Q4 2021 Tempur Sealy International Inc Earnings Call

Obviously last year was a tough year of having our customers on an constraint and we've committed as a management team to get back to the service levels that our customers expect and so we've pre hired and we are carrying I don't know 250 to 300 extra people X.

Okay.

Thanks, a lot and good morning, just to follow up on some of those questions. If you could give us any color that you have on Tempur pedic and how that brand performed through the President's day weekend and then secondly, what gives you the confidence that the low end consumer softness we're seeing is <unk>.

Temporary.

First of all you have to realize our information on presence days, obviously it takes a little while so were probably two or three days ahead of of having what I'll call hard information.

So let me hedge my comments, it's mainly on verbal.

Calling out there, but look I think I think <unk> had a great President's day.

It feels like and although we don't have all the public companies reporting at this point it feels like we continue to take share at the <unk> level.

We're hearing very positive.

Positive things from them.

From the Tempur side U S Tempur and as I mentioned, probably the best.

Formation, we have is our own stores, which of course, we get that information and continuously.

And from a same store standpoint, our tempur flagship stores are running same store sales of over 20% and Presidents' day.

So that part of the question quite frankly is kind of a softball and I. Appreciate it. The second part of the question is more like a SaaS ball towards the head, which is one where do you think the entry level customers coming back and why you have confidence in that area first thing I'd point out quite frankly that customer we don't make that much money on as you know.

The lower ASP beds don't have.

Margin on they.

They do cover a lot of good fixed cost.

From that standpoint.

I think in the near term we've got some tough compares when you look at March and stimulus checks and timing of that but if you step back and look at the U S. U S market you have got.

Consumers debt levels are in good shape included including the lower end.

That you are talking about.

<unk> got great wage growth in that segment, they've got I don't know what is it let's call it $3, 94% unemployment.

And quite frankly get a job anytime they want to so if you look at that segment.

It looks like it should be in a really good shape throughout the year.

Now the timing of stimulus checks being pulled out of the market and wage growth coming into the market whether that matches that perfectly on a month to month basis.

Who knows I am not smart enough to know.

But that segment to me it looks like it has pretty strong economics, and so that segments, usually shown a propensity to when they have money spend it.

So as long as gas prices don't get too high and as long as wage growth continues with what we've seen.

I think that segment is going to be in good shape, but he didn't look but it may be it may be a quarter. It may take a little while as the stimulus checks compares.

We've got a bench market against them, but it really is interesting when ice segment our customers.

It's more about not the size of our customers, but whether or not they focus on the high end or the low end and the.

<unk> that focus on.

Higher and there is certainly doing better than the customers that are focused solely on the lower end. So I do think that is an uncertainty.

When you are trying to put together a forecast, but like I said the good news is that segment is not using the segment that drives.

Our profitability.

Thank you. Our next question comes from Bobby Griffin with Raymond James.

Your line is open.

Good morning, Brian could you to taking my question I guess, Scott I just wanted to call out a couple of times in the release Army are throughout the year really inefficiencies due to COVID-19 supply chain different things like that run through the P&L.

Given the guide for the efficiency of the operations in fiscal year 'twenty, two do we get closer back to normal halfway there kind of what are what do you guys assume when you bake that in.

Yes.

Great.

Interesting and great and complicated question.

First of all.

Let me point out a couple of things that we may not have talked about directly.

One thing Thats happened in the recent spike in Covid is staffing issues not at Tempur sealy, but at our customers and so specialty REIT bedding retail stores, where they only have one or two staff may be in the building.

They've had trouble keeping some of the stores opened so we've got some closures related to.

Covid this time around that that may not be apparent.

So that's that's fair that's fair to us a little bit if you go to the supply chain I think the supply chain is the good news is.

Is it perfect no. It's not perfect is it significantly better than it was at the beginning of the fourth quarter, Yes without question.

Are we damn near close to normal I'm going to say, we're damn near close to normal on the supply chain.

And there might be some still some inefficiencies in the manufacturing and people standpoint from from absenteeism Covid related stuff.

But the supply chain is.

Generally in pretty good shape I mean, the chemicals are back the the inventory levels for tempur or close to normal if not normal and we will take a little bit more inventory into the second quarter, because we're fairly bullish.

On the second quarter.

Springs, obviously are certainly in good shape and Leggett has done a great job. There. So I think the inefficiencies that are left in the system have mainly to do with people.

And have to do with absenteeism.

So in order to protect ourselves and our customers.

From that risk, which we felt like we were in control of.

Look we've overstaffed.

We hired early we're training people and as I mentioned before we're carrying an extra people in U S manufacturing primarily on the Sealy side.

To make sure that.

We can get back to normal there will be some cost.

