Q1 2023 Tempur Sealy International Inc Earnings Call

May 9, 2023

[music].

Yeah.

Good day, and thank you for standing by and welcome to the Tempur Sealy first quarter 2023 earnings 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 on your telephone you walked in here and message.

Hazardous waste.

The other question simply press Star one again empty be advised that today's conference is being recorded.

I'd now like to hand, the conference over to your Speaker, Aubrey Moore, Vice President Investor Relations the floor is yours.

Yeah.

Thank you operator.

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

Joining me today are Scott Thompson, Chairman, President and CEO , and Bob <unk> Executive Vice President and Chief Financial Officer. After prepared remarks, we will open the call for Q&A.

This call includes forward looking statements that are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.

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

These factors are discussed in the company's SEC filings, including its annual report on Form 10-K, and quarterly reports on Form 10-Q under the headings special note regarding forward looking statements and risk factors.

Any forward looking statements 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 the non-GAAP financial information can be found in the accompanying press release, which has been posted on the company's investor website at Investor Doc Tempur, Sealy Dot com and filed with the SEC.

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

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 2023 first quarter earnings call I'll start by sharing some highlights from our first quarter performance and then Bhaskar will review our financial performance in more detail.

After that I will share some closing comments before we open the call up for Q&A.

In the first quarter of 2023 net sales were approximately $1 2 billion and adjusted EPS was <unk> 53, which.

Which represents a 75% growth in sales and approximately 300% growth in adjusted EPS over the first quarter of 2019, a pre COVID-19 period compared to the same period last year. This represents a 3% decline in sales and a 23%.

Decline in adjusted EPS, driven by launch costs to support our new innovative products and a less robust macroeconomic environment.

Our wholesale channel performed well, we reported wholesale sales stable to prior year as our continued global market over performance.

Mitigated the heightened macroeconomic headwinds our direct channel performance was more impacted by the current environment.

Unfavorable foreign exchange rates presented a challenge to our international operations and cost us <unk> <unk> per share quarter.

As I noted.

So industry conditions were less favorable than expected.

It's very clear we continue to outperform the market.

Units appear to be stabilizing at a historical trough level.

In the second quarter, our expectation is that our sales will return to growth year over year, driven by continued global market outperformance.

And the role the rollout of our new products.

We also anticipate industry demand will slowly improve in the back half of the year as comps ease.

As a reminder, U S produced mattresses consumption declined approximately an unprecedented 24% in 2022, representing trough unit production.

For the last 10 years.

Most of the decline was post first quarter of 2022.

As we've now fully lapped the challenging prior year comps, we anticipate the industry.

We will slowly recover resulting in a more stable U S bedding environment and the full year 2023, with the back half unit trends stronger than the first half.

Turning to highlights and some key wins in the quarter.

First we continue to see positive momentum in our brands and private label products at wholesale.

High quality products, leading customer service continues to drive third party retailers to lean into our brands and non branded products.

Our third party retail partners in the U S are especially supportive of the new Stearns <unk> Foster product, we are tracking to expand our third party retail slots of Stearns by approximately 20% compared to the previous collection.

We believe these slots will be coming from competitors enhancing the total presence of Tempur Sealy brands on U S retail floors.

We continue to make progress towards our goal of making Stearns <unk> Foster our next billion dollar brand more than doubling its current size today.

On the product side, we are well underway with our rollout of the new Stearns <unk> Foster collection in North America.

The new products are designed to further differentiate our high end traditional inner spring brand. While also offering an extended lineup of products that address the needs and differences of consumers.

The collections superior innovation enhanced stepped up opportunities and elevated design together create unprecedented luxury and our spring product that meet the need and what we believe is an underserved consumers seeking a premium innerspring product.

Overall, Stearns <unk> Foster's performed well relative to the U S market in the first quarter and we believe is currently the fastest growing major brand in the U S.

Okay.

The second highlight of the quarter is the launch of our new Tempur Breeze product and our new innovative line of smart adjustable bases in the U S.

These products build on the success of our prior generation of Breeze in adjustable basis to provide even greater consumer benefits to America's most highly recommended matrix.

Tempur Breeze product features our latest temporary material innovation, which delivers greater tipper feel characteristics and greater cooling benefits.

