Q4 2022 Tempur Sealy International Inc Earnings Call

February 9, 2023

The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.

[music].

The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.

[music].

Good morning, ladies and gentlemen, thank you for standing by and welcome to the Tempur Sealy fourth quarter 2022 earnings conference call.

At this time, all participants on 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 on your telephone.

Please be advised that today's conference maybe recorded I would now.

I'd like to hand, the conference over to your speaker host for today. So in April at the Investor Relations manager. Please go ahead.

Thank you operator, good morning, everyone and thank you for participating in today's call. My name is Warren either at the Investor Relations manager before getting started we want to extend our congratulations and best wishes to Aubrey who is currently on maternity leave.

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 provision of the private Securities Litigation Reform Act of 1995.

These forward looking statements involve uncertainties and actual results may differ materially due to a variety of factors that could adversely affect the companys business. Please.

These factors are discussed in the Companys SEC filings, including its annual report on Form 10-K, and quarterly reports on Form 10-Q.

The headings special note regarding forward looking statements and risk factors.

Any forward looking statement speaks only as of the date on which it is made the company undertakes no obligation to update any forward looking statements.

This morning's commentary will also include non-GAAP financial information.

Reconciliations of this non-GAAP financial information can be found in the accompanying press release, which has been posted on the company's investor website at Investor Dot Tempur Sealy Dot com.

<unk> filed with the SEC.

Our comments will supplement the detailed information provided in the release.

And now with that introduction it is my pleasure to turn the call over to Scott.

Thank you Laura.

Good morning, everyone and thank you for joining us on our 2022 fourth.

<unk> fourth quarter and full earnings call.

I will begin with some highlights from our fourth quarter, and then I'll turn to discuss how we delivered on our long term initiatives and Bhaskar will review, our fourth quarter financial performance in more detail and discuss our 2023 guidance finally, I'll close with a few comments on how we view the current market environment and we will.

I'll open the call up for Q&A.

In the fourth quarter of 2022 net sales were approximately $1 2 billion in <unk>.

Adjusted EPS was <unk> 54.

This represents a 36% growth in sales and a 59% growth in adjusted EPS as compared to the fourth quarter of 2019, a pre COVID-19 period compared to the same period last year. This represents a 13% decline in sales and a 39% decline in adjusted EPS.

As we navigated a weak overall market experienced robust inflation how's.

However, we continue to outperform the broader industry, alright, good bit and enhanced our competitive position.

With our previous quarter, we observed a slight increase and resilience of our premium customers with sales value focused customers.

Bit more subdued.

I'd like to begin by highlighting some of the key wins for the quarter.

First as we discussed last quarter, we successfully kicked off the North America launch of our new collection of Stearns <unk> Foster products, which is designed to further distinguish our high end traditional inner spring brand from the numerous mid market inner spring brands in marketplace.

Our third party retail partners have demonstrated their enthusiasm for both the new Stearns <unk> foster product portfolio and our commitment to supporting the lineup through compelling national brand marketing.

This excitement for the new product is reflected in robust year over year order trends.

In order to ensure the new product meets our stringent quality requirements. We have extended the launch window in response to a slight component delay we expect to complete the rollout by Memorial day holiday selling period overall, we remain on track to expand sterns retail slot by more than 20%.

Turning to our second highlight.

Our U S E Commerce channel performance performed well in the quarter delivering.

Approximately double digit growth, our new Stearns <unk> Foster and Sealy ecommerce sites have exceeded our expectation with greater mix into the more premium S. K U assortments, resulting an unexpectedly high asps across both brands.

Our temporary ecommerce business also delivered solid growth in the quarter, which is especially notable considering the difficult prior year compare.

With the recent launch of our new <unk> website, we now have operations in direct to consumer websites to the U S at each of our leading brands.

Our expanded ecommerce presence as a powerful tool that enables us to be closer to the customer drive share of voice and built on our Omnichannel strategy.

For the last five years, we've developed a direct relationship with millions of customers gained valuable.

Consumer insight and further our direct marketing capability. This helps build our long term customer relationships and drive marketing efficiencies.

Moving to ESG.

We further our commitment to protect and improve our communities and the environment. We recently published our 2023 corporate social value report, which is available on our IR website. We're proud of the progress we've made ESG goals in the fourth quarter, we achieved our goal of 100% landfill diversion.

From our U S and European manufacturing operations.

We also made progress towards our goal of carbon neutrality for our global operations reporting a decrease in emissions per unit.

Before turning the call over to foster I want to take a moment step back and review the progress we've made on our long term initiatives during 2022.

Though the year was fluid from a macroeconomic standpoint, we remain focused on positioning the business for long term success.

Starting with our first key initiative, which is to develop the highest quality products in all the markets we serve.

When it comes to product development, our number one objective is to anticipate and react to consumers' evolving suite preferences.

In early 2022, we.

We made continued progress against this objective through various product launches.

As part of the refresh of our U S. Sealy Pos repeat it portfolio, we launched a new line of premium and hybrid Sealy mattresses, featuring improved comfort superior support innovative cooling technology.

This lineup is truly resonated with our CV targeted consumer base.

We leveraged our sealy brands.

To tap into new market segments, as well, we launched our new Sealy natural collection.

Half of the year.

<unk> eco friendly and sustainable source material. This collection appeals to environmentally conscious consumers and continues to broaden our customer base.

We also launched our Sealy flex grid mattress line, which features pressure relieving grid gel grid. It represents the evolution of the technology in the market today.

With a unique scalable manufacturing approach, we're able to offer these products at a mid market retail price.

In addition to supporting our 2022 launches, we said the innovation pipeline for 2023 and beyond.

Later this quarter in the U S. We will launch an upgraded line of Tempur breeze products and smart adjustable basis.

Then later in the year, we expect to expand the distribution of our timber active breeze cooling system into select wholesale doors. We expect these launches to further strengthen tempers appeal to the premium.

Wellness minded consumer and drive improved attach rates and strong asps.

Yes.

Turning to our international group.

Beginning this quarter, we will undertake the largest international product rollout in the company's history.

