Q1 2022 Tempur Sealy International Inc Earnings Call
[music].
Good day and thank you for standing by welcome to the Tempur Sealy first quarter 2022 earnings conference call.
At this time participants are endless.
After the speaker presentation will be a question and answer session.
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I'll now turn the conference over to speaker today.
Our Investor Relations. Please go ahead.
Thank you operator.
Good morning, everyone and thank you for participating in today's call joining.
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 1095.
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 reports 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 statements speaks only as of the date on which it is made the company undertakes no obligations to update any forward looking statements. This morning's commentary will also include non-GAAP financial information reconciliations of the non-GAAP financial information can be found in the accompanying press release, which has been posted on the company's investor website at Investor.
<unk> Dot Tempur, Sealy dot com and filed with the SEC.
Our comments will supplement the detailed information provided in the press release.
Now with that introduction, it's my pleasure to turn the call over to Scott.
Thank you Robert.
Good morning, everyone and thank you for joining us on our 2022 first quarter earnings call.
I'll begin with some brief comments on this quarter sales and earnings results, then address certain top of mind issues and how they impact our global operations.
Conclude our prepared remarks, Oscar will discuss our record first quarter financial performance in more detail.
In the first quarter of 2022 net sales grew 19% year over year to $1 2 billion and adjusted EPS grew 8% year over year to 69.
This was a record first quarter financial performance.
But as we shared in our market update at the end of March sales came in below what we had initially expected in the year.
And commodity prices, primarily energy moved against us.
However, taking into account the turbulence of the global operating environment. We are pleased to report another quarter of double digit sales growth.
With.
The last 11 as well as EPS growth I.
I should also note there were no adjustments in our operating performance this quarter.
The team achieved several noteworthy non financial accomplishments during the quarter as well we began the rollout of our new premium Sealy product in the U S continued.
The successful launch of our new ERP system.
Just in the U S.
Launched the new Stearns <unk> Foster E Commerce platform.
And fully returned to normalized order to delivery times for both Tempur and Sealy.
I should also mention that our new plant, our new Kemper plant that we're building in Crawfordsville is on plan to be operational next year.
Now I'd like to take a moment dress FQ.
Economic issues and discuss how we're managing the business in this rapidly changing operating environment.
Like you were watching the tragic events that are unfolding in the Ukraine and absolute core.
In an effort to support those displaced by the war Tempur Sealy International Foundation contribute financially to support Ukrainian children and families and our European operations have donated over 1000 bedding products to refugee centers with more on its way.
And the term.
The impact to our business.
While we do not have any operations in the Ukraine, Russia. The warhead introduced element in the near term risk to our international supply chain.
It's been largely mitigated at this point.
We also have a ripple effect on consumer confidence in Europe , which has negatively impacted our trends in the region.
To give you an idea of the impact our order trends were running approximately 30% in Europe and eight weeks pre invasion.
And it turned negative in the eight weeks since the invasion.
Given the uncertainty around the evolution of this conflict. We expect these pressures on the European market to continue in the near term.
As previously announced given the circumstances, we've elected to postpone the launch of our new tenure Tempur International.
Product line that was planned for 2022, we now expect to begin to launch in the first quarter of 2023 to allow time for the international retail market to normalize.
Consequently.
This will be moving $20 million of associated costs.
<unk> 2023 <unk>.
Additionally.
We will have to really expected sales growth on the new product line out of few quarters.
Turning to the U S.
U S consumer confidence has been shaken by the rapid inflation and geopolitical uncertainty in recent months yet.
Yet we also see signs in the market that point to a resilience in the U S consumer such as record wage gains low unemployment and a projected 3% domestic GDP growth in 2022, despite significant pressures from COVID-19 and supply chain challenges.
We anticipate that once we work through the immediate shock to the recent macro developments.
And we lap the impact of stimulus in the prior year, we should see a modest improvement in the U S retail market.
Most likely in the back half of 2022.
The third extension external factor with commodity inflation.
As we've previously discussed input cost for the entire bedding industry had been rising over the last two years in response, we have been able to neutralize the dollar impact of these commodity increases through multiple pricing actions.
Last time, we reported we had fully passed on price inflation.
Subsequent to reporting another wave of inflation, driven by oil and fuel supply issues generally caused by the Ukrainian war hit the market.
Yes.
Our latest outlook for 2022 commodity cost has increased.
So we have announced another round of pricing actions for both our domestic and our international markets that will take effect in the second half of 2022.
