAP financial information reconciliations of this non-GAAP financial information can be found in the accompanying press release, which has been posted on the company's investor website at Investor Dot Tempur, Sealy Dot com and filed 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 operator.
Good morning, everyone and thank you for joining us on our 2021 third quarter earnings call.
Again with a few highlights of our record third quarter financial performance.
Oscar then we will review our financial performance in more detail finally, I will conclude with some comments on our building blocks for future growth.
We're pleased to report robust third quarter results. The team continues to deliver strong results all around the world.
In the third quarter of 2021 sales grew 20% year over year.
With strong performances across North America, and the international segments and with growth across all brands.
Channels and price points.
Our strong sales performance was driven by our company initiatives strong demand for Tempur pedic products in the U S and a solid betting industry backdrop worldwide.
Adjusted earnings per share for the third quarter with 88 cents, an increase of 19% versus the same period last year.
I should also note that we have grown sales and adjusted EPS double digits, where nine out of the last 10 quarters.
I would now like to highlight a couple of items from the quarter.
First we are pleased to officially welcome the dreams organization, our recent acquisition in the UK to the Tempur Sealy family.
The addition of dreams furthers, our vertical integration and Omnichannel growth strategies.
We are successfully integrating the business.
It is performing well.
Head at its initial expectations.
Topline and bottom line perspective.
We expect over time to leverage our combined track record of operational excellence to realize and budgeted synergies, which will further drive profitability.
Second.
Consistent with our legacy of launching innovative products. We're excited to highlight some of our new products in North America and around the world.
Starting with North America.
We plan to launch a sealy mattress.
With a best in class pressure, leaving shale grid layer.
A consumer appealing mid market price point.
Designed to target the niche market of consumers looking for a non traditional field.
Non non premium price point, we're also planning to launch excuse me branded eco friendly mattress collection made with responsible sourced material.
Furthermore.
In early 2022 in addition to the emerging niche markets. We plan to address we are launching a new line of premium sealy products targeted to wide variety of customers, which include a new lineup of industry leading hybrids.
This new Sealy lineup is intended to extend the brand leadership in the industry by offering superior support a new proprietary <unk>.
Okay.
Looking ahead to late 2022 team is also working on the next line of Stearns <unk> Foster products.
These products are designed to further distinguish our.
High end traditional innerspring brands from the competition.
Material to serving consumers that prefer a traditional innerspring mattress stern can foster is on track to have record sales this year.
Supported by a record amount of advertising dollars, we see ample opportunity to further expand consumers' awareness of this segment through.
Through the introduction of new products and continuing to advertising.
<unk>.
Turning to international.
As we have previously announced we are launching a new line of Tempur products in our European and Asia Pacific markets next year. These new products will feature the innovative Tempur Pedic technologies experienced great success in the U S and will be sold at a wider price range compared to the legacy Tempur International offers.
Offerings.
Next I'd like to highlight our recent capital allocation activities.
During the last 12 months, we've allocated over $1 billion in capital.
Wiring dreams repurchasing shares paying your dividend and investing in our ongoing operation.
At the same time, our robust earnings drove a reduction in our leverage ratio.
In the third quarter, we opportunistically repurchased $190 million of our shares bringing our total share repurchase over the last 12 months to approximately 700 million at an average price of $36 per share.
Regarding recent investments and business and the business over the last 12 months, we've opened three new manufacturing facilities. Additionally.
Additionally, we recently broke ground on our third domestic foam pouring plant in Crawfordsville, Indiana, which is planned to be operational in 2023.
We're investing to dramatically reduce our exposure to future supply chain disruptions by expanding our capacity whole key chemical inputs expand safety stock of certain products.
The operational investments, we're making today are part of a broader strategy to expand our north American manufacturing capacity, which will allow us to service. The long term demand outlook that we see for our industry, leading brands and products.
No.
Sealy and Tempur brands are currently ranked as number one and number two best selling mattresses in the United States.
The next highlight is a worldwide wholesale business, which grew a robust 11% this quarter as compared to the same period last year.