Reaching more than 90 markets worldwide. This new lineup of mattresses pillows and bed basis has been strategically designed to drive addressable market expansion of Tempur products.

Launched its phased over multiple quarters to allow for the customization by region.

Finally.

I would point out that our investment in Silicon Valley sleep Tech startup bright our partnership with sleep data company full power technology.

Our industry, leading R&D team will ensure a tempur sealy remains at the forefront of sleep innovation.

As evidence of our commitment to product quality and innovation are leading brands received a number of recognitions throughout the year, notably Chimera peak rate number one in customer satisfaction among mattress brands in the J D power 2020 to report for the fourth year in a row for <unk>.

Detailed mattress category.

And for the second year in a row ranked number one in the online mattress category.

A true Testament to the customers' trust of our brand and products.

Turning to our second initiative.

With us to promote our brands with compelling marketing worldwide.

Okay.

We supported our brands and products with a record marketing investment of approximately $450 million this year.

<unk> to generating strong near term returns and driving outperformance relative to the broader bedding market. These investments also serve to seed the market for our 2023 product launches.

Sealy and Tempur continue to be the number one and number two best selling mattress brands in America and among the most highly recommended recognized and desirable brands in the industry with 95% of shoppers aware of at least one of the Tsi brands.

In 2022, we leaned into the untapped potential of our Stearns <unk> Foster brand by doubling our presence on national TV.

In addition to contributing to growth and awareness and consideration for Stearns. These marketing investments grew our retail support which combined with the new product lineup.

Selected and a significant increase in placements.

Our investments in product brand and channel successfully drove Stearns <unk> Foster's website traffic and sales growth in 2022.

Clear progress to our goal to make Stearns <unk> Foster our third $1 billion brand.

Last year, we also seeded the market our upcoming international launch with strategic marketing investments in store sales programs and e-commerce initiatives worldwide.

Our third initiative is to optimize our powerful.

Distribution platform.

We evolved our global Omnichannel present in step with consumer preferences to be wherever they want to shop.

The largest pillar in our Omnichannel distribution strategy as our more than 26003rd party retail doors.

This broad footprint ensures that consumers can easily find and experience our products in person.

Now we're well represented in third party retailers in the U S. Today, there are opportunities to increase our balance this year with existing retail partners and to sell to certain retailers, who do not currently retail to perceive the products.

Turning to our OEM operations.

While we entered this space only a few years ago in 2020.

We made significant progress in growing our operations.

Both within our Sherwood private label inner spring business.

Our phone porting business in 2022, we delivered significant growth in our OEM operations.

As we continued to charge towards our target of $600 million and OEM sales.

Note that OEM sales growth will decrease the cost per unit for all of our branded products as we spread our fixed costs and drive more advantageous supply agreements.

On the enhanced volume.

In addition to growing our wholesale and OEM business.

We are now running in excess of $1 billion in annual sales.

Global direct to consumer business with a robust five year compound annual growth rate of over 40%.

Regarding our direct retail store operations, we opened 50 retail stores in 2022, and currently operate over 700 brick and mortar storefronts around the world. Our retail network is comprised of both wholly owned and joint venture locations led by over 200.

Temporary retail and multi branded sleep outfitter stores in the U S and our more than 200 dreams locations in the U K.

In total, including the e-commerce sales they facilitate our company owned stores to generate an average sale.

$2 million per location.

With the U S based tempur retail stores, averaging a robust $4 million per sales per location.

Finally, I should note that in aggregate our U S. Web has grown at a compounded annual growth rate of over 25% since 2017.

Our fourth and final key initiative is to drive increased EPS through operational execution and prudent capital deployment.

In 2022, we generated full year adjusted EPS of $2 66.

This represents a five year compound annual growth rate of 26%.

We executed on our balanced capital allocation strategy to return value to shareholders.

We allocated approximately $1 billion in capital.

First.

We reinvested over $300 million in operation.

This includes a one time investment to stand up our new foam pouring plant in Crawfordsville, Indiana, which is expected to commence operation in 2023, enhancing our ability to service our customers.

Ensuring product availability to meet increased demand in the premium sector, creating shorter lead times and reduced per unit logistics costs and the northeast market.

Second we invested $10 million and bright technology based mattress company with differentiated new product offerings targeted at a different premium customer than we currently serve today.

Third we invested over $665 million and share repurchase to buyback approximately 10% of our shares outstanding at an average price of $33 a share.

And finally, we paid $70 million in cash dividend I.

I should note, we announced today, a 10% increase in our quarterly dividend, bringing it to <unk> 11 per share.

I'd be remiss, if I didn't mention our ERP transition.

Which will play a critical part in our ability to deliver on all of our long term objectives.

In 2022, we completed the multiyear journey of transitioning more than 50 of our global subsidiaries from using five different ERP systems into one common system.

This investment and consolidating operations is expected to drive long term efficiencies across our global operations enhance cyber security.

Facilitate customer communications regarding order status and improve our direct to consumer capabilities.

With that I'll turn the call over to Bhaskar.

Yes.

Thank you Scott.

In the fourth quarter of 2022 consolidated sales were approximately $1 2 billion.

And adjusted earnings per share was <unk> 54.

We had $10 million of pro forma adjustments this quarter, all of which are consistent with the terms of our senior credit facility.

Turning to North American results.

Net sales decreased 12% in the fourth quarter on a reported basis, the wholesale channel decreased 13%.

And the direct channel decreased 5%.

Early indications are that we outperformed the market.

When looking at our sales growth. Please note our fourth quarter of 2021 were significantly benefited by a temporary period backlog reduction of $100 million.

North American adjusted gross profit margin declined to 37, 9%, primarily driven by operational headwinds and mix related to the prior year Tempur Pedic backlog reduction.

Partially offset by pricing actions.

The backlog reduction in the prior year accounted for approximately half of the margin decline.

North American adjusted operating margin declined to 15, 1% driven by the decline in gross margin and operating expense deleverage.

Now turning to international.

