Q2 2022 Tempur Sealy International Inc Earnings Call

Yeah.

Good day, and thank you for standing by and welcome to the Tempur Sealy second quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one.

One one on your telephone please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your Speaker today, Aubrey Moore with Investor Relations. Please go ahead.

Your line is now open.

Thank you.

Operator.

Everyone and thank you for participating in today's call.

Joining me today are Scott Thompson, Chairman, President and CEO and Bob.

Decorative 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 provision of the private Securities Litigation Reform Act of 1995.

Forward looking statements include 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 heading special note regarding forward looking statements and risk factors.

Any forward looking statements speak only as of the date on which.

The company undertakes no obligation to update any forward looking statements.

This morning's commentary also include non-GAAP financial information reconciliations of this non-GAAP financial information can be found in the company's press release, which has been posted on the company's investor website at Investor <unk>, Tempur, Sealy Dot com and filed with the SEC.

Our confidence 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 2022 second quarter earnings call.

I'll begin with some commentary on the second quarter.

Spend some time discussing how we are continuing to drive our long term growth initiatives in the current very fluid operating environment.

Foster who will review, our second quarter financial performance in more detail and discuss our updated 2022 guidance, which has been revised to reflect the changes in the market.

Finally, I will share a few closing remarks regarding our business model would operate in a recessionary environment and then we'll open it up for Q&A.

In the second quarter of 2022, net sales were $1 2 billion.

Just that Etfs with 58.

Both slightly below our expectations, primarily due to the U S market and a 30 million sales backlog on U S. Sealy.

We brought our new ERP system online.

We made significant progress in this backlog and expect to return to normalized lead times by the end of the third quarter.

The second quarter was also impacted by three additional factors.

First flare ups of Covid variances internationally, particularly in our southeast Asia markets.

Second commodity inflation impacting our cost ahead of the timing of our price increases which went into effect at the end of June .

Benefit future quarters.

And third operational investments to secure our supply chain to retain flavor.

In order to maintain product quality and customer service.

Our international operations performed in line with our expectations, even as we faced challenges.

In North America, the overall operating environment deteriorated during the quarter.

The forward look forward outlook for the economy and our sector diminished for all the reasons that have been well reported.

We believe that the overall U S mattress industry, our largest market.

<unk> volume decline in 15 years with units down 20% to 25% this quarter compared to last year.

This environment again gave us a chance to demonstrate the resilience of our business model as we generated profit invested in our business returning capital to our shareholders and outperformed the market.

The team continues to focus on execution.

First we continue to work on expanding our leading position in domestic U S. Bedding industry. The last few years, our growth initiatives and industry, leading products. If you have any meaningful outperformance relative to the market.

Continue to drive market outperformance with our focus delivering best in class product quality and customer service.

Second.

We completed our multiyear journey are transitioning more than 50 of our global subsidiaries.

Five different ERP systems to using one common system.

Investment and consolidated our operations is expected to drive long term efficiencies across our global operations.

<unk> cyber security facilitate customer communications regarding order status and improve our direct to consumer capabilities.

We are truly one company has completed the merger of Sealy and Tempur personally want to thank all of the employees who work on this critical project great job.

Third strengthen foster performed very well relative to the market in the second quarter.

Currently our fastest growing brand in the domestic market.

<unk>, we launched the Stearns <unk> Foster ecommerce website this quarter.

Although it's still very small is performing ahead of our expectations and ahead of where we were at this time when we launched our successful online cocoon by Sealy.

Similar research has identified that there is an unmet market need for high in traditional industries providing products.

Strength in Foster E Commerce channel with designed to provide additional opportunities to serve this demand.

Our approach is similar to our direct tempur strategy and that we drive meaningful brand awareness.

Benefit Stearns <unk> foster sales across all distribution channels.

<unk> ASP.

Driving advertising dollars and profit for all of our partners.

We'll launch our all new collection experience and foster mattresses.

Quarter, the new Stearns <unk> Foster line is designed to further distinguish our high end traditional inner spring brand with superior technology clear product stories and new contemporary look.

Fourth edition disappearance, and foster launch the other new product launches and our pipeline continues to be on tracking on plan furthering our objective to bring industry, leading innovation to market.

The second quarter.

The rollout of our new premium Sealy products, which offer improved comfort and support technology. We also launched our new Sealy natural collection.

Which was thoughtfully designed with our commitment to sustainability.

<unk> <unk>.