We expect these additional pricing actions will offset the expected incremental inflation headwinds.
In a normal profitability on a dollar basis once fully rolled out across the markets worldwide.
Turning to Covid.
Covid continues to impact operations.
Although cases have been decreasing globally benefiting our operations in many of the markets we serve.
Recent flare ups.
<unk> in China had negatively impacted our wholly owned and joint venture operations that operate in Asia.
A ballpark number we expect a $10 million EBITDA headwind in the second quarter as a result of this most recent COVID-19 outbreak.
Lastly, I want to update you on the ongoing supply chain disruptions.
The global supply chain is in better shape overall this year than it was this time last year.
Although certainly continues to have some we've continued to have some challenges.
For example, the recent challenges in China that have materially impacted supply chain and eastern Asia.
It has had minimal impact on our north American and European supply chains as most of our supplies are coming.
For the U S and Europe , we do source adjustable basis from the East Asian supplier for an east Asian suppliers, but we have largely mitigated that risk in the near term as we have we are well stock for 2022.
As I mentioned, our supply chain has improved although we are still experiencing some plant inefficiencies and it may take a few more quarters for the plants operations to normalize.
We've taken many actions to secure our global supply chain against future disruptions, including diversifying our supplier base.
Moving vendor and customer communications and strengthening our inventory positions of both Tempur finished goods and adjustable basis.
The team is focused on driving long term growth of the company through delivering on key initiatives, which we believe will facilitate future EPS growth.
These include.
First <unk>.
Develop the highest quality bedding products in all the markets that we serve.
Second promote worldwide brands with compelling marketing.
Third optimize our growing omnichannel distribution platform and fourth to drive increased EPS.
Deploy capital.
Over the last few years, our long term initiatives led us to diversify our brands products channels markets and technologies to meet the needs of consumers.
Ever and however, they want to shop.
This diversification of our business was significantly broadens, our addressable market worldwide, securing our position in the global bedding industry.
These same initiatives are driving the building blocks to our next stage of growth.
Building blocks include.
Investing in innovation to meet consumer needs.
Seating Stearns <unk> foster to be our next billion dollar brand.
Growing our global wholesale business through existing and third party partnerships.
Investing in our operations to position our business for significant growth.
Expanding our direct to consumer business worldwide through growing our E Commerce and company owned store presence.
Increase our international total addressable market through launching all new Tempur products in Europe , and Asia and executing on our capital allocation strategy.
With that I'll turn the call over to Bhaskar.
Thank you Scott.
I would like to highlight a couple of items as compared to the prior year.
Sales increased 19% to $1 2 billion in.
And adjusted earnings per share increased 8% to 69.
As expected, we neutralize the dollar impact of commodities through our pricing actions in the first quarter.
This affected our gross margin as sales increased with no change in gross profit dollars.
This accounts for 260 basis points of the year over year change in consolidated gross margins for the quarter.
Turning to North American results.
Net sales increased 5% in the first quarter.
On a reported basis, the wholesale channel increased 6% and the direct channel increased 2%.
The direct channel increased 78% on a two year stack basis, highlighting its strength and a particularly challenging prior year comp.
North American gross profit margin declined 340 basis points to 37, 8%.
This decline was driven by pricing benefit to sales without a change in gross profit.
And operational inefficiencies related to supply chain disruptions.
These factors were partially offset by favorable mix.
As Scott mentioned, we implemented multiple price increases to offset the highly inflationary environment and recently announced additional pricing actions across our domestic and international markets.
Global inflation has recently surged and we expect approximately $15 million of incremental commodity headwinds in the second quarter.
However, we expect that the second quarter, the second quarter impact will be neutralized on a dollar basis for the full year. Once the most recent pricing actions take effect in the back half of 'twenty two.
North American first quarter operating margin was 16, 7% a decline of 290 basis points as compared to the prior year.
This was driven by the decline in gross margin, partially offset by operating expense leverage.
Now turning to international.
Net sales increased 92% on a reported basis, primarily driven by the acquisition of dreams.
On a constant currency basis international sales increased 99% as we experienced $10 million headwind this quarter from unfavorable foreign exchange rates.
As compared to the prior year, our international gross margin declined to 55, 3%.
This decline was driven by the acquisition of dreams, and the pricing benefit to sales without a change in gross profit.
As a multi branded retailer dream sells a variety of product across a range of price points.