Net sales decreased 14% on a reported basis on a constant currency basis international sales decreased only 2% as we experienced a $36 million headwind in the quarter from unfavorable foreign exchange rates.

Foreign currency remains volatile, though we have seen favorable trends since the fourth quarter our.

Our current expectation for 2023 contemplates a modest FX headwind to both sales and adjusted EBITDA.

As compared to the prior year, our international gross margin improved to 55, 2% driven.

Driven by pricing actions to offset commodity inflation, partially offset by mix.

Our international.

National adjusted operating margin improved to 27% driven by the improvement in gross margin and operating expense leverage partially offset by the impact of Covid on our joint venture operations in Asia.

Turning to commodities, which.

Which we think about as inclusive of raw material inputs.

Logistic costs and labor all of which had been highly inflationary across the global bedding industry for more than two years.

In the fourth quarter global commodity prices largely trended in line with our expectation.

Some commodities have gravitated off their peaks, though others remain pressured.

We anticipate that prices could continue to ease throughout the year, although we expect commodity prices in 2023, we will continue to trend significantly ahead of 2020 levels.

Now to global operations.

We are taking actions to fully support our customers, while managing through an evolving global supply chain and a tight labor market.

Which have resulted in $10 million of incremental expense in the fourth quarter.

As the global supply chain continues to stabilize and as our new ERP system drives productivity, we expect improvement throughout 2023 and beyond.

Now moving to the balance sheet and cash flow items.

In the fourth quarter, we had operating cash flow of $95 million.

In response to the global supply chain volatility, we took actions in 'twenty two to reinforce our safety stock of raw materials and finished goods.

We believe this focus on providing our customers with the best possible product quality and customer service was one of the key drivers of our outperformance relative to the broader industry last year.

Our inventory days improved in the back half of 'twenty, two as we began to normalize our safety stock.

We anticipate inventory levels will continue to normalize throughout 2023 as the supply chain further stabilizing driving cash cycle improvement.

Our new foam pouring plant in Crawfordsville, Indiana is on track to begin a phased opening in the second quarter.

In order to optimize production in this new facility, we will phase, bringing the plant online to ensure the highest level of quality, while we grow into the incremental capacity.

This plant's location complement the existing manufacturing footprint and enhances our ability to service our east coast customers.

We expect our Capex to decrease significantly in 2023 and return to a more normalized level of spend thereafter.

We think of annualized Capex is approximately $150 million driven by maintenance spend of approximately 110 and growth spend of approximately 40%.

Yes.

At the end of the fourth quarter consolidated debt less cash was $2 8 billion and our leverage ratio under our credit facility was three one times slightly ahead of our target range of two to three times.

We anticipate returning to our target leverage range in 'twenty three.

Now turning to 2023 guidance.

We expect adjusted EPS to be in the range of $2 60 to $2 80.

This considers sales growth of mid single digits, primarily driven by the execution of our key initiatives and also benefited by the sell in of discounted floor models and the wrap around it impact of pricing.

Sales and marketing investments of $20 million to support product launches.

And record advertising spend of over $500 million as we container support our leading brands and new products.

Resulting in EBITDA of approximately $980 million at the midpoint of the range.

As I think about 2023 phases, the first quarter will be our last prewar comp.

That combined with Frontloaded product launch and advertising cost will result in a difficult year over year compare in the first quarter.

We expect to outperform the market. The consolidated first quarter sales are consistent to prior year and adjusted EPS that represents 19% of 2023 EPS expectations.

Our guidance also considers the following allocations of capital in 2023.

Capex of approximately $200 million.

Which includes $90 million of growth Capex, primarily to fund the completion of our Crawfordsville facility.

A quarterly dividend of 11 <unk>.

Representing an increase of 10% relative to 'twenty two.

And the repurchase of at least 5% of our outstanding shares funded through free cash flow, which is generated in the back half of the year.

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

For the full year 2023, we expect DNA of about $200 million to $210 million.

Interest expense of about $135 million to $140 million.

On a tax rate of 24% to 25%.

And a diluted share count of 178 million shares.

With that I will turn the call back over to Scott.

Thank you BASCO nice job.

Before opening the call up for Q&A.

Take a moment and share some thoughts about our expectations for the macroeconomic backdrop in 2023.

In the U S. We've aligned our outlook with the consensus GDP forecast of economics economists fifth major banks, and we're assuming that will counter and mild recessionary operating backdrop in 2023.

We see growth opportunities in Asia. This year led by a less volatile environment in China.

In Europe , although we see consumers exhibiting resilience in the face of the ongoing war to the Ukraine.

And elevated inflation, we expect a mild recession.

Turning specifically to our U S bedding industry expectations.

Last year, the U S bedding industry experienced its worst decline in history.

We do not have complete information, yet, but we would expect U S produced units were down an unprecedented 20% to 25% compared to 2021.

Our 2023 guidance is grounded in a stable U S bedding environment with units consistent.

The prior year.

With the back half stronger than the first half.

We are currently thinking the U S bedding industry units will return to growth in 2024.

Overall, our 2023 outlook targets growth on both the top and bottom lines.

This contemplates a continued.

Performance across the betting industry worldwide, driven by our new products strong brands and omni channel initiatives.

Our strong competitive position continues to provide us with significant long term growth opportunities.

And with that I'll open up the call for questions operator.

Thank you, ladies and gentlemen, Westar reminder, to ask a question you will need to press star one on your telephone and wait for your name to be announced.

Question Bressler, one again and the consideration of time, we ask that you. Please limit yourself to one question only please standby, while we compile the Q&A roster.

Yes.

First question coming from the line of Susan Mcclary from Goldman Sachs. Your line is open.

Thank you good morning, everyone.

Good morning.

My first question. My question is around thinking about the state of the consumer you gave a lot of good details on how youre thinking about the various product lines and the brands and how they are performing as you look at how are you thinking about the pushes and pulls on the different.

Income segment and the ways that the consumer may respond this year too to the macro.

Sure. Thank you for your question.

Focus on the U S. That's obviously, our biggest segment and to go around the world who would take the entire call. So spoken on the focusing on the U S. Consumer couple of observations one we're seeing the high end consumer continuing to hang in there.