And our new line of adjustable bases, we enhanced our connected suite platform and our continued focus on improving sleep and overall health and wellness of consumers.

In addition to our sense in response technology for Snoring featured in our previous Smart based collection. The new basis also feature lumbar support at the touch of a button and advanced technologies, including our industry first acoustic massage and a range of relaxation features that help prepare.

Customers bodies in mines for deep regenerative sleep.

Closer to the top tier Tempur Ergo smart base wind down programs and soundscape mode offers nib and immersive and multi sensory experience.

That's a very positive feedback from consumer studies and retail partner previews, we started shipping the new Tempur Breeze, and the new Tempur Ergo power basis in late first quarter.

The rollout is going according to plan and we have shipped over 75% of Breeze for models to date, we prebuilt inventory to support a seamless transition across our valued tip repeat it retail partners network.

Most all retails retailers will be fluid.

And selling for Memorial day, which is when our new Breeze and smart based advertising campaigns begin.

This is the first North America Tempur mattress launch in four years.

Third highlight is that we've significantly fortified our supply chain and we are executing orders within normalized order to delivery times.

Our U S operation operating team personnel have worked significant amounts of overtime.

To get us to the point of normalized order to delivery times, the overtime expediting cost hurt us a bit in gross margin this quarter, but we're thrilled to be back on normal customer service ahead of the prime selling season of second and third quarter.

This is especially positive and we've accomplished this while perform outperforming the broader market.

The final highlight is that we successfully kicked off the rollout of our new Tempur international product this quarter.

All new lineup of mattresses pillows and bed basis have been strategically designed to optimize temporary global addressable market.

Expanded price points and consumer centric innovations and the new collection will continue to appeal to our legacy ultra premium consumers at prices of 3000 and above while also meeting the needs of consumers shopping for mattresses between 2003 thousand.

We streamlined the construction of the new products to drive future manufacturing efficiencies.

And enhance our ability to adapt our products to individual markets needs.

It's updated process has enabled us to feel confident and unlocking a broader price range without materially altering our margin profile of our Tempur International business.

We are manufacturing both the new lines of products and the old line of products as we transition.

This is a heavy lift for our overseas team and after the transition period, we plan to optimize production of the new <unk>, which we expect will be a positive driver for gross margins.

We are launching the new lineup in over 90 markets worldwide and we're staggering the rollout of these new products to allow for customized approach by region.

The first quarter, we kicked off the launch of our temporary European markets.

We expect the rollout to be completed for all of our subsidiary markets in Europe , and Asia by the third quarter and to be completed by the end of the year for our third party distributors.

We expect the total rollout to be completed by the end of 2023.

Except for the UK, which has some country specific industry fire retardant regulations.

We expect the UK to be fully floored by the first quarter of 2020 for.

The early reaction to the new lineup has been very positive.

And with that I'll turn call over to Bhaskar.

Thank you Scott in the first quarter of 2023 consolidated sales were approximately $1 2 billion.

And adjusted earnings per share was <unk> 53.

We have approximately $10 million of pro forma adjustments in the quarter.

All of which are consistent with the terms of our senior credit facility.

These adjustments are primarily related to cost incurred in connection with the exploration of strategic acquisition initiatives.

Turning to North American results.

Net sales decreased one 3% in the first quarter.

On a reported basis, the wholesale channel decreased 1% and.

And the direct channel decreased 4%.

North American adjusted gross margin improved to 37, 9% driven by pricing actions, partially offset by operational headwinds and increased product launch expense.

North American adjusted operating margin.

Declined to 15, 3% driven by investments in advertising and product launch initiatives.

Partially offset by the improvement in gross margin.

Now turning to international.

On a constant currency basis international sales increased one 7%.

But decreased six 4% on a reported basis as we experienced $25 million of headwind in the quarter from unfavorable foreign exchange rates.

Foreign currency remains volatile, but recently, we have seen rates trend favorably.

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

As compared to the prior year, our international gross margin declined to 54% driven.

Driven by product launch expense, partially offset by pricing actions.

Our international operating margin declined to 15, 3% driven by investments in advertising and product launch initiatives.

The decline in gross margin and the Asian joint venture performance.