We are pleased with this performance, especially given the strong prior year sales comp.
And the fact that we were unable to ship all of the market demand in the quarter.
As expected our customers continue to be on allocation.
And we exited the quarter with a record backlog.
This quarter and the.
Normal market seasonality has allowed us to make significant progress on working down our backlog.
We recently took customers off of allocation.
Unfortunately, due to the tremendous demand for Tempur pedic products in North America, and domestic supply chain issues the backlog for tip repeat it expanded in the third quarter.
We expect to work down this backlog in the fourth quarter and enter 2022 better positioned to fully meet consumers' demand.
Across both brands. Our total backlog has increased from the end of the second quarter by about $100 million as of September 32021.
Okay.
Turning to the final item I'd like to highlight.
Our direct to consumer business had another record quarter growing 79% over the third quarter of 2020 and growing 17%, excluding the dreams acquisition.
With this quarter's strong performance.
Our third quarter direct to consumer sales.
Grown a compound annual growth rate of 45% over the last five years.
On an annual run rate basis, our direct channel is now on track to generate over $1 billion of sales.
Our company wide retail stores had a standout performance this quarter.
The dreams stores and our legacy company owned stores, both drove double digit same store sales growth year over year.
Our E Commerce operations also performed very well this quarter we.
We continue to see robust sales growth driven by double digit improvement in conversion and average order value.
Our commitment to investing.
And the online presence of Tempur Pedic brand is paying off.
While we are pleased with our result, I should once again remind you that both our wholesale and direct sales in North America had been constrained in the quarter.
Why chain constraints once again forced us to turn away business. This quarter, we estimate that it was about $100 million.
Considering this any unrealized sales from our increased backlog or sales could have been higher by over $200 million. This period.
Turning to our growth outlook and drivers.
I'm pleased to reaffirm our expectations that too.
2021 sales will grow approximately 60% over 2019, a period not impacted by Covid.
Our sales and earnings growth over the two year period has significantly outpaced the overall industry.
I'd like to take a moment to remind you what we said last quarter about the components of its growth.
We estimate about half of our two year growth is attributable to our new retail partnerships. Another 35% of our growth is derived from our M&A activity and share gains from previously untapped addressable markets.
We estimate only about 15% of our expected two year growth come from the broader industry.
Our performance to our commitment to driving our four key initiatives first develop the highest quality bedding products in all the markets that we serve.
Promote worldwide brands with compelling marketing.
Third optimize our powerful omni channel distribution platform and fourth drive increased EBITDA and prudently deploy capital.
Our clear long term initiatives rope robust free cash flow and solid balance sheet and supported the explosive growth that we've generated over the last two years, we expect to drive future double digit sales and EPS growth in 2022 and beyond.
With that I'll turn it over to Oscar.
Thank you Scott.
Sales increased 20% to over $1 $3 billion.
Adjusted EBITDA increased 7% to $298 million.
And adjusted earnings per share increased 19% to 88.
As expected there were a few transitory items impacting this quarter's margins compared to the records in the same period last year.
These included price increases to customers without margin benefit.
Operational inefficiencies to provide the best possible service to our customers, while dealing with supply chain issues.
And unfavorable brand mix again, driven by supply chain issues.
As expected we have been neutralizing the dollar impact of commodities through our pricing actions. Our gross margin was impacted as sales increase with no change in gross profit dollars.
This accounts for 350 basis points of the year on year change in consolidated gross margins for the quarter.
This rate dilution was expected and the underlying margins for the business remains strong.
I also want to reiterate our belief that driving incremental bottom line profitability is the best way of returning value to shareholders.
Now turning to North America.
Net sales increased 13% in the third quarter.
On a reported basis, the wholesale channel increased 12% and the direct channel increased 20%.
North American adjusted gross profit margin declined 490 basis points to 39, 9%.
This decline was driven by the previously mentioned items.
We have implemented several pricing actions over the last 12 months to offset rising input costs.
While we had been neutralizing the dollar impact commodity prices have increased beyond our prior forecast.