Low end consumer has been where a lot of the deterioration has been.

I think when we look at it called the units down 20%, 25% this year.

Is that is well down from where we historically have been and is very close to actually trough unit production in North America, we're probably five or 6%.

Trough and that would be 2009 ish, that's correct I think.

Oscar So clearly you've taken a downturn, but store traffic continues to be a little bit soft I think with the retailers would tell you but people to show up by.

We're seeing.

I guess a little.

Bill.

Fewer people financing it that's right I think it's quite let's say from the consumer standpoint.

So.

You heard our outlook were basically looking for 2023 to the stable, which again is almost at trough unit production in the U S.

I assume that 2020 for the unit growth will come back to the.

The industry.

Okay.

Yes.

Final question.

And our next question coming from the line of Seth Basham with Wedbush. Your line is open.

Okay.

Thanks, a lot and good morning.

Please give us a little bit more color on the bridge to your margin guide for 2023, you talked about a few components, but of those launch costs.

Advertising et cetera can you tell us what you think that the biggest drivers.

And then as it relates to <unk> again, how much do you expect to benefit that.

Absolutely so when I think about EBITDA margins and as they go into 2023, we are anticipating some improvement on a year over year basis.

To put together those building blocks the way I think about it in no particular order as I would think of operations. We've made some investments in 2022, our expectation is that as that supply chain continues to stabilize is that will turn into a tailwind for us in 2023 as the year plays out.

In addition to that as we have pricing actions. The last action we put in place in June of 2022, we will get the wraparound benefit of that in 2023.

As you mentioned, we do have four miles very excited about what we have going on we have the breeze coming out in the second quarter were wrapping up stones in the first quarter, we have Q, that's happening sorry, the international launch Thats happening all throughout 2023, however, the costs associated with that will be the floor model discounts, let's call that principally in the second quarter as Bruce gets out there and then.

All throughout the year, we will be investing in advertising as we mentioned on the call over $500 million.

You add all those puts and then fundamentally is that we have initiatives that are going to grow the top line. So of our mid single digit growth is that half will come from those initiatives and with the balance coming from four models as well as a bit of the pricing actions.

Thank you and our next question coming from the line of Curtis Nagle with Bank of America. Your line is open.

Good morning, Thanks very much.

My last question in terms of just breaking out the sales guidance, which I think was a little better than expected. So that's good.

Maybe just taking a little more into the U S. Scott over the past I don't know four months, we've been talking about.

Stabilization.

In the U S, which sort of started with <unk>.

Through.

Where we are right now has that continued could we talk a little bit in terms of just.

The U S is trending at the moment.

How are you feeling about that.

Well I mean as of eight a M. I can tell you how we're doing.

Look it's very stable I mean, it feels like from a trend standpoint, we're getting off we'll call. The COVID-19 trend of people shopping more during the week than they used to and less on the weekend.

Moved back to more traditional.

Shopping with more shopping on the weekend.

During the week.

The other trends that we saw during COVID-19.

Was that the.

The holiday periods were not quite as robust in.

The business with steadier through through the calendar and now we're going back to what I think it's more of a historical pattern, where the trough is a real trough and the peaks are real peaks.

The holiday periods become critical for the industry, but all of that would be what I would call normal and getting back to stable.

Look I think our volumes, we haven't seen anything.

Since year end that would make us think the industry is anything but.

At least stable.

And I'll add that I haven't seen anything.

It makes me think that we won't continue to take a reasonable amount of share in 2023.

Thank you and our next question coming from the lineup.

Bobby Griffin from Raymond James Your line is now open.

Good morning, guys. Thank you for taking my questions. Scott in your prepared remarks, you talked a little bit about an opportunity to sell some products may be are some retailers, who don't have as much share I think you guys do have tests going on with Sam's with maybe some potential to launch that in stores. So can you maybe update us on how that initial rollout is going and some of the timing around that.

And is anything assumed in the guidance for picking up some new slot placements there.

Yes, we are in Sam's online you can see it online.

And we're working very closely with Sam and other customers.

To fill their needs I don't really have an update for you in regionally don't talk a lot about specific individual customers, but I would say our relationship with Sam's is good.

And expanding.

Do we have anything specific in our guidance.

No I would say that.

We have lots of opportunities and sales team.

<unk>.

But we certainly don't start.

Putting that kind of step in our forecast.

While we would have a firm deal.

Thank you and our next question coming from the line of.

Joe Macquarie from UBS Your line is open.

Good morning, Thanks, a lot for taking my question and thanks for all the great color on the call.

Scott Alaska or.

Question on the sales guidance.

Hum.

Up 5%, our other up mid single digits.

If there were a scenario where sales were to fall short.

Students, who are flattish or low single digits.

Do you have enough cushion in the P&L too maybe pare back on expenses and still achieve the EPS guidance of 2016.

Well, there's really there's embedded quite a bit in that question. When you know our variable cost structure, which we have basket in the variable cost structure 30 70 30.

So we have the ability to right size the organization relative relatively quickly if there is a downturn.

I think the real issue, though is would you pull all those levers you certainly would pull levers. If you thought you were headed towards.

Several quarters of recessionary activity.

You may or may not pull the lever. So if you think you've got a very short term.

Downtrend in business because within the organization around is complicated and you might take it as an opportunity not to pull those levers so.

Can't guarantee what we would do.

I think it might be interesting to know.

As an example in 2022.

If you look at our advertising expenses are advertising expenses in North America on a dollar basis.

Is is up and obviously as a percentage because our sales are down is up 80, you might wonder why didn't we pull that lever we critical lever pulled back on advertising.

In the latter part of 2022 and had a higher EPS number and maybe make somebody happy on the street I don't know.

But we run the business for the long term.

And we've taken the opportunity to continue to.

To support our brands so.

It's a great business models that we have the flexibility to deal with those situations, but right now we're in a pretty pretty strong competitive position and my guess is we're talking about short term a little bit of a blip in the overall macro market I suspect we will continue to be aggressive take share.

And support our brands.