Their margin profile is lower than our historical international margins.
This is driving a major change in year over year margins internationally.
Excluding dreams the underlying margin performance was in line with our expectations across both Europe and Asia Pac.
Our international operating margin declined to 21, 7%. This was driven by the decline in gross margin and operating expense deleverage as cost in the current year have returned to a more normalized level.
Now moving to the balance sheet and cash flow items.
We generated first quarter operating cash of $86 million, our inventory days extended throughout the quarter as we continued to build safety stock to be able to better support our customers across our global operations.
At the end of the first quarter consolidated debt less cash was $2 6 billion and our leverage ratio under our credit facility was two two times.
Our leverage ratio was down nearly one turn from where it was two years ago, highlighting the flexibility of the business model.
Our highly variable cost structure gives us the ability to swiftly adapt to changing conditions.
Our fortified balance sheet and robust cash flow attributes give us the optionality to continue to invest in the business to drive long term growth even throughout challenging period.
Now turning to 'twenty two guidance.
The company has updated its earnings guidance and now expect adjusted EPS to be in the range of $3 20 to $3 40 and 2022.
Which includes the impact of the acquisition of dreams, and our share repurchase program.
Our EPS expectation contemplates the expected benefit from year over year sales growth of at least 10% driven by the pricing actions, we have taken to neutralize the commodity cost inflation.
And the acquisition of dreams.
We expect that 2022 will be a heavy investment year for the business, which will lay the groundwork for future growth.
First we expect to make thoughtful marketing investments to drive long term brand awareness.
Our brands are among the most highly recognized recommended and desired in the industry and we plan to make record of investments of more than $500 million in advertising this year.
And we'll also be up on a rate basis year over year as we continue to invest.
Second we expect to continue to invest in our operations to deliver the best service for our customers.
Our global supply chain has been improving although we are still managing through some plant inefficiencies as we strive to deliver high quality product to the market.
These investments to secure our supply chain and retain our valuable employees are expenses that otherwise would naturally have flex with sales.
They equip us to fully support our customers, while managing through supply chain disruptions and a tight labor market.
We experienced $10 million of incremental operational inefficiencies first in the first quarter and anticipate a similar amount in the second quarter.
As Scott mentioned, there are still uncertainties related to the war in Ukraine ramp in inflation and the resurgent resurgence of COVID-19 variance.
We expect these factors to challenge, our second quarter sales and EPS versus our prior expectations.
For the second quarter, we anticipate sales growth of at least 10% with EPS declining year over year.
Internally, we are targeting that on a two year basis second quarter sales will grow nearly 100% and EPS will grow approximately 200% over 2020.
We would.
Expect the third and fourth quarter could be up year on year for sales and EPS as pricing actions go into effect and the U S retail market stabilizes a bit.
Okay.
Lastly, I would like to flag a few modeling items.
For the full year 2022, we currently expect.
Total capex to be between $2, 50, and $280 million, which includes maintenance capex of $100 million and investments in our U S manufacturing capacity, including the new foam pouring plant.
D&A of about $200 million.
Interest expense of $90 million.
On a tax rate of about 25%.
And a diluted share count of 183 million shares which includes our assumption to repurchase at least 10% of our shares outstanding.
With that operator would you please open up the call for questions.
As a reminder to ask a question you will need to press star one on your telephone to.
Enjoy your question press the pound key.
In the interest of time, please keep your questions to one per person.
Please.
The Q&A roster.
Our first question comes from that.
Bobby Griffin from Raymond James Your line is open.
Good morning body, thanks for taking my questions.
Scott.
Thank you Scott Marshall I was hoping can we impact the inventory numbers, a little bit it's up pretty big year over year and on a two.
Two year basis, as well just a little concern.
Given that the channel probably had a little extra inventory in it.
Youre passing through another price increase that give you any type of concern and then can you maybe just unpack what some of the big drivers are of the inventory increase I know you've got product launches coming here in the U S. So.
I'll, let bhaskar clean me up a little bit first of all you have to realize prices have gone up so we've got each inventory skus cost more than it did last year. We certainly are fully stocked for timber because as you remember we were short on timber last year and so we've got more safety stock and temporary to make sure that we can keep our order to delivery.
<unk>.
Times in line with our expectation and our retailers expectation.
And then obviously, there's some chop.
Challenges in China, and so we made a very good decision early on to.
Increase our safety stock on adjustable basis by.