Commodities, which we think about is inclusive of raw materials logistic costs and labor have been highly inflationary cost of global betting industry for more than two years.

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

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

Now moving onto the balance sheet and cash flow items.

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

We generated record first quarter operating cash flow of $100 million, and we invested approximately $50 million to $52 million in capex, including investments in our new foam pouring plant in Crawfordsville, Indiana.

We continue to track toward beginning its phased opening in the latter half of this quarter.

We will bring the plant online in phases to ensure the highest level of quality, while we grow into the incremental capacity.

Now turning to 2023 guidance.

Consistent with previous communications, we expect adjusted EPS to be in the range of $2 60.

To $2 80.

This considers sales growth at 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 impact of pricing.

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

And record advertising spend of over $500 million.

As we continue to support our leading brands and new products.

Which will result in adjusted EBITDA of approximately $980 million at the midpoint of our EPS range.

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.

And a quarterly dividend of 11.

Representing an increase of 10% relative to 2022.

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.

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.

Nice job. Thank you bosker.

I'm excited to share that we've announced this morning that we've signed a definitive agreement acquiring mattress firm.

The nation's largest mattress specialty retailer.

The acquisition aligns with our strategy of acquiring companies and extend our competitive advantages enable us to move closer to consumers and facilitate continued innovation.

This combination will complement tempur Sealy has extensive product development and manufacturing capabilities with vertically integrated retail.

First and foremost mattress firm has been a valued retail partner for more than 35 years, and we look forward to welcoming their talented workforce and more than 8000 employees to the Tempur Sealy family once the deal is closed.

The transaction is expected to close in the second half of 2024.

Subject to satisfactory and customary closing conditions and applicable regulatory approvals.

Mattress firm is expected to operate as a separate business unit within the Tempur Sealy organization and to continue to provide customers with brands and products they desire.

This morning, we released a separate press release Investor presentation related to this transaction both can be found on our investor webpage. These documents provide further details on the transaction and the strategic rationale.

We see this transaction as being attractive both strategically and financially and with that we'll open up the call for questions operator.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone and wait for you need to be announced to withdraw your question simply press Star. One again, we do ask you to please keep your questions to one.

Sorry go back in the queue. Please standby, while we compile the Q&A roster.

And our first question is from Susan Mcclary with Goldman Sachs. Please proceed.

Thank you good morning, everyone.

Good morning, Susan.

Good morning, My question is around.

The acquisition that you announced this morning appreciating what the synergies are but how do you think about managing some of the perhaps channel conflicts that are going to come through with this.

Some of the adjustments that we will need to be made in terms of product.

Offerings in logistics and those types of efforts in there and just how are you thinking about some of those elements of this deal.

Wow five questions in one great job.

Question good start.

First of all let me let me let me talk about channel conflict first of all we consider it one.

One of our expertise is the ability to manage omnichannel strategy throughout the world that have been doing it for for a number of years. If you look at the most recent acquisition before this dreams as kind of a maybe a beta test.

Dreams is obviously, a large retailer in the U K, we're obviously in the U K.

And we did not have any problems with channel conflict in that acquisition.

And we've been working on this.

This has been in the marketplace, where people have thought about this for years, probably five or six years I doubt, there's anybody embedding in that has surprised.

With this transaction and move over to the states.

We're in retail stores, we've got our sleep outfitters operation, which is a direct competitor.

<unk> firm.

In the marketplace and we've got our Tempur stores, and although years ago, and I must say, what four or five years ago Bosker there used to be a little bit of noise in the system I think once retailers saw how we operate our stores that I'm going to say, we're a good good retailer.

And we're not really trying to steal share from anybody.

It hasnt been a problem. Additionally.

Additionally over the years, we have discussed this concept with various of our various customers large and small and I think we have a good understanding of what their expectations are.

Look it's going to depend on us, having quality product quality service quality advertising and servicing them correctly.

And making sure that they are not put at a competitive disadvantage and so I'm not expecting any significant.

<unk> conflict.

As long as we deliver a quality product at the right price.

Proper support around it.

You asked about kind of logistics and I assume you're kind of moving towards synergies.

Look they are both.