Environmental preservation.

In the fourth quarter, we expect to launch a sealy mattress with a best in class pressure, leading channel grid layer.

At our consumer appeal and mid market price points, which product is designed to target a relatively small category of consumers looking for a non traditional mattress feel.

In 2023, we expect to begin to rollout our lineup of all new Tempur mattresses, pillows and bed basis across both Europe and Asia.

This new product line that features exciting customer centered innovation allows better channel and customer differentiation kind of a wider price point retailer reaction to this new product and price points to date has given us confidence that this updated product strategy will enable us to significantly increase our total international address.

Vessel market.

In addition to Asia Europe Rollouts in the first quarter of 2023, we plan to introduce our new line of Tempur Breeze products in the U S. Along with a new line of adjusted basis with incremental consumer focused features and benefits.

We have made substantial investments in 2021 and 2020 to prepare for these launches and we're looking forward to bringing these new consumer solutions to market.

Turning to the final highlight.

First half of 2022, and incremental 10 plants devoted 100% of manufacturing byproducts from landfills, we continue to be on track to achieve our goal of zero landfill waste at our wholly owned Tempur and Sealy manufacturing operations worldwide by the.

The end of the year.

Our focus remains on delivering shareholder value through the execution of our long term strategies by investing in our brands products people and capacity.

We also continued to allocate capital to share repurchase as part of our commitment to returning capital to shareholders.

We've repurchased over 8% of our shares outstanding year to date, we plan to repurchase at least 10% in 2022.

Our key initiatives, which have driven growth from a $500 million company at the time of our IPO.

$5 billion company today.

The underpinning of our confidence in our ability to continue to extend our leading position in the global bedding market.

Key initiatives include first develop the highest quality bedding product in all the markets we serve.

Second promote worldwide brands with compelling marketing.

Third optimize our powerful omni channel distribution platform.

Fourth drive increased EPS.

Operation execution and by prudently deploying capital these.

These initiatives have shaped the building blocks to our next stage of growth, which we're laying the groundwork today.

In the U S. We're investing in new products compelling brand advertisement expanding channel diversification.

In our international operations were investing in the 2023 launch of our all new Tempur products in Europe and Asia to increase.

Our international total addressable market.

Our operations are also.

The investment focus this year.

Executing on four key priorities.

The transition to our new ERP system.

Standup third U S phone porting plan three strengthen our supply chain worldwide.

Sure.

Increased safety stock of imported products key components.

Inputs with long lead times.

With that I'll turn the call over to Bob script.

Thank you Scott I would like to highlight a few items.

Consolidated sales increased 4% to $1 2 billion.

Adjusted earnings per share was <unk> 58.

And we repurchased over 4 million shares in the quarter.

At the end of the second quarter, we successfully implemented a new round of pricing action.

This follows previous rounds of pricing all of which were designed to fully offset the headwinds from rising input costs.

Our pricing actions are dilutive to gross margin as sales increase with no meaningful change in gross profit.

Since 2019. This dynamic has accounted for 400 basis points of headwind to consolidated gross margin.

We believe that designing price increases to cover the dollar impact of inflation is both beneficial for near and long term retailer advocacy and in consumer demand.

We expect certain input costs may ease beginning in the back half of the year.

This relief were to come to pass we anticipate the unfavorable margin dynamic that we have experienced over the past couple of years will reverse providing a tailwind in 2023.

As Scott mentioned, we are leveraging our industry, leading balance sheet and cash flow attributes to invest in the business.

Laying the groundwork for future growth.

We have made investments to diversify our supplier base to fully support our customers, while managing through a fragile global supply chain and a tight labor market.

We invested an incremental $10 million and our operations in the second quarter to maintain our high standard of product quality and customer service.

Sure.

We anticipate these incremental investments to continue to a lesser degree in the second half of the year.

For 2023, we are set up to drive efficiencies as the global supply chain infrastructure stabilizes.

Our new ERP system drive synergy.

We have adjusted $17 million of charges during the quarter all of which are permissible adjustments under the terms of our senior credit facility.

$9 million of those adjustments were related to the transition of our new ERP system, which as Scott noted was completed in the second quarter.

In addition, we had $4 million of organizational restructuring costs.

$3 million of operational startup costs relating to expanding our capacity.

We expect there may be a similar amount of adjustments related to these items later this year, primarily from further investments in our new foam pouring facility Crawfordsville, Indiana.

Now turning to North American results.