By a good bit to protect us from any disruption in China, and that's ended up being.
Real good call I think both of those.
The main items and obviously sealy is build to order.
So what you are looking for is the price increase on the items safety stock in temporary and a lot of safety stock in adjustable basis.
I think mark was from our position I'm not worried about the inventory levels at all at the current level, 100% going into going into the busy season, we should see those and I should point out.
And our next question will come from the line of Peter Keith from Piper Sandler.
Your line is open.
Hey, Thanks, good morning, everyone.
So with the revised revenue outlook, there's kind of a lot of moving pieces with some pricing and dreams.
At this point just to help frame it up for US what are you guys expecting from an overall organic demand standpoint, that's baked into that revenue outlook.
Absolutely so just to go through the pieces.
Very good call out as it relates to dream that should be a tailwind for us as well as from a pricing standpoint that should be a tailwind for us think about that as let's call that mid single digits for both of those both of those particular items as you think about organic what we anticipate is that the underlying business, we would see a bit of growth.
Outside of those those big those big drivers in that growth can be driven by price.
We expect the units probably be down call It North America.
3% to 5% it would be kind of in the range of a guess.
But that's that's basically it.
Our next question comes from the line of Seth Basham from Wedbush Securities. Your line is open.
Right.
Thanks, a lot and good morning can.
Can you just contextualize the first quarter and how it finished up you guys beat year updated guidance on the top line pretty handily, just want to understand a little bit better.
What happened there and then secondly, as a follow up question can.
Can you give us a sense of why youre not seeing a flux.
Cost lower given the demand environment that remains depressed and uncertain.
Sure, let me work on that a little bit.
First of all on the sales.
Sales were strong in the first half of the quarter and got weaker in the second half of the quarter.
After the cranial invasion.
There was a clear change in the marketplace. So we did a pre release related to sales.
The books weren't closed at the time. So you never know exactly what sales are going to be ensures he'll not going to miss a pre release, so we'll call that.
The majority of the over performance from from that standpoint.
And then you talked about whether or not we should flex out our cost structure.
I'd say it is I think I am less earnings call I said the company is positioned from an offensive position.
We continue to be an offensive footing.
Whether it be in advertising and new product launches capacity, new ERP system growing our retail store base.
Clearly the market has decelerated some and we had March was not particularly strong and April is the toughest comp of the year and April has not started off very well for the industry. Good news as April has also the smallest part.
The quarter and what's key really as the holiday period, when we look at the overall trends whether it be GDP, whether it be unemployment.
And other things that we look at.
It still looks like to us that the.
The world looks pretty good not as robust as it was but certainly are not on a recessionary footing.
We're to see different trends.
We would pivot.
And you've known us for quite a while you saw how we pivoted during when Covid hit we can pivot pretty fast in our cost structure.
770% variable.
Currently taking what we believe to be a good amount of share both sales and certainly in profits and we're continuing to be on offense at floating.
Next question comes from the line.
Hmm.
<unk> from UBS Your line is open.
Good morning, Thanks, a lot for taking my question.
Scott and possibly your guidance implies mid to high single digit revenue growth.
Back half of the year can you maybe provide some more color on how the spring stock in North America and international I'll check dreams.
And then really for you to achieve this guidance are you assuming that the macro materially improved in the back half or you can achieve.
Pockets of macro remains where it is.
You will need the detailed and under the macro sure. Yes. So as we think about it from a growth standpoint.
Is where our expectation would be is that North America will continue to grow really driven by price and et cetera, and if you think about from an international standpoint is that we do what's contemplated is that the Ukraine situation will continue for the balance of the year with international growing primarily from dreams, specifically as we get into the back half of the year.
It depends on what country and how you want to look at it but it just take North America.
What we said was we're thinking 3% to 5% unit decline.
That's not a very good bedding market and if you compare that to like the worst bedding market in history would be more like 2008 that was probably a 7% to 10% unit decline.
So I guess, what I would tell you is our read is that the retail market was surprised stunned shocked.
By the Ukrainian invasion, and the resulting increase in oil prices and consumer confidence.
Certainly fallen I think we are.
107 today I think we're more like $1 15, the beginning of the year and certainly sentiment has come down.
Into the ditch.
But it also doesn't look like a recession. So we think this is a.
Just kind of shock to the system and as long as you don't have another shock to the system, which would be the expansion of the Ukrainian Moore for another round of oil pricing.
We think people get used to some of this.
And it stabilizes.