We expect additional pricing actions to offset these headwinds in 2022.
Although we will feel a bit of cost pressure in the fourth quarter.
North America third quarter, adjusted operating margin was 21, 2%.
A decline of 260 basis points as compared to the prior year.
This is driven by the decline in gross margin I previously discussed partially offset by operating expense leverage.
Now turning to international.
Net sales increased 73% on a reported basis inclusive of the acquisition of dreams.
On a constant currency basis international sales increased 72%.
As compared to the prior year, our international gross margin declined to 54, 6%.
This decline was driven primarily by the acquisition of dreams.
And pricing benefit without change in gross profit.
Our international operating margin declined to 22, 1%.
This decline again was driven by the acquisition of dreams.
Klein in gross margin and operating expense deleverage as cost in the current year have returned to a more normalized level.
As a multi branded retailer dreams sells a variety of products across a range of price points.
Their margin profile is lower than our historical international margins, which is driving the major change in year over year margins internationally.
Excluding dreams, the underlying sales and margin performance internationally was in line with our expectations across both Europe and Asia Pacific.
Now moving onto the balance sheet and cash flow items.
We generate a strong third quarter operating cash flows of $285 million.
We are running very light on inventory and we would expect that our inventory days would increase by the end of the year to support our expected sales growth in 2022.
At the end of the third quarter consolidated debt less cash was $1 9 billion.
And our leverage ratio under our credit facility was one seven times.
Our strong financial performance and balance sheet resulted in positive signals from the capital markets.
First we received multiple rating agency upgrades during the quarter, resulting in our strongest credit ratings in the company's history.
Second we issued $800 million, three and seven 8% 10 year bond.
Which was significantly oversubscribed by the market.
This bond secures our long term flexibility at historically low rates and resulted in record liquidity of $1 $2 billion at the end of the third quarter.
This transaction will have the near term impact of an incremental $7 million of interest in Q4 2021.
We are temporary holding excess cash and over time. These funds will be invested to drive incremental EPS.
Now turning to our 2021 guidance.
We have updated our full year guidance to reflect our third quarter performance.
The expectation is to reduce our elevated backlog.
And incremental costs, we expect to incur to service our customers through the balance of the year.
We currently expect 2021 sales growth to exceed 35%.
And adjusted EPS to be between $3 20, and $3 30.
For a growth rate of 70% at the midpoint.
I want to note that this expectation on adjusted EPS includes a headwind of <unk> <unk> from the increase in interest expense I noted before.
Consistent with our prior quarter's commentary, we expect the fourth quarter will be unusually strong as we work off the large backlog, we carried over from the third quarter and remove customers off allocation.
We expect this to result in sales and profits being higher in the fourth quarter than in the third quarter.
At the midpoint of our guidance this implies EBITDA to grow over 30% in the fourth quarter versus the prior year.
Lastly, I would like to flag a few modeling items.
For the full year 2021, we currently expect total capex to be between 140 and $150 million.
D&A of about $180 million.
Interest expense of about $62 million.
A tax rate of 25%.
And a diluted share count of 204 million shares.
With that I'll turn the call back over to Scott.
Thank you pastor great job.
I wanted to provide some additional details about our plans for future growth.
We have complementary building blocks in place that we believe will drive growth in our business for next year and beyond.
The first major building block is the launch of our new line of Tempur products in our European and Asia Pacific markets.
New products will have a wider price range.
The Super premium ASP ceiling maintained.
And the ASP for expanding into the premium category.
Will allow us to reach a new segment of customers substantially increasing our total addressable market internationally.
We will launch and invest in these new products across our international markets in 2022.
Second key building block is the continuation of our initiative to expand into the domestic OEM market in 2020, we recognized white space opportunity for Tempur Sealy in the OEM market and successfully generated $150 million in sales in our first year. We believe that we can grow our sales by.
400% to $600 million by 2025 due to continuing.
<unk> of utilizing our best in class manufacturing and logistics capabilities.