Thank you and our next question coming from the line of.

Peter Keith with Piper Sandler Your line is now open.

Good morning. This is Matt Akers on for Peter Thanks for taking my question, sorry, if I missed it but can you just walk us through the puts and takes of your input cost. This year. I know you said they are excited to be down, but just can you go through maybe on kind of individual basis, how youre expecting them versus 2019, and what's what's embedded into guidance.

Yes, absolutely so when I think about commodities as I mentioned on the call I think about everything from ocean cargo to raw material to labor. So broadly speaking we've seen unprecedented increases in commodities over the last few years. So the way I think about 2023 and what we saw in 2000 <unk> fourth quarter 2020.

Two a bit is is that they have come off their peaks and the peaks being earlier in the year, but what I would say is is that we are expecting let's call. It a modest tailwind.

Into 2023, however by no means are they at the pre pandemic level.

Thank you one moment. Please our next question and our next question coming from the line of.

Jonathan Mitsubishi <unk> from Jefferies. Your line is open.

Great. Thanks, so much for taking my question.

Had a question on the competitive landscape.

Your largest competitor recently filed for bankruptcy a couple of weeks ago. Just curious if you could give us a sense of how conversations with your retail partners have looked since this news broke and how our conversations progressing regarding potential slot gains for the Tsi brand. Thanks, so much.

Yeah. Thanks for the question look I don't think.

Particular news was shocking to the industry I think it was well telegraphed.

Spectrum, So I don't think it fundamentally changed.

The discussions with our retailers.

With the retailers care about is quality product support with advertising.

Those kind of items I think.

Our chief competitor has strong brands and as a hard tough competitor, but we continue to work aggressively with our retailers, but I don't think the actual filing.

Did that change very much in the most retailers mines as long as they provide quality products and service the marketplace.

Thank you and ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press star one.

Our next question.

And our next question coming from the line of Brad Thomas with Keybanc. Your line is open.

Hi, Thanks.

Scott I was hoping to ask about the international.

<unk> changes that are underway obviously.

Obviously, the potential to be really really substantial for the company I was hoping you could share a little bit more detail on perhaps how much this expands the addressable market.

Sure.

Tempur and.

How you think about what the financial impact could be.

Once this is rolled out.

Yes, I'll start and I'll, let Oscar probably clean EMEA as you are.

As you said look this is significant launch internationally.

Bigger than a normal tempur launch.

We're repositioning the brand and where changes in the manufacturing procedures.

As to how we make timber so that we can hit some lower price points and servicer serves our customers better.

Early on we are in the middle of it early indications are good.

And I would say.

Trustable market expansion do you think is it 20%, 30%, 30% absolutely an addressable market standpoint of course, we have to perform.

Just put that and say, okay, that's going to increase to per sales.

That much but we're working very hard.

Commentary, but I do think it unlocks a growth potential for the international operations from a sales standpoint, we should start seeing that in the second quarter of this year.

Because of the launch costs and stuff you will see the benefits of the EBITDA probably starting in 2024.

And the full benefit of it but I think long term next two or three years will be will be very important from a growth standpoint.

Thank you and our next question coming from the line of <unk>.

Laura Champine with loop capital your line is now open.

Thanks for taking our question this morning.

It's on the inputs to the guide for mid single digit growth. This year does the industry need to recover in the back half and actually be positive in the back half in your view for you to hit that.

Estimate.

Yes, probably so.

You were talking about Crystal ball stuff so.

Give me a little bit of hedge words on this.

Well look I suspect.

As we said in the fourth quarter units were down 20%, 25%. We think we don't have all the final data yet, but thats, probably certainly in the Zip code.

So I think going into the first quarter I suspect that units will be down in the first quarter that is a very tough compare for the industry. It is the last pre war.

Compare so we were the first quarter, we'll call it <unk>.

Projected to be down and feel pretty confident that the units would be down in the first quarter by definition, you've got to have some units go the other way and <unk> in 2020.

<unk>.

With growth.

And call it the third and fourth quarter.

Thank you one moment for our next question now.

Question coming from the lineup.

Carla Casella with Jpmorgan Your line is open.

Hi, Thank you.

I just wanted to ask given kind of the turbulence in the market.

You guys seem to be navigating very well.

And yet opening up more M&A opportunities or is there are there thoughts that for you to continue to grow your OEM and and.

Expand the dividend that you need M&A as well as organic growth.

Sure.

Yes, it's interesting as we've always said.

Is something in the world.

As in the bedding industry and there is an opportunity we want to look at it and we do when we look at quite a few opportunities every year.

Historically, we've done one or two transactions a year I think we've done like nine.

As I've been here, but the whole strategy is really based on purely opportunistic.

Purchases and where we can find a win win and so having said all that means is look we look at stuff, sometimes we price style, sometimes the price work.

<unk> and something happens sometimes the price.

Our miles apart.

And nothing happens.

And then sometimes the prices pretty close and we stay close to that particular company for a number of years using the example of dreams and it's probably the classic one.

I think we effectively negotiated with them for five years until we both felt like we had a win win transaction, which I think actually it was a win win transaction for both companies now that we've had them for a year.

Some transactions happen very quickly and when it comes to mind is Sherwood.

I think from start to finish that might've been more like 30 days.

We were aligned very quickly.

With that team towards the future look like so that was a very quick transaction.

And with the market had some it was a.

Difficult year, when you look back at it as whether you could talk about the unexpected war in Europe . The inflation the rapid unit decline FX Colgate over in Asia. So, yes, certainly a colorful year.

So are there more opportunities there.

There probably are there are more opportunities whether or not we ever get aligned on anything I don't know, but we continue we continue to talk to people and really look for transactions that are good for both parties good for our customers good for the industry.

And we will continue to talk to people.

Thank you and we have one last question in queue coming from the line of.

Ms Laurie from UBS Your line is open.

Hi, Thanks for Slotting me in again.

I just had a quick question Bhaskar in the first quarter guidance seems like you are guiding to.

20% to 5% EPS decline could you provide some incremental color on on the building blocks that get you there.