We go specifically to Europe .
She is obviously was more challenged areas as I've said in the prepared remarks, we were running up 30% in orders.
Pre invasion.
After invasion those orders turned negative.
As we sit here today, the orders are pretty much back to flat to up 1%.
I pointed out the rebound once things kind of semi normal lines in a different world not different than what we've seen in the COVID-19 situation Covid hits, it's pretty bad for a little while and then people deal with the environment and things begin to kind of normalize so I would say to hit our guidance, we're expecting no more surprises.
Sure.
The type that we had.
And we're also not expecting anything to get a whole lot better than where we're sitting today.
Our next question comes from the line of Keith Hughes from Truth.
Okay.
All right. Thank you just to dig into the quarter, a little bit more can you give us some more detail on how much during the quarter overall worldwide pricing was up year over year.
Absolutely. So when you think about dreams. Initially when we came out we indicated is about $400 million on an annual run rate basis, and what I would the way that we think about that is is that it has performed ahead of our expectations. So a bit ahead of the $4 50.
When you think about global pricing is that we did call out that it was about let's call. It 250, 260 basis points improvement or a drag on gross margin. When you reverse engineer that math that would imply about $70 million from a price standpoint globally.
And I think what I would add in there is we took our capital allocation program is certainly enhanced.
EPS this quarter.
And Thats part of our core businesses allocating capital in because we're allocating generally operating cash flow.
We think of that as kind of core operations.
Our next question comes from the line of Brad Thomas from Keybanc Capital markets. Your line is open.
Alright. Thanks.
Scott I was wondering if you could talk a little bit more about what youre seeing in terms of the promotional landscape and how youre thinking about promotions and advertising as we go through the year and get more get more aggressive do you need to get more aggressive.
Because of the backdrop and then basket if I could just ask a quick question on that on the second quarter guidance I think the math, if I'm doing it right implies earnings around the 50% level, just just any help on making sure I've done the math right and how the margins might play out into Q. Thanks.
Yes, I will talk about promotions.
After we go through the second part of the question.
First of all you remember from previous calls we didn't pull back on promotions, even though demand was robust and so from a manufacturing standpoint, we plan to be on the same promotional calendar costs that we had last year.
Don't expect any change there, where we advertise last year this year, we're going to advertise.
Now, there's other promotions, which I'll call those retailer promotions and I do think the environment at the retail level with less promotional.
Last year than maybe in previous years and the retailers are are getting back in the game.
The promotion standpoint, and from an advertising standpoint, some some retailers last year pulled back on their advertising and in fact, some some retailers didn't earn their full co op.
Because they pulled back on the advertising so far and I think one of the things that was slower first quarter.
Talk to retailers they got to get back in the game, you've got to be a little bit more promotional they've got to spend the advertising dollars.
And that's what we're seeing them doing that's what they're working on and what the holiday period coming up will be will be critical to understanding understanding the full year, what we've seen so far this year is during holiday periods.
Good growth year over year and during the valleys when youre not on holiday period.
Negative same store <unk> same store growth.
Brad good call out on the quarter. So the way that we're thinking about that from a mass standpoint. It was closer to 60, let's call it a bit in and around 60.
And when you think about that specifically is that we do expect that to be the most challenging when you think about the full year on a quarter EPS standpoint, and the big drivers. There is we did announce another price increase however that does not go into effect until the back half of the year. So we will be exposed on commodities by about $15 million.
In addition, we've got the challenges happening specifically over in China with the Covid variance, so theres, a headwind, resulting from that as well and then as Scott mentioned, we're going to continue to invest and come out of this stronger than we than our competition. So we had the advertising investments that will that will happen throughout the year, but in the second quarter as well.
Our next question will come from the line of Curtis Nagle from Bank of America, you may begin.
Good morning, just a quick one on <unk>.
Scott or Bhaskar, I guess could you talk to it to March performance relative to the other two months in the quarter what was it down or.
How much <unk>.
Just a quick follow up on the Stearns <unk> Foster.
Website launch.
Really interesting just curious how that's trending so far and should we expect a purely transactional website launch as well later this year.
Sure I would tell you in the first quarter business was.
Solid in January and February .
And post invasion business was very soft as.
<unk> is where I would tone it.
In early April .
Soft.
With Europe , having some recovery.
Here recently.
Stearns <unk> Foster is certainly a highlight.
Stearns <unk> Foster's growth rate in the first quarter was the highest of any of the brands as I recall.