Manufactured non branded product this will allow us to earn our fair share of the approximately 20% of the bedding market. We believe is serviced by OEM.
This is also is also expected to decrease our cost per unit for our branded product as we spread fixed costs and drive more advantageous supply agreements.
The third building block of future growth is our expectation that we'll be able to service the entirety of the robust robust demand for our brands and products through the wholesale channel throughout 2021, because the supply chain issues.
Had to turn away, new North American customers' opportunities.
And had our existing customers, including our e-commerce and retail operations on allocation beginning in 2022, we anticipate being able to fully service demand and reengage with those new customers, who approached us in the past about bringing on our brands and non branded products.
We also expect to return to a normalized brand mix dynamics as supply chain improved for both Tempur and Sealy operations.
The fourth building block is continued expansion through our direct channel.
I've said before we believe that we have one of the fastest growing most profitable direct to consumer bedding businesses in the world.
We expect both our E Commerce and company owned stores to have robust growth opportunities going forward.
E Commerce will continue to focus on converting customers interested in purchasing online directly from our brand.
Our retail operations are driving both same store sales growth and expansion of the store counts.
Currently operate over 600 retail stores worldwide and see opportunities to further increase our store count organically about double digits annually for the next.
It'll years.
The fifth building blocks that will drive our future growth with continued investment in innovation consumers are growing consumers have a growing appreciation for the importance of sleep to overall health and wellness and as a result are increasingly searching for new solutions and technology to help improve their SKU.
<unk>.
We have a strong legacy of delivering award winning products that provide breakthrough sleep solutions to consumers backed by over a century of knowledge and industry, leading R&D capabilities.
Our planned 2022 product launch exemplifies how we will relentlessly drive innovation to continue to bring consumer centric solutions to market.
Lastly.
We expect to continue to execute execute on our capital allocation strategy.
We run a balanced capital allocation plan.
Which contemplates supporting the business returning value to shareholders via share repurchase and dividend.
And on opportunistic basis, acquiring businesses that enhance our global competitiveness.
We believe that our execution across these key building block for sustained double digit sales and EPS growth in 2022 and position the company very well for sustainable long term growth.
In closing.
I briefly want to touch on ESG.
We've embedded environmental social and governance factors into our core strategy to help deliver long term value for example, our new eco friendly mattress collection I discussed a moment ago, we made of responsibly sourced materials.
We also expect our new U S.
Pouring facility to allow us to hire approximately 300 local employees.
Our average annual salary.
Our U S manufacturing employees is above the national average and it's about $42000 a year.
The facility will also include state of the art equipment, which is expected to improve energy efficiency on a per product basis.
With that operator will you. Please open the call up for questions.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one.
And you touched on the telephone.
Again to ask a question. Please press Star then one.
We do ask that you. Please limit yourself to one question and then please rejoin the queue.
Our first question comes from Curtis Nagle of Bank of America. Your line is open.
Good morning, Thanks very much.
Scott just a question on that.
For 'twenty two and.
And beyond comments.
Right. So it's a double digit sales.
Earnings.
I don't think that's new per se in terms of the sort of.
What you guys have said in the past, but it is in print, which I think is important so.
Just what gives the confidence and then just a very quick one on what are the biggest supply chain issues are at the moment.
Yes, that's right.
Good morning, and thank you. Thank you for your question.
You're asking about our confidence going into 'twenty, two and you look at it from our standpoint, we just reported.
Nine out of the last 10 quarters, we've had double digit sales and EPS growth. So a lot of momentum to start with.
Within the business.
<unk> is the third quarter I think we were at 20% growth in sales, but clearly highly constrained.
We tried to outline the impact of that constraint, we had an increase in our backlog of about $100 million.
Primarily driven by by Tempur and then we've had customers on constraint and that's primarily been North America Sealy. So I mean, if you really put the $200 million, we feel we were constrained in the quarter.
Underlying demand for our product was probably closer to 40% and the organization wasn't able to.
Realize that demand you can see from our comments that we're working very hard to increase our capacity.