In terms of revenues gross margin and cost.

Before he does that let me we felt like we needed to give you a little more color on the first quarter, we normally wouldnt give that.

Just kind of color on it on a quarter, but we really wanted to make sure everybody realize that's the last two.

Tough comp for the bedding industry.

Not be surprises last pre war.

Well that's a good question, let me answer it this way year over year. When you look at Q1 to Q1. There is a lot of things that are happening whether it be FX, whether it would be it's a war of the macro the inflation et cetera. So let me do it. This way let me go from Q4 to Q1, I think it's a much more straightforward to think about it so what.

We've implied for Q1 off of Q4 is that we would expect some slight revenue growth seasonality from a seasonal standpoint that would that would make sense and then what you then.

Obviously from that incremental revenue, we'd expect some flow through associated with that and then what we have is that we have two items that are unique to the quarter. When you think about it versus Q4 and that is the.

The launch of our international products as well as the wrap up of our Stearns <unk> Foster so the way I think about that as and brand advertising to support those launches. So again relative to Q4 to Q1, what I would expect as a better revenue and then investments associated with those products, let's call that brand advertising as well as the.

Investments for the launch in Opex.

Thank you I will now turn the call back over to Mr. Scott Thompson for any closing remarks.

Thank you operator.

Two of our 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 board of directors.

That ends our call today operator, thank you.

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.

[music].

The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.

[music].

Hum.

Okay.

Yes.

Yeah.

[music].

Okay.

[music].

Yes.

[music].

Okay.

Yes.

[music].

Okay.

Yes.

So.

Hum.

[music].

The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.

[music].

Okay.

Yes.

[music].

Okay.

[music].

Yes.

[music].

Yes.

[music].

Okay.

Thank you.

Yes.

[music].

Okay.

[music].

Yes.

[music].

Yes.

[music].

Okay.

So.

Hum.

[music].

The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.

[music].

Yeah.

Yes.

[music].

Okay.

[music].

No.

[music].

Yeah.

Yes.

Okay.

[music].

Yes.

[music].

Yes.

[music].

Okay.

So.

Hum.

[music].

Yes.

Okay.

[music].

The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.

[music].

Okay.

Yes.

[music].

Okay.

[music].

No.

Yes.

[music].

Okay.

[music].

Yes.

[music].

Okay.

Yes.

Okay.

Yes.

[music].

Yes.

[music].

So.

Hum.

[music].

Sure.

[music].

Yes.

Okay.

[music].

The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.

[music].

Okay.

Yes.

Okay.

Yes.

[music].

Okay.

Yes.

Thank you.

[music].

Okay.

[music].

Sure.

Yes.

Okay.

Yes.

[music].

Sure.

<unk>.

So.

Hum.

[music].

Okay.

[music].

The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.

[music].

Okay.

Yeah.

[music].

Okay.

[music].

Okay.

[music].

Yes.

[music].

Okay.

[music].

Yes.

[music].

Okay.

Sure.

[music].

Yes.

[music].

Yes.

[music].

Yes.

[music].

So.

Dan.

Okay.

Yes.

[music].

Sure.

Yes.

Okay.

Yes.

Sure.

Okay.

Yes.

Okay.

Yes.

Thanks.

Yes.

[music].

Yes.

Hum.

Yes.

Okay.

Yes.

Okay.

Thank you.

Yes.

Okay.

Sure.

[music].

Okay.

[music].

Okay.

Thank you.

Okay.

[music].

Okay.

[music].

Sure.

Okay.

Yes.

[music].

Okay.

Sure.

[music].

Thank you.

Okay.

[music].

Sure.

Okay.

Yes.

Great.

Okay.

Yes.

Okay.

Sure.

Okay.

Yes.

[music].

Hum.

Okay.

Yes.

[music].

Okay.

[music].

Okay.

[music].

Okay.

Sure.

Yes.

[music].

Yes.

Okay.

Yes.

[music].

Yes.

[music].

Yes.

Okay.

Yes.

[music].

Okay.

Yes.

Okay.

[music].

Sure.

Okay.

Yes.

Sure.

[music].

Thanks.

Yes.

Okay.

[music].

Okay.

Yes.

Okay.

[music].

Yes.

Thank you.

Okay.

[music].

Okay.

Sure.

Okay.

[music].

Sure.

Yes.

Okay.

[music].

Yes.

[music].

Okay.

[music].

Okay.

Thanks.

Okay.

Yes.

Okay.

Thanks.

Okay.

Please proceed.

Yes.

Sure.

Yes.

Okay.

Yes.

Okay.

[music].

Yes.

Okay.

Sure.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

[music].

Yes.

Thanks.

Okay.

[music].

Yes.

Okay.

Yes.

[music].

Okay.

Please proceed.

Okay.

Yes.

Sure.

Yes.

Okay.

Yes.

Thanks.

Yes.

[music].

Thanks.

Sure.

Okay.

Yes.

Okay.

Thank you.

Sure.

Yes.

Okay.

Thank you.

[music].

Okay.

Yes.

Okay.

Yes.

Okay.

[music].

Okay.

Sure.

Yes.

Sure.

Okay.

Yes.

Thanks.

[music].

Okay.

Yes.

Okay.

Yes.

Thank you.

Okay.

[music].

Okay.

Yes.

Okay.

Great.

Okay.

[music].

Sure.

Yeah.

Good morning, ladies and gentlemen, thank you for standing by.

I'll come to the Tempur Sealy fourth quarter 2022 earnings conference call at.

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 westar one one on your telephone.

Please be advised that today's conference may be recorded I would now like to hand, the conference over to your speaker host for today Laurence.

<unk> Investor Relations manager. Please go ahead.

Thank you operator.

Good morning, everyone and thank you for participating in today's call.

My name is Mark <unk>, the Investor Relations manager.

Before getting started we want to extend our congratulations and best wishes to Aubrey who is currently on maternity leave.

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 provision of the private Securities Litigation Reform Act.

<unk> hundred 95.

These forward looking statements involve uncertainties and actual results may differ materially due to a variety of factors that could adversely affect the companys business.