Net sales decreased 5% in the second quarter.

Our reported basis, both wholesale and direct channels decreased 5%.

North American adjusted gross profit margin declined to 38, 7%.

This decline was driven by operational investments to service, our customers and pricing benefit to sales with no gross profit.

These factors were partially offset by favorable mix Stearns <unk> foster performed well in the quarter.

North American second quarter, adjusted operating margin declined to 16, 5%.

This was driven by the decline in gross margin and advertising investments in terms of foster ahead of the planned fourth quarter launch.

Now turning to international.

Net sales increased 59% on a reported basis.

Primarily driven by the acquisition of Green.

On a constant currency basis international sales increased 68% as we experienced $10 million of headwind this quarter from unfavorable foreign exchange rates.

Foreign exchange continues to fluctuate and we believe that FX will be a larger headwind for us going forward.

At current FX rates were to hold we estimate our year over year headwind of at least $80 million to international sales and $15 million of profit in the second half of 'twenty two.

This has been considered in our revised guidance.

As compared to the prior year, our international gross margin declined to 53, 1%.

This decline was driven by the acquisition of Dream.

Mix pricing benefit to sales with no gross profit.

As a multi branded retailer green sells a variety of products across a range of price points.

Their margin profile is lower than our historical international margin.

This is driving a major change in year over year margins internationally.

Our international operating margin declined to 14, 5%.

This was driven by the decline in gross margin the impact of Covid related shutdowns on our joint venture operation.

And operating expense deleverage.

Now moving onto the balance sheet and cash flow items.

In the second quarter, we had a slight use of operating cash flow.

Our inventory days extended throughout the quarter as we reinforced our safety stock of adjustable basis.

And raw materials to be able to better support our customers across our global operation.

We believe our focus on providing our customers with the best service has been the key driver of our outperformance relative to the broader industry.

At the end of the second quarter consolidated debt less cash was $2 8 billion.

And our leverage ratio under our credit facility was two seven times.

Within our target range of two to three times.

Now turning to our revised 2022 guidance.

We have updated our earnings guidance and now expect adjusted EPS to be in the range of $2 60.

To $2 80 in 2022.

Our guidance contemplates full year consolidated sales to be consistent with the prior year.

North American and international sales to be both down low single digits in the second half of 'twenty two versus prior year.

Gross margin to improve from the second quarter into the back half of the year as our latest pricing actions are now in effect.

And our advertising rate in the back half of the year to be consistent with our second quarter advertising right.

Also included in our 2022 outlook is our plan to invest over $250 million in Capex to support the long term needs of our business.

In addition to our maintenance capex of $100 million.

We are making significant nonrecurring investments in our U S manufacturing capacity, which includes standing up a new foam pouring plant and our expanded chemical tank farm and warehousing.

The team is on track for these major capital projects and we anticipate in future years, the Capex will moderate as these investments roll off.

Lastly, I would like to provide a few modeling items.

For the full year 'twenty two.

We expect DNA of about $185 million.

Interest expense of about $100 million.

A tax rate of about 24, 5%.

And a diluted share count of 180 million shares which includes our assumption to repurchase at least 10% of our shares outstanding.

With that I will turn the call over to Scott.

Thank you basket great Scott.

Clearly the risk of an economic slowdown has increased today relative to just a few quarters ago.

So before opening the call up for Q&A I want to take a moment to discuss the resilience of our business model.

Our highly variable cost structure, working capital strength and low leverage profile insulate the business during challenging periods from the pressure to make unhealthy short term decisions that may hurt the strength of our brands.

The business from capitalizing on new opportunities.

Global and geographic diversity mitigates the impact from market specific downturns.

The business has faced global sales declined in 2017 and 2020 in both periods the flexibility of the business model allowed us to focus our efforts to come out each situation's stronger than we were when we started.

This is a good reminder of how our businesses both structured to weather challenging periods as.

Net sales trends change first approximately 70% to 80% of our cost flex down to accommodate for decline in unit demand.

Second our input cost normally decline as there normally tied to global economic activity.

Third our working capital needs reduce freeing up cash for.

Our capital expenditures flex down to maintenance Capex.

The last few years, we've been leaning into growth investments.

Regardless of the market environment, we have a track record of executing and outperforming the industry.

We're not in a defensive situation today, but we have cut back on expected hiring even long dated some of our capital project time lines dish.