So assuming no macroeconomic events, assuming the viruses.
Trending the way it is we go into 'twenty, two feeling very good about demand.
Really about just our ability to produce and thats something that were relatively in control of.
Assuming the supply chain kind of normalize.
But but feel very good.
Particularly about Tempur worldwide I'd also say if you look at our direct business, which is a business that we obviously have total control over.
The compound annual growth rate on that is about 40 plus percent over the last five years.
The stores.
Called it out.
In the prepared remarks are running 20% same store sales.
So our expertise in retailing continues to.
It gives us confidence you also slipped in an extra question because you're very skillful at that and so you kind of threw in a supply question Lucas.
We look at supply chain.
I would say in general is getting better.
I think we also have to realize it at the supply chain in the world a little bit fragile. So he could get shaken up by some something we don't know about.
But as we sit here today the supply chain issues are improving.
As I think we called out last quarter, we are hoping we get normal seasonality, particularly in Sealy North America, where we've been constrained we have got some normal seasonality.
In the fourth quarter on Sealy, and we've rapidly caught up in the backlog as it relates to Sealy and the good news about that is it takes.
Our customers off constraints in North America.
Starting probably here in the last week or so, but that's first time, they've been unconstrained Oscar it about a year correct. So.
Thrilled to get the salespeople back out in North America to drive new customers.
And feel really good about our times to delivery on Sealy that we've struggled with over the last year. Thank you for your question.
Yes.
Thank you. Our next question comes from Seth Basham of Wedbush Securities. Your line is open.
Thanks, a lot and good morning, nice quarter, just a couple of quick questions combined on the guidance first in the fourth quarter gross margin outlook, how should we think about that relative to the third quarter given 72 moving pieces and then secondly, why no explicit EBITDA guide for the full year.
I'm sorry, what was the last question.
Okay.
EBITDA guidance for the full year didn't see that in your press release relative to what you had.
For the second quarter results, Okay got it sure. So the easy way to think about GP percent in the fourth quarter is as we called out we did accumulate.
Accumulated backlog on the Tempur side, and Thats about $100 million.
And the way I think about that as just flipping in the fourth quarter. So sequentially, we should see meaningful improvement from a GP perspective going from three to four.
As it relates to EBITDA for the full year, we did give a way to think about the fourth quarter, where we said we would grow.
Plus 30% on a year over year basis. So if you add the first three months sorry. The first three quarters of actuals you can get to it and I think on the EBITDA thing, we're trying to just move to simplify our guidance and pointing more towards EPS going forward.
Okay.
Yeah.
Thank you. Our next question comes from Bobby Griffin of Raymond James Your line is open.
Good morning, everybody. Thanks for taking my questions.
On a good quarter.
A long term question, but a lot of interesting and powerful initiatives going on in the business Dreams OEM.
Some of the growth of the brand and so when you think long term in that algorithm that you laid out do you still see margin opportunities or is this model more flex hold EBITDA margins here in the low twenties generate robust cash flow and drive EPS growth above our peers.
Great question. The way, we think about margins is on a business unit basis.
So there's margin opportunity in the various business units, but has as those business units mix into the total.
I don't know I don't know how to really think about dated consolidated GP.
A lot of that is going to be determined based on what customers preferences are.
Our execution and as an example.
The OEM business, which is a great business for us, but the margins are lower certainly than our tempur business.
And we're just getting started in the OEM business. So it may blend differently.
So.
But I would tell you when I look at the individual businesses and we roll them up through our budgeting process. We continue to see margin opportunity in individual businesses, but how they mix is a difficult question at this point to answer.
Thank you.
Our next question comes from <unk> <unk>.
<unk> of UBS Your line is open.
Yeah.
Good morning, Thanks, a lot for taking my questions.
Scott you mentioned that the fourth quarter demand grew nearly 40%.
Third quarter demand grew nearly 40%.
Fourth quarter guidance implies about 30% revenue growth when you're expecting to work through some of the backlog Israel.
Guidance, assuming the core demand slows and if so why would that be the case.