These factors are discussed in the Companys 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 it is made the company undertakes no obligation to update any forward looking statements.

This morning's commentary will also include non-GAAP financial information.

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

Our comments will supplement the detailed information provided in the release.

And now with that introduction it is my pleasure to turn the call over to Scott.

Thank you Lauren.

Good morning, everyone and thank you for joining us on our 2022 fourth quarter and full earnings call.

I will begin with some highlights from our fourth quarter, and then I'll turn to discuss how we delivered on our long term initiatives, then Bhaskar will review, our fourth quarter financial performance in more detail and discuss our 2023 guidance finally, I'll close with a few comments on how we view the current market environment and then we will open the call up.

For Q&A.

In the fourth quarter of 2022 net sales were approximately $1 2 billion and adjusted EPS was <unk> 54.

As we navigated a weak overall market experienced robust inflation.

However, we continue to outperform the broader industry, alright, good bit and enhanced our competitive position <unk>.

Consistent with our previous quarter, we observed a slight increase and resilience of our premium customers with sales of value focused customers a bit more subdued.

I'd like to begin by highlighting some of the key wins for the quarter.

This excitement for the new product is reflected in robust year over year order trends.

In order to ensure the new product meets our stringent quality requirements. We have extended the launch window in response to a slight component delay.

We expect to complete the rollout by.

Morial day holiday selling period overall, we remain on track to expand Stearns retail slot by more than 20%.

Turning to our second highlight.

Our U S E Commerce channel performance performed well in the quarter delivering approximately double digit growth, our new Stearns <unk> Foster and Sealy ecommerce site have exceeded our expectation with greater mix into the more premium S. K U assortments, resulting an unexpectedly high.

Asps across both brands.

Our temporary ecommerce business also delivered solid growth in the quarter, which is especially notable considering the difficult prior year compare.

With the recent launch of our new <unk> website, we now have operation to direct to consumer websites to the U S at each of our leading brands.

Our expanded ecommerce presence as a powerful tool that enabled us to be closer to the customer drive share of voice and built on our Omnichannel strategy.

Over the last five years, we've developed a direct relationship with millions of customers gained valuable consumer insights and further our direct marketing capability. This helps build our long term customer relationships and drive smart TV efficiencies.

Moving to ESG.

We furthered our commitment to protect and improve our communities and the environment. We recently published our 2023 corporate social value report, which is available on our IR website. We are proud of the progress we've made ESG goals in the fourth quarter, we achieved our goal of 100% landfill diversion.

From our U S and European manufacturing operations.

We also made progress towards our goal of carbon neutrality for our global operations reporting a decrease in emissions per unit.

Before turning the call over to Bosker I wanted to take a moment step back and review the progress we've made on our long term initiatives during 2022.

Though the year was fluid pumps from a macroeconomic standpoint, we remain focused on positioning the business for long term success.

Starting with our first key initiative, which is to develop the highest quality products in all the markets we serve.

When it comes to product development, our number one objective is to anticipate and react to consumers' evolving suite preferences.

In early 2022, we.

We made continued progress against this objective through various product launches.

As part of the refresh of our U S. Sealy posture portfolio, we launched a new line of premium and hybrid Sealy mattresses, featuring improved comfort superior support innovative cooling technology.

This lineup, that's truly resonated with our CV targeted consumer base.

We leveraged our Sealy brand.

To tap into new market segments, as well, we launched our new Sealy natural collection.

Second half of the year.

<unk> eco friendly and sustainable source material. This collection appeals to environmentally conscious consumers.

To broaden our customer base.

We also launched our Sealy flex grid mattress line, which features pressure relieving grid Joe grid. It represents the evolution of the technology in the market today.

With a unique scalable manufacturing approach, we're able to offer these products at a mid market retail price.

In addition to supporting our 2022 launches, we said the innovation pipeline for 2023 and beyond.

Later this quarter in the U S. We will launch an upgraded line of Tempur breeze products and smart adjustable basis.

Wellness minded consumer and drive improved attach rates and strong asps.

Okay.

Turning to our international group.

Beginning this quarter, we will undertake the largest international product rollout in the company's history.

Reaching more than 90 markets worldwide. This new lineup of mattresses pillows and bed basis has been strategically designed to drive addressable market expansion of Tempur products.

A launch is phased over multiple quarters to allow for the customization by region.

Finally.

I would point out that our investment in Silicon Valley sleep Tech startup bright for <unk>.

<unk> shipped with sleep data company full power technology.

Our industry, leading R&D team will ensure tempur sealy remains at the forefront of sleep innovation.

Retail mattress category.

And for the second year in a row ranked number one in the online mattress category.

A true Testament to.

Do the customers trust of our brand and products.

Turning to our second initiative.

With us to promote our brands with compelling marketing worldwide.

We supported our brands and products with a record marketing investment of approximately $450 million this year.

In addition to generating strong near term returns and driving outperformance relative to the broader Betty market. These investments also serve to seed the market for our 2023 product launches.

Sealy.

And temper continue to be the number one and number two best selling mattress brands in America and among the most highly recommended recognized desirable brands in the industry with 95% of shoppers aware of at least one of the Tsi brands.

In 2022, we leaned into the untapped potential of our Stearns <unk> Foster brand by doubling our presence on national TV.

In addition to contributing to growth and awareness and consideration for Stearns <unk>.

Marketing investments grew our retail support.

Combined with the new product lineup, it's reflected in a significant increase in placements.

Our investments in product brand and channel successfully drove Stearns <unk> Foster's website traffic and sales growth in 2022. Thank.

Thank you clear progress to our goal to make Stearns <unk> Foster our third $1 billion brand.

Last year, we also seeded the market our upcoming international launch with strategic marketing investments in store sales programs and e-commerce initiatives worldwide.

Our third initiative is to optimize our powerful.

Distribution platform.

We evolved our global Omnichannel present in step with consumer preferences.

Wherever they want to shop.

The largest pillar in our Omnichannel distribution strategy is there.

More than 26003rd party retail doors.