Additionally, our early 2023 planning reflects the change in the operating environment with a greater focus on driving operating efficiencies.

With that operator, please open the call up for Q&A.

Yes.

Thank you.

To ask a question on your telephone you will need to press star one one.

We ask that you. Please limit your questions to one question and one follow up.

One moment for your first question.

Our first question comes from the line of Bobby Griffin with Raymond James Your line is now open.

Hey, good morning, everybody. Thanks for taking my questions.

Hey, Bob its Scott.

And Jim I guess, firstly could you maybe help us understand just a little bit more detail how the quarter progressed.

Through the month.

Was there any slight improvement here towards the end of June or going into July was fourth of July and then second I'll just go on and ask a follow up now or we can get out there but to the follow up side is within the guidance for the back half how does that what does that assume from a unit perspective is it roughly the same as what we've seen year to date modest improvement just anything to help us kind of putting it.

Protect the back half versus what we've seen on play so far this year.

Sure Let me take the last question first so when you think about just the cadence throughout the year is as we mentioned is that the units and from an industry standpoint, whether it be the first quarter or the second quarter were challenged we performed well.

And significantly better from an industry standpoint, as we think about the back half we would expect I would say slight to modest improvement in our own units as we go into the back half. So when you think about what does that mean is not only do we get a bit of improvement from from from volume, we would expect some pricing benefit as well as the pricing that we took.

For the latest round of commodities, we get the full impact of that or the benefit of that in the back half.

As we think about the cadence through the quarter, what I would say is as we pointed out in the first quarter is that the normal seasonality of the business is back and not only is that seasonal across the quarters, but it's also seasonal around let's call. It the holiday selling periods. So again consistent with prior years call. It 2019 is in the non promo period.

We see some let's call it base or softness and then on the promo periods during the holiday periods, we see we see nice growth so hopefully that helps.

Thank you.

Again to ask a question Thats Star one and please keep your questions to one our next question.

Will come from.

Your line of Seth Basham with Wedbush. Your line is now open.

Thanks, a lot good morning.

Scott you referenced how you can flex costs down significantly when the economy and demand turns lower.

Guidance for the back half of the year implies significant pressure on.

Operating margins can you talk about when you all decide to reduce your fixed costs and capex more aggressively to current demand levels if they persist.

Sure Great. Great question first let me kind of frame it as to what we've done so far when.

When we looked at this year going into the year, we were expecting a fairly solid year than we've got certainly some macro issues, whether it be the conflict over in Europe , whether it be inflation, a little bit of Covid still.

Still around China got close we got hit with FX. So we ended up with a little bit different operating environment than we expected going into the year and I think on our prior earnings call. I said, we were set from an offensive position.

Obviously, when we got into the second quarter. It became clear that it wasn't going to be as robust a year as we thought but at the same time, we are in the primary selling period, the second quarter in the third quarter.

And it certainly didn't seem like any time when you are in the busy season to be doing too much we'll call. It cost controls. So we've trimmed around the edges a little bit.

We're going to play through the third quarter getting more information about the market.

And I suspect at the end of the third quarter, we will have to make a decision as to how we want to position the company.

For we'll call. It late 2022, and really 2023, I would expect that will be more conservative in our budgeting next year.

So I'd say, we're going to play through the busy season, then look at it I do have to say, though although we probably we have spend some extra money to make sure that we're ready in case the market was robust and remember we are pretty much just in time delivery kind of supplier to our customers. So it's critical that we have the capabilities.

To meet their demands.

Look at how we're performing relative to market those strategies have really work and I think when we get the results for the second quarter for the whole industry.

I think we will have continued to take market share and maybe accelerated our market share capture.

During the second quarter, so it's working but it has been a little bit expensive and we'll work through it but to answer your question very directly you should expect.

At the end of the third quarter that will we will look at that very closely to see that we have the right balance there, perhaps just a double tap into that if you think about our margin performance one thing to be mindful of is we would expect the back half EBITDA margins to improve from the second quarter and the second quarter, there was a bit of a uniqueness happening whether it be the geopolitical cry.

<unk> that hit us or whether it be the commodities, where we were not able to get in price until let's call. It June early part of July .

So that if you think about that in relation to the back half that should help bridge on how and why we think margins are going to improve however, if you think about it versus prior years just be mindful.

Pointed out that the price without incremental gross margin is about 400 basis points. When you think about it versus 2019. So yes. It is when you think about the math and the rate that is unfavorable however, when you think about the strength in the brands and the products what that shows is our ability to move on price or sorry move costs.