That was absorbed in the first quarter, but I think by the time to get to the second quarter.

With no unforeseen events I would say.

In the second quarter will be back to normal operations, both from time of delivery and efficiencies is that fair bosker budgeted. So we're not quite there, but look we feel look the major accomplishment in the fourth quarter. Although the numbers are very strong at 29.

Rent growth, but the major accomplishment is we're back to normal and we're servicing our customers and we've got our sales force back in.

Hunter mode as opposed to trying to service customers and chase orders down.

We think that puts us in a very strong competitive position going into 'twenty two.

Thank you. Our next question comes from Atul Maheshwari with UBS. Your line is open.

Good morning, and thanks for taking my question I got a multipart question, so I'm going to apologize in advance.

Got it.

So I can write them down very quickly because I can't remember so go ahead, yes. Thank you.

Thank you. So what is the level of industry unit growth that you've assumed in this guidance of 16% to 20% revenue increase for 2022, and then related to that can you maybe provide more granular color on the contribution from the various building blocks that get you to this level of revenue growth then.

<unk>.

Low end softness were to persist for the year.

Do you still believe you can achieve this guidance just trying to understand how consumer acquisition.

Sure.

I'll work on some of that and then after I mess it up Bob Crow clean it up look unit grabbing one thing it's kind of interesting.

Unit growth in the fourth quarter.

Because we know our unit growth it was negative, but we still grew sales, 29%. So I think thats. The first thing not that unit growth is an important but probably mix is more important than unit growth.

I think some other industry experts have been talking about unit growth for 2022 and in the U S at somewhere between probably zero and 4% is kind of it sounds like to me has been the chatter.

But thats, probably a good thats, probably a good estimate I mean, if I if I were guessing.

But again mixed us is probably more important.

And then actually unit growth.

The second question was Oh, the building blocks in Bosnia and walk them through you got dreams in there you've got pricing pressure.

And there you've got the retail stores.

We're opening and obviously, you've got some new launches going in there. So I'll, let you do the building blocks. So the way I think about it is with those components. What I would say is overall outside of the items on specifically going to call out we would expect growth in all of our channels all of our segments all of our Geos.

Then building upon that what I would say is is that we do have dream.

Other side of that and let's call that mid single digits.

We have priced the wrap around effect from the 2021 price increases that we took as well as the new when we put in place during the first quarter and let's call that mid single digits.

And then on top of that what we would anticipate is again just aggregating a little bit OEM had a great 2021, we would expect growth from OEM as we get into 'twenty to DTC as Scott mentioned nice momentum both on our online business as well as our bricks and mortar business and we expect that to drive.

Growth in 2022 as well.

And I think there's a question as to to the extent that the entry level bedding.

Didn't return.

How do we think about I would say our estimate for entry level bedding.

Not particularly aggressive.

Without we don't do it in granular detail, where you can pull it out of the forecast, but certainly.

We're expecting the entry level betting for the nine months compared to when the stimulus checks really hit to probably be very difficult.

In the in the forecast.

Thank you. Our next question comes from Peter Keith with Piper Sandler Your line is open.

Hi, Thanks, good morning, everyone.

I was just wanted to look back to Q4, I'm, just having a little bit difficulty reconciling some of the commentary. So you had the $100 million backlog going into the fourth quarter, but then you mentioned that.

Retailer inventory position that were stronger than expected.

Can you can you bridge me to those two comments because seem to conflict and then where did you finish the year with backlog that is carrying over into the new year.

Yes, good observation because they do conflict.

Look we left let's go back we left the third quarter to the third quarter earnings Conference call.

There hadn't been we had COVID-19 hadn't picked back up.

Strong backlog and temper.

<unk> million dollars.

We got we got cut.

Comfortable normal.

And everybody in the industry I would say manufacturing kind of got caught up.

The manufacturers industrywide, we're providing retailers betting at more normal pace okay.

And then we hit a little we hit a little bit of a slow spot.

Here's from talking to retailers.

We don't get perfect information, because the retailers don't give us their inventory positions that we can tick and tie to it but here's what I believe happened remember we had the industry on constraint for over a year, probably almost 18 months.

Of course, we've never done before.

And during that period, we are on hard allocation.

The retailers were aggressively kind of we'll call. It gaming the system and we are monitoring it to make sure. We're doing what was fair for everybody and over the 12 month period or 18 month period, I believe that retailers in general went from what I'll call a natural inventory in the system, which we normally don't talk about.

It's not that much of two to three weeks, we'll be kind of like normal industry inventory and I think they squirreled away some beds and ordered some beds and they probably got their inventories up to more like three to four weeks as they try to build some safety stock because all of the manufacturers in the industry.

We're not.