This broad footprint ensures that consumers can easily find and experience our products in person.

Turning to our OEM operations.

While we entered this space only a few years ago in 2020.

We made significant progress in growing our operations.

Both within our Sherwood private label inner spring business and our foam pouring business in 2022, we delivered significant growth in our OEM operations.

As we continued to charge towards our target of $600 million OEM sales.

Note that OEM sales growth will decrease the cost per unit for all of our branded products as we spread our fixed costs and drive more advantageous supply agreements.

On the enhanced volume.

In addition to growing our wholesale and OEM business.

We are now running in excess of $1 billion in annual sales.

Global direct to consumer business with a robust five year compound annual growth rate of over 40%.

Regarding our direct retail store operations, we opened 50 retail stores in 2022, and currently operate over 700 brick and mortar store fronts around the world. Our retail network is comprised of both wholly owned and joint venture locations led by over 200.

Tempur retail and multi branded sleep outfitter stores in the U S and our more than 200 dreams locations in the U K.

In total including e-commerce sales they facilitate our company owned stores to generate average sale.

$2 million per location.

With the U S based tempur retail stores <unk>.

Jean a robust $4 million per sales per location.

Finally, I should note that in aggregate our U S. Web has grown at a compound annual growth rate of over 25% since 2017.

Our fourth and final key initiative is to drive increased EPS through operational execution and prudent capital deployment.

In 2022, we generated full year adjusted EPS of $2 66.

This represents a five year compound annual growth rate of 26%.

We executed on our balanced capital allocation strategy to return value to shareholders.

We allocated approximately $1 billion in capital.

First.

We reinvested over $300 million in operation.

This includes a one time investment to stand up our new foam pouring plant in Crawfordsville, Indiana, which is expected to commence operation in 2023, enhancing our ability to service our customers.

Ensuring product availability to meet increased demand in the premium sector, creating shorter lead times and reduced per unit logistics costs and the northeast market.

Second we invested $10 million in bright technology based mattress company with differentiated product offerings targeted at a different premium customer than we currently serve today.

Third we invested over $665 million and share repurchase to buyback approximately 10% of our shares outstanding.

At an average price of $33 a share.

And finally, we paid $70 million in cash dividend I.

I should note, we announced today, a 10% increase in our quarterly dividend, bringing it to <unk> 11 per share.

I'd be remiss, if I Didnt mentioned, our ERP transition.

Which will play a critical part in our ability to deliver on all of our long term objectives.

In 2022, we completed the multiyear journey of transitioning more than 50 of our global subsidiaries from using five different ERP systems into one common system.

This investment and consolidating operations expected to drive long term efficiencies across our global operations enhance cyber security.

Facilitate customer communications regarding order status and improve our direct to consumer capabilities.

With that I'll turn the call over to Bhaskar.

Yes.

Thank you Scott.

In the fourth quarter of 2022 consolidated sales were approximately $1 2 billion.

And adjusted earnings per share was <unk> 54.

We had $10 million of pro forma adjustments this quarter, all of which are consistent with the terms of our senior credit facility.

Turning to North American results.

Net sales decreased 12% in the fourth quarter on a reported basis, the wholesale channel decreased 13% and the direct channel decreased 5%.

Early indications are that we outperformed the market.

When looking at our sales growth. Please note our fourth quarter of 2021 were significantly benefited by a temporary <unk> backlog reduction of $100 million.

Yes.

Sure.

North American adjusted gross profit margin declined to 37, 9%, primarily driven by operational headwinds and mix related to the prior year Tempur pedic backlog reduction, partially offset by pricing actions.

The backlog reduction in the prior year accounted for approximately half of the margin decline.

North.

<unk> adjusted operating margin declined to 15, 1% driven by the decline in gross margin and operating expense deleverage.

Now turning to international.

Foreign currency remains volatile, though we have seen favorable trends since the fourth quarter.

Our current expectation for 2023 contemplates a modest FX headwind to both sales and adjusted EBITDA.

As compared to the prior year, our international gross margin improved to 55, 2% driven.

Driven by pricing actions to offset commodity inflation, partially offset by mix.

Our international adjusted operating margin improved to 27% driven by the improvement in gross margin and operating expense leverage partially offset by the impact of Covid on our joint venture operations in Asia.

Turning to commodities.

Which we think about as inclusive of raw material inputs logistic costs and labor all of which had been highly inflationary across the global bedding industry for more than two years.

In the fourth quarter global commodity prices largely trended in line with our expectations.

Some commodities have gravitated off their peaks, though others remain pressured.

We anticipate that prices could continue to ease throughout the year, although we expect commodity prices in 2023, we will continue to trend significantly ahead of 2020 levels.

Now to global operations we.

We are taking actions to fully support our customers, while managing through an evolving global supply chain and a tight labor market.

Which have resulted in $10 million of incremental expense in the fourth quarter.

As the global supply chain continues to stabilize and as our new ERP system drives productivity, we expect improvements throughout 2023 and beyond.

Now moving to the balance sheet and cash flow items.

In the fourth quarter, we had operating cash flow of $95 million.

In response to the global supply chain volatility, we took actions in 'twenty two to reinforce our safety stock of raw materials and finished goods.

Our inventory days improved in the back half of 'twenty, two as we began to normalize our safety stock.

We anticipate inventory levels will continue to normalize throughout 2023 as the supply chain further stabilizing driving cash cycle improvement.

Our new foam pouring plant in Crawfordsville, Indiana is on track to begin a phased opening in the second quarter.

In order to optimize production in this new facility, we will face, bringing the plant online to ensure the highest level of quality, while we grow into the incremental capacity.

This plant location complement the existing Mac manufacturing footprint and enhances our ability to service our east coast customers.

We expect our Capex to decrease significantly in 2023 and return to a more normalized level of spend thereafter.

We think of annualized Capex is approximately $150 million driven by maintenance spend of approximately 110 and growth spend of approximately 40%.

At the end of the fourth quarter consolidated debt less cash was $2 8 billion and our leverage ratio under our credit facility was three one times.

Slightly ahead of our target range of two to three times.