I think what you are bumping into your inbox can you can you can weigh in on this.
As we've mentioned we have returned to what I call normal seasonality going into the fourth quarter. The third quarter as you know the most usually most robust quarter.
For the industry and as you come into the third quarter, we have felt some normal seasonality primarily in Sealy Tempur cloud right.
Is that probably is running into absolutely.
Thank you.
Our next question comes from Peter Keith Piper Sandler Your line is open.
Hey, Good morning, It's Bobby Singh on for Keith Thanks for taking my question.
Just wanted to ask a browned high end versus low end sales trends.
If there is anything to call out there.
Yes.
Bifurcation between the two.
With the high and leading.
Feedback we hear from retailers that premium has been very strong so I'm wondering if.
We're starting to see any divergence in trends between the two.
Yes.
I don't have any.
Analytical data to prove it.
My gut feeling is exactly what you said I think high end and premium is.
Doing the best.
I think at the lower end, it's probably cooled off some from what might have been a little bit of stimulus checks earlier in the year, but still good but premium is clearly leading the way and some of that may be from consumers more focused on angel and being.
Willing to spend on health and wellness as it relates to their experience with the pandemic.
Yes, I think I think that's absolutely true and quite frankly that that's.
Good trend for.
The manufacturers because obviously, we make more not just dollars, but margin on the higher end product and Tempur and Sealy and Stearns <unk> Foster is certainly well positioned.
Within the industry at the premium end.
Yeah.
Thank you. Our next question comes from seeking insurance your line is open.
Thank you Ed questions about the new Sealy product launch Joe.
Gel product.
Talk about.
How many how many skus will be part of that what do you think youre going to get there in.
The market any other details you want to share.
Sure.
K Crushable wafer is kind of my slang word floor for it.
We've got the product developed.
It'll be at Sealy product call it middle market.
Exact number of Skus haven't hasn't been determined we expect it to be in the market in 2022.
Its in testing make sure it's best in class as we sit here today.
I don't think its a big product that only can be material to the organization. It's another one of those examples of where we find niche opportunities.
And.
As the largest bedding manufacturer in the world, there's probably not a bad we can't make if we believe that there's a market there it's worth attacking and so we're going to attack that market.
Thank you. Our next question comes from Brad Thomas of Keybanc capital market line is open.
Thanks Congrats.
Congratulations on all the momentum in the business here.
Scott I was hoping you could talk a little bit more about your channels in North America.
An unusual year as DTC was very strong a year ago brick and mortars bounce back and I was wondering if you could just share a little bit more detail about where you're most optimistic from a channel perspective in North America as we look at next year.
Hum.
That's a really interesting question because as you as you framed the question Youre right Theres been a lot of volatility within the channels in North North America.
I'm going to say without consulting people, who probably know hell of a lot more to me if I had to pick a channel I, probably would say the in store.
It might grow a little bit faster next year than online not that online over the long term probably grows faster, but there's probably a little bit of headwind and then he got such tough comps.
I'm, probably the most optimistic on in store, which May sound a little funny.
Kids compared to online over the next 12 months and if you go kind of a three year five year timeframe I'm probably more optimistic.
About the about the online experience.
Seem like I mentioned before.
Really strong performance.
The best in class retailers on their in store performance.
And I think customers are when they go to store are clearly being.
Our focusing on their health and wellness and moving to premium product.
Online, it's good but it's more difficult to move to premium product online.
Probably right now subsidiary as I said before more optimistic about in store.
Kind of sounds funny coming out of my mouth.
Thank you. Our next question comes from Laura Champine of Loop capital. Your line is open.
Thanks for taking my question I'm curious in your inventory balance, which grew significantly year on year, how much of that is from dreams and what should we.
Expect internally in terms of inventory turns in that dreams business that you've recently acquired.
Sure. So you are correct. The vast majority of the increase is associated with dreams on a year on year and sequential basis, a way to think about it is if you look at the underlying as I indicated is that we're a little bit light on inventory, we would like to run with more inventory than we have now to be able to service our customers and timber PDP.