Delivering quote on time and over that period of time built up an extra week or so of inventory, which again doesn't sound like a lot and makes perfect sense, but then in the fourth quarter when everybody opened up and it's seasonally a little softer quarter naturally they right size their inventories back to.

The two to three weeks.

Which call it 5% to 7% catch up as the industry normalized their inventory from the safety stock that they had kind of squirreled away on us.

But I would say how do we reconcile that but it was it was a surprise to us at the time retailers were screaming for more inventory and but.

But I think they were probably a little bit of gaming of the system.

As they provided us the information demands that they were seeing.

Thank you. Our next question comes from Laura Champine with loop capital. Your line is open.

Thanks for taking my question I wanted to ask about what looks like an inventory build as you exited the quarter did sales trends weakened relative to your expectations as you exited the quarter or did you build inventories because of the supply chain issues that plagued the whole year last year.

Well, we certainly are building inventory of timber.

We've been we all year, we were light on temporary we weren't optimized from an inventory standpoint, and certainly the message and business plan is to go into the busy season. This year.

Heavier.

On inventory than we were last year and since the product never becomes obsolete.

It makes sense for us to carry some inventory to make sure that we're.

Top months, having said that.

I would say probably from a phasing standpoint towards the end of the fourth quarter, probably sales were a little lighter, but I don't think that and I think it has to do with some of this normalization of inventory levels at the retail level right. So it was I'd call it slightly softer in December , but if youre seeing an inventory build.

Say the lion's share of that is strategic.

That is correct and largest of double tap on that a bit is yes, we did get in a better inventory position.

A majority or most of that build associated with the adjustables. So we have a very long lead time, and we want to make sure that as Scott said as we get into the 2022 and around these holidays, we want to make sure that we have plenty of supply not only of mats, but of adjustables foundations et cetera, Yes, I really think one of the one of the key competitive advantage as a company like Tempur Sealy.

As we've got the financial strength.

To make some strategic investments and at a time when world is a little complicated.

We certainly are making some investments to make sure that we service our customers.

The best way possible it hopefully industry leading.

Thank you. Our next question comes from Brad Thomas with Keybanc capital markets. Your line is open.

Hi, good morning, Thanks for taking my question.

Two maybe more housekeeping items.

First boss or if I missed it could you just remind me what the expectation is for commodities has an impact in dollars or basis points as we're thinking about this year.

And then I was wondering if you all also could maybe put a little more context around.

What percentage of your business, you think is addressing the low end versus the middle versus luxury.

Just be curious of your take on how much you think you have exposure to the low end.

As it relates to commodities, what I would say is as over the last couple of years 2021, the amount of commodities that.

The inflation that we've seen is really unprecedented what I do also feel good about though.

The power of our products and our brands, we've been able to fully neutralize the impact of commodities on a dollar basis not only in 'twenty, one, but our expectation is that in 2022.

The impact of commodities will be able to fully offset that with the price increases that we've taken.

Don't want to get into the magnitude of what we're seeing in 'twenty, two but what I would say is that we had an expectation, leaving 21 as we talked about in the fourth and our third quarter call. We've seen some slight <unk>.

Increases since that point in time.

However, still within the range of reasonableness and in our guidance. What we've assumed is that they stay at the peak in the second quarter and they remain for the rest of the year. So if there is deflation that would be a bit of upside for US. Yes, I think it's probably fair to say that obviously it could change quickly, but what we see today.

We probably aren't anticipating another price increase in the near term, we feel we feel pretty good about what we've done from a pricing standpoint versus cost standpoint. So we think we're in pretty good shape there.

On go forward, Thanks could change, but that's where it sits today and then he asked about what percentage of our business is entry level I don't think towards how you define entry level and I don't know about where you think 10% 15%.

Probably yes, maybe kind of within the.

The round.

And profitability of that sector is obviously as I've talked about before.

Not the same as the higher end so again, when we talk internally as we run our business plans and think about the business.

Not that you're not interested in that segment, but let me tell Ya mix is what it's about and that's one of the reasons why.

We're very interested in our Stearns <unk> Foster brand.

And mix is much our P&L is much more sensitive to mix.

Good news is.

Our retailers' P&L has also.

The shift in mix.

So we're aligned.

With our customers from that standpoint.

Thank you. Our next question comes from Jonathan <unk> with Jefferies. Your line is open.

Great. Thanks, so much I appreciate all the color Scott or Bhaskar.

Following up on the topic of mix, maybe from a different angle, there's been some more data points here and there regarding matches sized preferences are evolving during the pandemic.

Maybe if you could just share.

Degree to which tpa.

TPS has been benefiting and.

And how sustainable you see that shift.

That we've seen from Queen to King.

Over the past.

So call it 24 months.

Sure No no question that there has been a shift.

Call It SKU size.