Large companies, we've put we've put $100 million down on a piece of paper the kind of stuff you should be thinking about as warehousing and logistics. There are cities, where we literally have warehouses within five miles of each other and on a tempur product, we would make the product and our plant put it on a truck take it to our warehouse take it off the truck put it in.

The rack.

It and wait for an order from mattress firm and then we would get another truck take it down from the rack put it on the truck and we would take it to their warehouse and they would take it off the truck put it in Iraq and they would wait for a customer order of which then they'd get another truck take it out from the rack put it and take it to customers House.

That's just the way the systems work, we've never been able to get the two companies to figure out how to clean up some of the logistics.

So we think there's good synergies in logistics and warehousing. The other thing that may not be as evident to the people who aren't in the business.

On the manufacturing side and this would be on the Tempur side of the house not the mattress side of the house I think everybody knows where order to delivery on Sealy and so that means we don't know what beds, we're going to make until we get an order from somebody.

And that generally call it three or four days.

And these are in Sealy operations as you know these are manual manufacturing. So we whipsaw. The workforce there are some days, where they show up at work and we've got lots of orders and we expect that we'd like for them to work overtime someday as they show up at work and we don't have enough orders and they only get to work for our.

At most plants, we decide on Friday afternoon, if theyre going to work the weekend.

And of course, there is overtime involved in some of these swings, but it's also just the quality of workforce and be able to hire people because.

The hours are variable, if we had real committed orders.

And had certainty of distribution, we could pre build and level out the manufacturing.

So on the days that we don't have specific orders if we knew for sure we're going to get some orders.

Go ahead, and build some product and level it out and I think that's a.

That's a big.

Quality improvement for its workforce issue and there is also I believe significant cost savings. We of course would have the normal insurance savings and we'll call. It a little bit of overhead here kind of savings I think the other thing it may not be obvious that we're really thrilled about it's one thing COVID-19 kind of.

Really really highlighted was the supply chain around the world is not very robust, okay, and if you stop and think about it. The reason it's not very robust is a little bit of what I, just said nobody down the supply chain knows for sure what their orders are so everybody's working kind of just in time.

And being able to have we'll call. It fully committed distribution I think will allow us to.

Fortify the supply chain by gaming suppliers, more certainty and being able to sign a long term contract, which I think will also have quite frankly, some synergies there.

Last one I'll kind of throw a laundry list here, but first question is I think one of the other things that.

Combination does is we have very sophisticated.

Labs that test the quality of product.

It is the core of temporary is the core of Sealy.

Best in class ability to analyze foam springs durability.

So one thing we can do that would help a retailer as we can make sure that products that are put on their floor or the quality that they are supposed to be and continuously test to make sure that we're getting what we're paying for.

That will that will make the product sharper at mattress firm I think that's good for the customer and I suspect, we'll find some opportunities from a from a cost standpoint once.

You do the really hard analytics and test the product.

Thank you one moment.

Question comes from the line of Bobby Griffin with Raymond James. Please proceed.

Good morning, everybody. Thanks for taking my question.

Scott box, there won't be a five part, but it is going to be a two part question. Please.

So first Scott can you maybe just talk about the timing of it I think the strategic rationale of this acquisition makes a lot of sense and a lot of investors will understand that but there is some clear economic concerns maybe just talk about the timing of it and then Bob can you share financial details for mattress firm, that's getting used in kind of the accretion analysis, whether it's 2002.

22, or 2023 EBITDA.

Anything there would be helpful.

Sure. Let me, let me kind of step back a second first of all I would say if you're talking about real timing the timing has been probably seven years.

It's always been on our chalkboard.

It's something that made a lot of sense strategically for some of the reasons I mentioned and others.

But it never was right.

<unk> times, we Werent right times, they Werent right times.

Market wasn't right. So so.

It's been on the board so it's not like a new concept or a new idea. So first of all it's been a seven year journey.

<unk>.

Second of all we've been engaged with.

With the mattress firm folks for the last two years.

As they put the company up for sale or process and they ran a dual process.

So we've been around hanging around the hoop in my terminology for the last two years.

Exchanging some data getting some price discovery thinking about it.

We filed an HSR.

In October of 2022.

The two companies file an HSR, which then gave us access.

To the FTC folks and we could get some feedback on some of their thinking and so that before we would get down to a definitive agreement both parties would have some data on the FTC process.