Taking pricing actions.

Thank you.

One moment for our next question.

Our next question comes from Keith Hughes with <unk>. Your line is now open.

Thank you my questions on pricing.

You could give us some details on the second quarter, how much pricing you got in the quarter and then how much particularly with another round the end of the second quarter, how much do you expect on the guidance for the second half.

Absolutely. Good question. So when I think about that let me answer the the full year question.

Think about all in pricing versus prior year, plus the pricing actions that we've added is the way I would think about that as call. It low low to mid single digits. When I think about specifically in the second quarter is that last pricing action that we announced we did not get that in effect until late in the quarter.

What we did comment on is that that that exposure that we had meaning between commodities and price was about $15 million that we would recoup in the back half. So when you put all that together what that would imply is that we would get a bit more pricing benefit in the back half than we would in the first half or in the second quarter.

Okay.

Operator, we're ready for another question. Thank.

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

Hi, Thanks, Good morning, everyone. So maybe just to follow on that a little bit as we look to the back half Bosker you'd noted input costs might start to come down a little bit I was hoping you could provide some specifics on what areas Youre seeing potential reduction and then is the plan to to hold price, where you would get a gross profit dollar benefit or would you.

Flex the pricing accordingly, as some input cost come down.

From an industry standpoint, what I would say is is that typically when commodity prices go up pricing is taken and when commodities come in is that those pricing sticks.

General philosophy from an industry standpoint, and that would be our strategy as well when you think about our commodities portfolio broadly speaking is that.

Within the raw material the commodity profile of our portfolio is that there are ups and takes or whether it would be a little TDI, whether it'd be a little sorry chemicals, whether it be the ancillary of purchase volume.

<unk> has come off sorry oil has come off the high of $125 a barrel lumber has come in a bit. So we're seeing some steel is hanging in but perhaps there is some opportunity there as well. So all of that has been considered in our from an outlook standpoint, but it feels like just given the state of play here from a buyer standpoint.

There is our biases that theres more benefit.

Ben than downside versus where we were call. It last year now again as we think about 2023 is that to the extent that that does come to pass is that would be incremental gross profit dollars that would flow through as well is that that rate item that we spoke to the margin the margin deterioration from price without pumps without gross profit is that wood.

Turned to be a tailwind as well.

Thank you.

Our next question.

Comes from the line of Carla Casella with Jpmorgan. Your line is now open.

Hi.

Given your comments about raising or building more inventory more safety. Scott can you just talk about how we should think about working capital for.

For the next couple of quarters do you see that being a typical benefit like it is.

Past years in the third quarter.

Or can you give us any kind of full year sense of how much build you need an inventory and if there any other offsets in working capital.

Well, it's probably fully built the working capital needs that we have some strategy standpoint.

To strengthen the supply chain and ensure safety stock for our customers. If anything probably you are going to have more favorable working capital trends in the third quarter I suspect than you did historically because we built in the second quarter, but there is no more incremental working capital needs.

This strategy is their basket is now 100% I would agree so the typical seasonality of the business is that we start spinning working capital are benefiting in the back half of the year that would that should come to pass and as Scott mentioned is is that we did ramp specifically on Tempur and then raw material as well.

From a safety stock standpoint is in and around adjustable and rounding Justin.

Lead time, and obviously the issues relative to shipping so I suspect the working capital trends from a historical standpoint will be better in the back half than they have been thats right, but certainly not negative based on what we know today that's right.

Thank you.

Our next question comes from the line of David Melon out.

Melanie <unk> with Bank of America. Your line is open.

Thanks, David on for Curt Nagle here just wanted to another couple of quick sentences. If that's all right on the price increase that was taken in June .

Was it across all brands and then as well have you kind of observed any demand destruction or trade down from pricing actions that have already been taken.

If I look through the Tempur brand to start with just in total and look at the higher end products versus the lower end products within Tempur.

The higher end products have done better than the lower end products within Tempur. If you look at it from a brand standpoint, I think we called it out in the notes.

Stearns <unk> Foster actually grew.

During the quarter, then temper would be the next.

Performing brand in Sealy would be the lowest performing brand. So I would say on the historical standpoint, we're not seeing any demand destruction from previous pricing actions more of them.

My hearing any any of that from the retailers.