The tanker Pdp's correct. So as you think about.
Moving to the end of the year I would anticipate overall that our cash cycle would increase by a couple of days, primarily driven by inventory days as you think about dreams, specifically is as a retailer is there also a manufacturer as well. So if you step back from that retail generally has very very low.
<unk> and turns very quickly however, given the manufacturing as well as retail nature of it it would be a bit higher than what you would expect from a retail a typical retailer.
Thank you. Our next question comes from Bob <unk> of Guggenheim. Your line is open.
Hi, good morning.
I guess the question I have is you talked about.
Ability to bring on new customers, but you do believe you'll be able to bring them on next year. Just wondering is that something you anticipate like the first quarter of next year and from like a supply chain perspective, you said its getting better just trying to understand the expectations around the flow of bringing on some additional customers to the business.
Great.
Talking generally in North America here, it's been constrained.
You should think about they come throughout the year.
And.
Bill.
Grow during the year, because we're still going to be I suspect fighting some supply issues.
In the first quarter, so we'll be cautious.
But I think youre, probably talking about during the year and probably a little further back loaded than front loaded.
A supply chain standpoint.
Thank you. Our next question comes from William Reuter of Bank of America. Your line is open.
Good morning.
My question is on capital allocation I think you mentioned that the share repurchases are now $700 million on an LTM basis, given the strong cash flow generation that should be expected over the next year. How are you thinking about additional share repurchases and I guess, what's the outlook for M&A like.
Sure Great question.
Look we've been running below our leverage target.
One seven Bosker, yes, one seven.
Our range is really two to three we've been very clear I think that the.
The reason we're below two has to do with the general health prices around the world on the virus and once we'll call. It we're clear wed like to get back into our stated leverage ratio call. It two to three certainly at the low end of that.
Would be my perspective.
If you take that statement and play with little bit of math I'll discuss some extra liquidity.
We're going to generate a lot of cash flow as our as our estimates for next year. It would look like we have significant powder.
To either do acquisitions or share repurchase in fact have to do one of those two will drown in cash in.
We will be at a leverage ratio that would not be acceptable.
So my expectation right now is the next year it will be a pretty robust year from a share repurchase standpoint.
That could change depending on what goes on in acquisitions as I've said before we are.
Constantly talking to people.
We priced stuff.
And then we patiently wait to see whether or not it makes sense for the other side.
I don't know, it's always hard to predict acquisitions, but I suspect, we'll either be reasonably.
Reasonably active in acquisitions or significantly active in buyback and probably a little bit of both.
Guessing today.
Drowning in cash doesn't sound bad to me. Thank you.
Thank you.
It will it will if I just use it to pay debt down.
So.
Got to do something with it is it is a high class problem, but it's probably now to deal with.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press Star then one on your Touchstone telephone. Our next question comes from Jonathan <unk> of Jefferies. Your line is open.
Hey, Scott, Hey, Bob Good morning, and nice quarter.
Picture question on marketing.
Obviously, we're in a supply constrained environment.
Right.
Some other folks have been pulling back on.
AD spend but it feels like you Havent gone there.
As has been all in on marketing I think he commented on.
MS <unk> Foster specifically in your prepared remarks, but just asking kind of more broadly.
In terms of.
Marketing going forward.
Great Great observation.
We have chosen not to optimize.
The quarterly financial statements by trimming marketing.
We thought about it because youre right. We are in a constrained environment and you could ask like why why spend the money.
Because of the demands there, but we look at brand building.
As a long term goal and part of what we owe the retailers and so we've not pulled back on marketing and we have been put all in and we're going to continue to be all in from a marketing standpoint, we have called out Stearns <unk> Foster because thats a historical change to lean into more historic two more advertising Stearns <unk>.
Oster.
The high end brand that I think has over a period of years has outstanding opportunity.
To grow market share, but now we're all in on the advertising we like the trends we like the brand strength that we're seeing in our analytics.