That kind of work through the timing, but I think youre also talking about the economic cycle and that kind of stuff. So I want to make sure that every.

Body got kind of a timeframe this has been a.

Long.

And thorough review by both companies as to what would be in the best interest of both the companies.

Now what you actually guys like Okay. This is interesting Scott I guess, but man who knows what the what the economy is and everything.

And there's different ways to think about it people green disagree but.

Where we are and where we're sitting in the data we look at it would look like the bedding industry not the macro comment the bedding industry go to U S units produced are probably the lowest they've been.

For more than 20 years of looking at Baskins, because I'm sure I don't I think I think when you you can probably go through some other sources and look at that so the unit production.

Is at trough numbers that we've never seen as an industry.

Pointing out to both companies very profitable even at these trough units.

So it would appear to us.

Trough and it feels like we've been bouncing around the bottom.

The bedding industry for the last three quarters or so.

It is not shown a lot of recovery and when you talk about that this question or another one but it clearly doesn't look like another leg falling and it looks like just bouncing around the bottom.

So fundamentally you decide you want to transact.

Under that basis, or do you want to wait and see green shoots or those kinds of things.

There is a price to that it would be a different pricing at that point a.

A different environment and look we feel very confident in our ability and we feel pretty good about the market and then you lay on top of that that there is this is going to take a while we're not closing this deal next week. So the real economy that youre looking at when you're trying to find.

The right price and normalized earnings is really 12 to 18 months from now it's not tomorrow.

So could there be a little more rock'n'roll next few quarters, maybe so.

If there is it doesn't affect us.

We're effectively buying the company.

In the future.

And at that point, we feel pretty good about it but plus quite frankly, we think we're kind of bouncing around the bottom now so.

I think I kind of answered that I think so.

So when you think about your question about the accretion.

One year post acquisition all of those things that Scott mentioned, there is a bit of time between where we are and where where we are today and where we're going to be a year or so from now so the way to think about that as we gave we gave at the $435 432 last 12 months. So what we would anticipate is whatever the rock'n'roll happens from a macro standpoint.

We get to the other side of that we'd see some continued growth from our mattress firm perspective, and then so a way to think about the let's call. It. The accretion is from a targeting perspective again lots of uncertainty that could happen between now and then but from a targeting perspective, I would think somewhere between 20 to 25.

Incremental EPS and then when you get a couple of years out after that with full run rate synergies I would anticipate I would anticipate about a dollar.

Thank you on the range for our next question comes from Peter Keith with Piper Sandler. Please proceed.

Hey, Thanks, good morning.

Congrats on the big deal after seven years of work.

Yes, I appreciate it.

I'm not sure how much you'll be able to answer this question, but I wanted to ask because it sounds like you have been engaged with the FTC for a number of months.

Has there been any preliminary opinion or any insight that you have gained on.

Getting approval or how this could all look.

Post acquisition.

Sure.

Early days, we've been engaged with them.

But I would I would say early innings.

But it's given us some preliminary.

Information, none of which was particularly surprising.

Those folks have a job all very talented men and women.

We look forward working with them, but obviously, we wouldn't have moved forward. If we didn't think that ultimately.

We would be able to clear the process either in the traditional sense or through through litigation.

Thank you a moment for any questions.

Curtis Nagle with Bank of America. Please proceed.

Great. So maybe I'll just break with your question a little bit.

And.

One question just on the business as it stands now just curious if you could talk to how much of a headwind.

Four models and some of the catch up over time.

Shipping correct.

Back to normal how much that hit gross margin and then just a quick follow up in terms of just thinking about.

For streams and now firm I mean is this kind of I guess go forward model in terms of how you guys continue to expand particularly.

Internationally do we have the template now I guess.

Yes, I'll take that last one one basket that will.

Flipping the pages look now that these are pretty unique transactions. There are only a few large great specialty retailers embedding in the world.

And we've got the.

To best.

Not really one sitting in every country, we could maybe do some other relatively smaller deals in some countries, but these these two would be the lion's share. There is there may be two or three that we would think about but again, we don't have to do these but.

When the Time's right the price is right and it lines up strategically for that market, we'd certainly want to we'd want to look at them.