The pricing that went in in June I think that was across all brands. If I remember correctly, you're blockbuster across all brands and as always were a little thoughtful about how we spread it generally a higher end consumer and Ken's can handle it books versus a.

Call it a value products. So we were thoughtful when we spread it and so from a pricing scheme, but I don't think we've seen any issues.

There I think the issue that you're feeling a little bit in the second quarter is really a traffic issue and consumers just being a little more conservative in their shopping.

Thank you.

Our next question comes from Thomas with Keybanc. Your line is open.

Hey, yes, it's Brian Thanks for taking my question.

One asked a little bit more about.

Trends in North America, and the expectations in the second half with respect to mix and the performance of the Tempur brand.

I was wondering if you could just give us a little bit more color you called out mix as still being a positive forward.

For margins in <unk>, what are you assuming in terms of how the mix plays out how temporary holds up.

Yeah.

I guess in the first half of the year it feels like.

Yes tough comparison is that correct.

The middle and lower end of the market. How are you looking at the higher end luxury and premium end of the market. Thank you.

Well I think we're seeing we're expecting higher end to perform better.

The overall market and I think Tempur has continued to take share.

And in the U S market.

Having said that we're not expecting a very robust period.

In the back half.

No. Thanks Oscar.

Oscar that's pretty fair I think that's right. When you think about it Holistically North America, let's call it low single digit decline.

Generally what happens during these periods of times at high end hangs in better than what it otherwise when it otherwise would versus the low end also we're very excited about what <unk> has already done in the second quarter than in prior and were continuing to support that brand and we've got to launch coming up here in the fourth quarter. So holistically the way I think about that as the high end <unk>.

Hanging in better than that from a low end standpoint, and then I think when we look at our like our Tempur stores. The Tempur store, our flagship stores will be retail in North America.

They had a they had a reasonably good second quarter.

Compared to the market and I think once we get the final data for the second quarter I think they are probably will look like they performed very well.

Thank you.

Our next question comes from.

Jonathan Massachusetts.

With Jefferies. Your line is open.

Great. Thanks, so much.

My question was on assumptions for second half.

Historically, the wholesale bedding units and sales that had a pretty good correlation with GDP and consumer confidence over time.

So just curious what your implied second half.

Guidance assumes as it relates to some of those macro dynamics are you assuming a sequential deterioration.

In GDP and consumer confidence and other dynamics.

More color there.

Would be helpful. Thanks.

Yes, I'll start with that and then I'll, let bhaskar clean it up clean it up a little bit.

Clearly, we're not expecting a very robust back half of half of the year.

Units, probably declining in the industry.

Call it single digits for lack of a better way of saying it.

And whether it's what you call it a recession or whether it is not a recession I think our outlook is that at best you are talking about a flattish.

Kind of world.

Next two to three quarters.

No absolutely if you look at the macro indicators versus where we were in the first quarter and where we are today things have things have turned a little bit and just reiterating what Scott said is no no no material improvement from here and no material decrement from here is what how we're thinking about the back half.

Thank you.

One moment for our next question.

Comes from Bob <unk> with Guggenheim Partners. Your line is now open hi.

Hi, good morning.

Just a couple of questions just on on inventories I guess your own inventory, but more importantly inventories at retail just trying to understand what youre seeing with your retail partners and their patients <unk>.

Willingness to be promotional around the industry given the weakness you could give us some insights around that that would be helpful. Thanks.

By its very nature of the bedding industry doesn't have much inventory in the system at the retailers.

Because of the short order to delivery time, so they don't carry a lot of inventory.

Now the furniture, guys do and if you're talking about the furniture side of the business is completely different business and their inventories are are long, but it's got about mattresses embedding generally is just not much inventory in the system.

Because it obviously retailers our fixed cost structure kind of business model.

The sales volume is actually more important to them than to us.

And I think we're seeing retailers being more promotional or you might say getting back to the normal promotional cadence and aggressiveness that the industry was used to before the pandemic.

But I think that there is.

Stepping up in advertising and they have been stepping up and promotions and I think they'll continue.

To be to be a little more aggressive than they were certainly during the COVID-19 years, we'll call it but really more back to normal promotional cadence.

Okay.

Thank you.

One moment for our next question.

Our next question comes from Ms.

Ms Schwartz.

And comes from Atul Macquarie with UBS. Your line is open.

Thank you and good morning, and thanks, a lot for taking my questions Moskow first a quick clarification. If I heard you right. I think you mentioned that you were expecting your own units to improve slightly in the back half relative to a year to date.