And the key is leading the way I am sure Thats coming from housing formation.

Certainly moving out of an apartment into a house gives you an opportunity.

To upsize your bed, probably little bit of a pandemic and you spend more time. Some people are working in their beds and living in their beds.

And it's it's.

Part of the growth that we see in ASP.

Asps.

And I think it's I think it's going to continue.

So you wont see anything and.

That's good.

Yes.

Thank you. Our next question comes from Carla Casella with Jpmorgan. Your line is open.

Hi, just on that same question about that.

Promotional market now lower and I guess, you talked about the valleys and the peaks and valleys and how promotional spend will go this year.

And then things returning to more normal.

That imply that the more of the products will be sold on promotion. So we could see margin pressure from that.

Yes, we did not change our promotional cadence or discounts last year dairy.

That program some maybe some of the retailers did so.

Tempur Sealy standpoint being more promotional.

Is it isn't going to be significant to the financial statements and the promotions that we have during the period, even though it may be more units sold in there.

Won't be material to our financial statements I think what I'm really talk in talking about its retailers. Some retailers look because you have to look at from a retail standpoint. They did they were having trouble getting supply last year.

And so they pulled back on their promotions and pulled back on their advertising.

Because they are having that Couldnt service the customers that were just walking in the door when I say the industry is going to be more normal. It is the retailers are going to have to get back to spending historical amounts in promotion and advertising and doing the things that they normally do.

Now that we're able to service them at the volumes can't.

Confidently I think the retailers will step up and do their part, but we didn't change advertising or promotions last year. So we don't have a bad comp.

Going forward in that area.

Thank you. Our next question comes from Seth Basham with Wedbush Securities. Your line is open.

Thanks for taking the follow up just a couple of questions on the margins first in terms of the fourth quarter performance with most of that.

Sales impact at the lower end, which doesn't carry that much in terms of margin contribution at your margin degradation. So to speak did seem pretty high.

I'm just trying to square that away secondly for 2022, when you think about the building blocks for the cost pressures advertising $550 million, what was that versus in 'twenty, one and similarly, the launch costs what was that in 'twenty one.

Sure Dreams is probably your margin.

And fourth quarter in the fourth quarter.

I actually I think margins were very much aligned with how we thought they would come in if you think about the sequential improvement that we saw going from the third quarter to fourth quarter, we expected some improvement principally driven by the high end and that backlog filling yes, there was a bit of weakness on the on the low end and the inventory rebalancing.

Which was across both brands, but we were very pleased with the gross margin performance in the fourth quarter year over year. When you look at it yes, there is a there.

There is a variance, but it's caused by the <unk>.

That the power of our brands and we were able to offset.

The commodity inflation that we're seeing with price.

What was the second question.

In 2022.

Launch costs incremental launch costs and incremental advertising is a dollar and probably as a percentage of sales is probably where he was shooting for absolutely. So when you think about when you think about that our K will drop.

This evening, so youll have it in front of you to do it what I would say is is that both on dollars as well as rate we would expect incremental.

Advertising to be able to support our brands and really see the market in advance of the new products that we have coming out as it relates to launch costs the incremental investments that we're putting around these would be $50 million okay.

And I think when you're talking about advertising, there's two ways to think about it.

We're not.

Advertising aggressively to.

To sell current product, we're not having to add push we're not having higher cost for customer acquisition costs and that's what I've been trying to make sure. It's clear what we're doing is something different we have two major market moves that we're trying to do.

And it has required a little bit of pre investment and.

That is Stearns <unk> Foster we're talking about taking a brand that has been relatively minor and moving it into a category of $1 billion brand at very good margins for us and very good margins for the retail. So this is this is a major move it is not a normal stearns launch and so there is some incremental expense.

We're going to spin.

To stand this up for the long term and then as we've talked about numerous times the Sealy tempur.

Tempur Pedic launch internationally again is not a normal launch this is something we've been working on for three years or four years.

A much broader addressable market.

And when you do that you're not doing a normal launch youre willing to spend some money to make sure that.

This goes right. The good news is there is clearly green shoots in both areas, our Stearns <unk> Foster brand in the fourth quarter grew.

<unk> grew at like 35% and this is before we have the new product in the marketplace and the International group has continued to perform I'll call it above our expectations and quite frankly above trend line again before the product even hits the market. So we.

We're feeling pretty good about it and we will get a really good read on it it's going to be a few quarters, whether we will know whether this strategy worked and whether this money was.

Productive, but right now we feel very good about both of those those strict strategic moves we're making from an advertising standpoint.

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 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. Thank you for your confidence in Tempur Sealy leadership team and the board of directors. This ends our call today operator.

This concludes today's conference call. Thank you for participating you may now disconnect.