And we did just launch the Stearns <unk> Foster direct program web site.
Too early to have any report.
I think our our early investments in Stearns <unk> Foster.
Our show and are showing progress and we feel really good about it and we're going to continue to lean in and what I'm hearing from retailers is we've got good support from our retailers. So that it could be more to report throughout the year on Stearns <unk> Foster.
Our next question comes from the line of Laura Champine from Loop capital. Your line is open.
Thanks for taking my question, it's on the outlook for 10% growth at least this year how much of that do you contemplate coming from price mix.
A lot.
If you if you look at the price increase.
Probably that's double digits almost.
When you look at it on a like for like.
Our like for like and then because you're also getting a little bit more higher end rather than lower end, you're getting some benefit.
And then you've got some dreams, certainly don't going in there so.
If you were to if you were to strip out price increase and you were to strip out.
Acquisitions and or capital allocation issues.
You'd see we've got a pretty good headwind.
In the business, but I think I don't we don't we don't really.
We're not ashamed of that that's really part of the strength of the business.
Is because of the broad diversity.
And capital allocation program, the free cash flow of the business. It allows you to continue to stay on your business plan and plow right through the softer periods alright.
And Laura and the way to think about that from a pricing standpoint, when you put all that together and you think about it globally is think about price give being mid single digits think about dreams being mid single digits. We still have growth drivers that Scott said investing in the business from a DTC standpoint, OEM et cetera.
And although we don't have other peoples numbers, yet and we'll keep looking at all indications are certainly certainly in the fourth quarter, we took a good bit of share and I suspect when we see and see all the first quarter numbers and analyze I suspect with even more share in the first quarter.
So from a from a competitiveness and strategic standpoint.
We really like where we're positioned and think that we continue to get stronger from a competitive standpoint.
And as a reminder.
Follow ups.
Our next question comes from the line of careful from Guggenheim. Your line is open.
Hi, Good morning, just a couple of quick questions for Scott.
On the industry at retail inventory levels can you just give us a little more color around any.
The sequential changes or improvement that you saw sort of Q4 Q1 Q2, and then foster on the marketing side. I think you had said previously $550 million in marketing and I think you said this morning at least 500 is the $50 million is that sort of.
Little bit more discretionary as you think about the rest of the year or is that really the magnitude of the cuts that youre looking given some of the push into 'twenty three for the international side.
That if it's okay I'll deal with that advertising. So one of the attributes of our business. The strength of the business model is the natural flex of it. So as you think about advertising. There's a couple of components. One is the cooperative advertising, where we provide $1 to our retailers to advertise on our behalf. So as the as the revenue flexes, what youre going to see.
Is that the cooperative advertising flexes as well. In addition to that is is that we have the direct advertising national advertising. We believe that's a good driver from a growth standpoint over the long term. So what youre seeing is good call out $5 50.
We were previously thinking about it and now given the work what our latest expectations are is what you're seeing is advertising is flexing.
Primarily from co op and a bit through the advertising or direct advertising and what was the first part of this question Bhaskar.
<unk>.
Inventory levels at retail.
Got it look we had some we'll call it unusual activity last year in inventory and we called it out on some calls.
I would say that we think <unk> got normalized by the end of January . So I don't think we really have a lot to talk about going forward on inventory other than what I can tell you look it's been a little slower. So the retailers do you have a little bit more inventory, but it's not the same kind of activity. We had last year and I don't think its significant.
To the numbers.
We are feeling some pressure.
From that we'll call it the furniture stores is their warehouse space is getting.
Challenged as they had a lot of furniture product that was on the water.
It's headed to North America, and indeed, the place because the furniture sales have slowed down significantly and so thats squeezing some of some of the retailer's warehouse space, which is causing some pressure.
Two two.
<unk>, they're lower they're betting inventory, but again I would consider those almost normal business.
It's a little bit of it.
Hiccup here, but not significant at the level youre thinking of when you're thinking about earnings guidance and those kinds of things.
Our next question will comes from the line of William Reuter from Bank of America. Your line is open.
Hi, My question's on M&A, given that the environment is pretty uncertain.
Does this leave you more cautious on potential transactions or there may be smaller targets that maybe having more challenges contending with inflation. So there may be better valuations and as a result, there could be more transactions.
Well Theres certainly better valuation.
Both from do you want to compare it to the public market or risk free rates.
Certainly there the pricing for acquisitions has moved down.