Detectives right why do you expect any improvement given the potential for macro turn for the worse later this year. So that's right.

First question and then Mike.

Second question is Scott you mentioned industry units down maybe in the 20% to 25% range in this quarter. So do you believe the industry is at a point, where and when it's shaken off some of the excess demand that it saw during the pandemic or in other words had the interest returned back to 2019 levels for the industry.

Or will it be a few more quarters of decline before we get to that point.

Thank you.

I'll start I'll answer your second first just to confuse bosker.

And your third fourth yes, when you're looking at when you talk about the second quarter and the unit client call it 20% to 25% for the industry and in the U S. I mean, the key there first of all it's a terribly hard compare from last year, because last year units were up 20% plus it is by far the heart.

Disk comp in the year on a quarterly basis.

And although we don't think there was any pull forward in sales turn the Covid period. If you look at it from a quarterly standpoint. There is no question in the second quarter last year.

We probably pulled forward from sales and if any if you look at it in the third and fourth quarter from last year was rather.

Stable I would say so it would look like to me when stimulus checks hit last year second quarter boomed, we probably pulled forward within the year.

Some sales, but again, if you look at the full year 2021.

Units were not far off what I'll call historical or historical trend.

Towards the second part.

And that really addresses the question about units first half versus back half. If you think about what was happening from an industry standpoint.

Last year, whether it be stimulus or not and as Scott mentioned second quarter was an extremely hard comp when we think about the back half it fits.

<unk>.

That's how we're thinking about it which is slight to modest improvement versus the first half I think the other thing I would point out is if you take kind of step back and just look at the competitive analysis and look at all the players in the industry and how they're performing and what their competitive position is.

It looks like to me, we're in a stronger competitive position at the end of the second quarter than we were this time last year.

Whether it be some companies, it's little more difficult to raise capital certainly the online business has become a little more challenging.

Some of the changes that Google and Apple have made.

And then our products have done very well in the marketplace. So I think our competitive position.

Is.

Considerably quite frankly considerably stronger than it was this time last year and you blend that together with a relatively robust non not robust back half.

We think we can we can knock out some positive units.

Thank you.

And our next question comes from William Reuter with Bank of America. Your line is now open.

Hi, My question is on capital allocation, so youre slowing down your share repurchases in the second half of the year.

You guys are above the midpoint of your leverage target given an environment, that's more uncertain and as you think about next year.

I guess do you think about trying to allocate more capital to keeping your leverage towards the bottom end of the range or do you feel comfortable within the range regardless.

But great question and the challenge in answering the question as it can change based on the current facts and circumstances that we learn every week or every month.

I think what we've said is look we plan to buy at least 10%.

And we will continue to look at what the economy looks like and kind of manage our balance sheet I think what are we about $2 seven.

Whether were $2 724, or something to that but I imagine.

Assuming that we don't see any change in our perspective of the future.

We will run somewhere around call it.

Two five give or take a couple of hundred a couple of 20 bps.

Forward or backwards.

If something looks a little more challenging.

We would do kind of what you're insinuating as we would begin to move some closer more towards two times leverage.

And if things got a little bit looked a little bit brighter, we might move a little closer and closer to three but I think we will hover around the midpoint of our leverage would be our current expectations.

Thank you.

And our next question comes from Laura Champine with loop capital. Your line is now open.

Thanks for taking my question, it's more of a clarification. So if industry units were down 20% to 25% in Q2 <unk> units.

Ours were not down that much.

Okay.

Okay.

I think we took considerable share, but I don't have all the data I am not trying to be smart, but I don't have all the data yet from all the sources to nail it down and I don't want to give our number out specifically for competitive reasons, but we were down significantly less than that.

Thank you.

Our next question.

I have a question from Carla Casella with Jpmorgan. Your line is open.

Great.

Follow on my last question with the working capital gains in the back half do you expect to be able to be fully out of the revolver this year or to chip away at some of that revolver draw from the quarter.

No we would expect to from a utilization standpoint, and efficient utilization of our of our of our debt structure as we would expect to still be in the revolver at the end of the year at the end of the year and what that would yes absolutely.

That would imply as leverage at two seven we would expect to as Scott mentioned is that issue can come down from here slightly.

Thank you.

One moment for our next question.

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

Peter are you muted.

I am sorry about that thanks again.

A big picture question for you on housing I've always thought that housing turnover drives maybe about 20% of unit volumes.