And again it kind of goes back to as part of what gives us confidence in 2022, because we are taking this momentum into next year as opposed to worrying about optimizing our quarterly income statement this year.
Thank you.
Next question correctly, Seth Basham of Wedbush Securities. Your line is okay.
Hi, Thanks for taking a follow up question.
My question is on the backlog these thoughts about $100 million increase from the second to the third quarter or would that be on a normalized.
Basis for seasonality and what do you expect.
Backlog to look like at the end of the fourth quarter relative to the third.
I would say probably on a normalized basis, we wouldn't talk about baccarat starwood. So wed like normal I don't expect to ever have talked about backlog again.
And the end of the fourth quarter.
Think sealy will be totally back to normal.
My expectation and temporary is really a question of how strong the sales are.
And as I mentioned earlier timber continues to be robust.
And it's possible that we that we have a backlog on tempur.
Smaller one but backlog on tempur going into the first quarter, but thats.
But the demand.
Estimation.
Thank you. Our next question comes from Keith Hughes of choice. Your line is open.
Yes, just to follow up on international can you give us an idea of what organic growth.
So it was without dreams, and maybe any comment on margins there too would be helpful without frames.
Absolutely so internationally without dreams, we did grow for the quarter also from a gross margin standpoint, as I mentioned dreams.
Is is accretive to the whole. However, when you think about international specifically it is dilutive on the GP perspective, so the underlying margins for both Europe and Asia Pac outside of Dreams.
We're in line with our expectations.
Okay great.
Our next question comes from Brad Thomas of Keybanc Capital markets. Your line is open.
Hi, Thanks for letting me back in as well.
I was hoping to just address the question of margins overall and I know that there are a number of elements of your business, but it has helped to drive some structural improvements in margins, but a question that we get for much of our coverages how much your company's over earning right now if at all and how much margins have to.
Come back in the face of some normalization in to some supply chain headwinds.
So.
Was hoping you all could just talk about how you think about that going forward here.
Sure.
From my perspective.
Don't see us over earning and let me, let me put some meat around that.
As I've already mentioned earlier on this call we didn't pull back on advertising. So we have not.
Change that expense, so theres no optimization, there when I go into the plants.
The plants are not running at normal efficiency. These supply disruptions have been.
Very difficult on operations and so when we look at our plant operations and statistics were off plan.
Use the term, we're running sloppy and I don't mean, disrespectful, skip where can damn hard, but we arent optimized from an operational standpoint, the plants. So those numbers certainly.
We're not we're not over earning in any way.
On commodities the way. This works is we get hit with commodities first and then we pass them on to the retailer.
There's been a lag there so which you've seen in our reported numbers is that lag, where we experienced commodity cost, but not fully passed on yet.
So that's in the numbers and so that doesn't feel like I'm over earning and then when we pass those commodity costs onto our retailers, we don't pass and with profit on there. So we just we just pass them to offset our costs and as <unk> explained that's a headwind to the margin rate, even though the margin dollars, we fully offset.
Now the retailer gets a little bit of benefit there because we do we do pass cost on whether it was margin.
But the manufacturer does not make that.
Unless you think the sales volume.
Is unusually high and the total sales volume is going to come down.
Can't find anywhere in the income statement. It looks like there is any over earning Oscar can give me give Eric I mean, we're expediting beds and supplies to service customers.
I don't see anything that's right.
On the over over earnings I'm kind of hoping that things kind of go back to normal because I think you'd see some improvements in the other areas.
Thank you.
I'm showing no further questions at this time I'd like to turn the call back over to Scott Thompson for any closing remarks.
Thank you operator.
The nearly 12000 employees around the world. Thank you for what you do every day to make the company successful to our retail partners.
Thank you for your outstanding representation of our brands to our shareholders and lenders.
For your confidence in Tempur Sealy leadership team and its board of directors.
This ends the call today operator, thank you.
Thank you ladies and gentlemen, this does conclude today's conference. Thank you all for participating you may now disconnect have a great day.
Okay.
[music].
Yes.
[music].
[music].
[music].