I'm a little more challenging.
Environment, and especially for companies that are tied to the internet.
Changes that were made by Apple, Google and cost of customer acquisition for sure.
Sure online play and the companies.
That's been kind of a game changer, so their growth rates their cost structures.
Changed quite a bit.
So like always.
The market changes up and down now from from our perspective.
I don't think anything's really changed I mean, we continue to look at deals occasionally price deals.
We're in the market everybody knows that if it's in the bedding industry anywhere in the world we want to look at.
And if we think that that company can be bought at a reasonable price and can make us stronger and more competitive.
We're not I don't think we're hesitant by any means to transact. So one of the reasons, we've kept our leverage low.
And our cash flows.
Our very strong and if we don't invest in other companies minimal buy some more stock back and so we continue to do that trade off probably what has more impact on the acquisition market is our stock is trading right now.
Like eight or something which is when it's normal p/e is like 12% to 14.
Little bit insulting, but those things happen and so when you do an acquisition you do have to consider alternative use of capital and stock buyback.
It is a pretty tough comp when you're when you're looking at acquisitions.
Our next question comes from the line of Jonathan Matuszewski from Jefferies. Your line is open.
Great. Thanks for taking my question is there a way to think about the impact of the delayed Tempur International product launch on the guide moving from 15% to 20% down to 10%.
Sure.
But my perspective.
The Tempur international launch.
Cost is quite a bit of money it was going to a little bit of a drag on this year's EBITDA, yet because we've got moved.
Which would normally be so that comes back to you in the guide is a benefit at the same time, we have a little Ukrainian war going on.
Thats, a big negative and that takes a lot of the benefit where almost all the benefit away from what should it would normally have been a positive this year.
EBITDA and earnings Scott and.
And we kicked the kick the launch off till next year.
We will have some of those costs will also have the increased sales.
In 'twenty three that's except fair at pretty much close almost dollar for dollar ish, that's exactly right.
Our next question comes from the line of Bobby Griffin from Raymond James Your line is open.
Hey, guys. Thanks for let me get one more in here I just wanted to Scone bus, let's talk about the second half.
You guys called out for earnings to be up year over year, I think some of that would be share count probably be worth 20, or so versus last year and maybe a month of dreams, but that would kind of put your still on an apples to apples basis of $2. This half versus $2 <unk> last year with some of the other drivers to kind of give confidence in that.
Inflationary environments worse this year.
The underlying macro environment, probably is arguably worse for retail I guess what are you guys are assuming when you kind of unpack two H two H.
One is you've got easier comps maybe just to.
To start with right.
Part of it part of the numbers you had its first this first half.
Look March April that time period last year. Those are really extraordinary comps that you are trying to comp to commvault.
Look we're going to have some additional retail stores and you're going to have the pricing increase in where we had negative commodity expense. We were picking up last year, because we haven't got prices and last year, we were trying to prepare.
And we've got <unk>.
New product coming out the Sealy product, that's coming out and we continue to take share in the marketplace right. So Bobby the way that I think about that is is that in the second quarter. There is a confluence of events, whether it be what's happening in China with basically Shanghai being shut down and I think we called out specifically that is going to be about a $10 million drag from an EBITDA standpoint.
And thats, not an exclusively China, but thats broader Asia. So as we think about as we go into the back half is I don't think that we're not contemplating that that Shanghai situations trying situation is going to happen. So that should be that should be a help for us as we get into the back half. In addition to that we also again the strength of our brands and products et.
Cetera, we have put in another price however, in the first half or in specifically in the second quarter, we've got about $50 million of exposure associated with comp commodities. So when you think about that in the back half of the year and do you think about the lapping of price in the back half that should be a tailwind for us as well and then though we're not anticipating.
A significant improvement as Scott mentioned as the consumer getting a bit of stabilization that should be a help for us as well and I would highlight is the foster said is we are assuming that China is going to be open for business.
In the third quarter, yes, so we've got call it one quarter of China in Lockdown.
That's certainly helpful in the back half also.
Thank you and I'm not showing any further questions in the queue I will turn the call back over to Scott Thompson for any closing remarks.
Thank you operator.
Our over 12000 employees around the world. Thank you for what you do every day to make the company successful.
Our retail partners. Thank you for outstanding representation of our brands to our shareholders and lenders. Thank you for your confidence in Tempur Sealy leadership team and its board of directors.
This ends the call today operator, thank you.
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