We're obviously going into a pretty challenged market for home buying and second home purchases do you have any updated views on how that impacts your business either as a percent of units or the high end versus low end.

Yes look there's no question housing starts.

Impact the business.

Actually I don't think its in the top two or three.

Drivers, but obviously housing slowing down as in what I'll call a minor headwind for me the most.

Key statistic that I guess I was watching is really consumer sentiment and consumer confidence and I think those track better too to the performance of our.

Our sales housing affordability certainly higher.

And we're watching it but I'll spend more time on consumer sentiment and confidence.

Thank you.

And our next question comes from Bobby question with Raymond James Your line is open Hey.

Hey, guys. Thanks for laying back in the queue for follow ups boxes as quickly I think you mentioned second half AD expense relatively in line with Q2, but I don't I don't think we have <unk> as the base. So can you tell us.

<unk>.

Second quarter AD spending was.

Yes, so call it nine 2%.

Okay I appreciate that and then.

Bobby apologies.

Bobby apologies bad math not one eight.

Need a calculator.

Yes.

Yeah.

Our next question comes from the line of.

Oh to Macquarie with UBS Your line is open.

Thank you so much for taking my follow up Scott It looks like some of your competitors and some other brands are ramping up their promotions as their properties Inc.

Some sales pressure so what level of sales decline will keep PX decided to raise its own promotions be price discounts or otherwise I think a particular customer and Chris.

I think I think our promotional cadence will be relatively consistent with last year.

It may be a little tweak because we were constrained with CLA at times, where we pulled back a little bit on sealy, because we couldnt deliver on cigarettes because of some issues there but.

I think we're very comfortable with the strength of our brand.

That we won't have to change our call our historical promotional cadence.

For on.

The manufacturing site for manufacturers that are trying to drive volume with.

With price and we've seen that against the last few quarters I think it's probably two or three quarters, we've bumped into that a couple of times.

That has not been successful ways my perspective.

When we studied that.

<unk> lowered price.

They really haven't made much of a move so I don't think thats the way to probably drive success as a manufacturer I think probably.

Spending money in advertising quality of products quality of Salesforce.

Probably better drivers if youre trying to drive sales as a manufacturer I think the pricing thing doesn't really work that well.

Thank you.

And our next question.

Our next question comes from.

Your line of.

Brad Thomas with Keybanc Your line is open.

Hi, Brad Thomas again, thanks for letting me back in.

Scott I was wondering if you could just talk a little bit more about the potential.

Acquisition landscape, but you all have done a great job over the years that finding.

Jack Kennedy is to invest in and.

Is that changing and how might your appetite be changing at all.

Given what's happening from a macro perspective. Thanks perfect. Thank you for the question I mean first of all just as a quick update the recent acquisitions are performing very well.

Whether it be sherwood or whether it be dreams too.

First come to mind.

And so I would say in total our acquisition strategy over the last few years has done better than pro forma it and we're certainly proud of and it's made it's made us stronger.

Obviously multiples have come down in the industry and some of that come come down on our stock and that makes it a challenge to do anything because we're going to do anything that we don't think is accretive or drives value.

There are lots of candidates I will tell you that over the last four or five months.

The number of candidates.

Worldwide has certainly picked up and we continue to talk to people to see whether or not it makes sense for us and for them.

But again, it's a little bit challenging we have made.

Relatively small investment in a company called bright that had some very interesting technology and the way we think about technology as we want best in class technology, and we generate some of that technology internally.

Through our team's vary whether it be in springs foam and other areas. We have some great internal people that helped us from a technology standpoint, but we also.

Don't mind getting technology, we'll call it outsourced technology and we've got a great relationship with full power and you're seeing the impact of that on our adjustable basis.

And today, we I think bright announced that we put some money in bright they've got some interesting technology.

Not commercial yet, but they've got 90 rebalancing.

In a bed that.

Self adjust that are very quiet and we were very bullish on their technology. So we've made a small investment.

There, but but we will continue to look at acquisitions.

But the pricing environment because of the multiple compression is difficult and in coming up with normalized earnings is difficult because of Covid and other things. So we'll be cautious, but we've got some some great.

We continue to talk to worldwide.

Thank you and I would now like to turn the conference back to Mr. Scott Thompson for any closing remarks.

Thank you operator.

To our 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 its board of directors.

Since our call today.

This concludes today's conference call you may now disconnect everyone have a wonderful day.