From a gross margin perspective is that I was pleased with the performance overall when you think about year over year, a 40 basis point decline. However in the face of what from a floor model launch perspective as you pointed out is that we did have some headwinds again, all driving future growth. So specifically as it relates to the operations on a global perspective I would call.

All of that about 100 basis points of a headwind again is that we did carry into into 2023 a bit of a backlog. So we did prioritize.

Meeting our customers' needs. So we incurred an incremental overtime associated with clearing out that backlog and then going to the launch question on a global on a global perspective, we have about 100 basis points of headwind. So again, what I would what I'd go through how I look at that is is that once we get through the <unk>.

The floor model launch side of it as well as the operations to continue improvement there is that the earnings power of the business is very attractive.

Thank you <unk> for our next question that comes from Atul <unk> with UBS. Please proceed.

Good morning.

Thanks, a lot for taking my question.

Based on what we know today.

The biggest risk to this transaction is like a few years from now.

The synergies are less than expected or if there are any revenue dis synergies what would be the most likely cause of that.

Asked this question another way like what are the biggest risks that exist today based on what you know and and what are you working activity to avoid some of the some.

Some of those pitfalls.

Yes, great Great question look the biggest the biggest risk is macroeconomic.

Where we are in the cycle.

What the cycle looks like 18 months from now.

But I think by far.

Well called the the factors outside of our control would be the would be the largest.

After that look it's probably people culture.

As you know the history of acquisitions can be checkered generally if you study <unk>, we has to do with people structure culture those kinds of things.

Kind of synergies that we're talking about because remember this is a vertical integration.

So they aren't as complicated as some acquisitions to get where you're doing horizontals and lots of people, losing their job and all of that kind of stuff. This this is a very clean vertical integration again I'll use trains as an example, just because it was a vertical.

But still you still have people issues you still have structure issues that you need to work for <unk>, but other than that Oscar can you think of any like.

Any other big risk, that's keeping you up at night.

I think some of these companies have worked together for 35 years together, we work daily throughout the organization interfacing with the companies I think we know each other well.

Clearly tempur Sealy from a manufacturing standpoint in the U S is having a great run.

New product is doing very well.

Stearns <unk> Foster is probably the fastest growing major brand in the United States temporary is doing well.

So we're coming from a very strong manufacturing base and if you study mattress firm and there is some material.

We sent out mattress firm has been eaten up a good bit of market share.

And we would expect them to continue to outperform outperform the market. So.

I can't think of anything comes to mind, otherwise you said I mean, Scott what I would say is I sleep on Tempur, So I always sleep well at night and then specifically when you think about the synergy number.

And nothing's ever easy things or things are always complicated. However, just to put it in perspective, when you think about the Cogs that are available between the two companies, let's talk about $5 billion.

And what we're talking about is 100 million on that $5 billion. So again, I'm, not saying, it's easy and et cetera, but it seems like theres a theres enough go get that it makes it manageable yes.

<unk> lease some thoughts on synergies. So we're all on the same page I think the number 100 million I think is very conservative but at the same point.

I think when you buy a business, especially when you buy a successful business.

Some people are so focused and so energized on synergies that they take undue risk and break the not the great asset they bought.

And so it will be slow on implementing synergies like we've done on all of the acquisitions and make sure that management team that's coming over.

And then the Tempur Sealy team kind of agree on what's worth going forward and how to how to do it but the absolute number.

As foster pointed out it is not that big a number two the cost potentials that we have to work with.

Thank you for our next question that comes from Seth Basham with Wedbush Securities. Please proceed.

Thanks, a lot and good morning, and congrats again on the deal.

And my question is revolving around some of the prior questions, but first in terms of the timeline to close now a year plus is a very long timeline, you mentioned youre going to continue talking about the FTC, but are there any concessions that you are expecting to have to make any changes to that.

Current asset base.

And then secondly in terms of the synergies.

What you put on paper and when you talked about how the different dollar in synergies is materially higher than the $100 million.

Cost synergies you talk too. So are you expecting some revenue synergies or are you just seeing more science upside there. Thanks.

Okay. So let me let me work through those.

First of all look we're open we're talking to the FTC.

Consider.

Doing things that make the FTC happy with the transaction that may include divesting of some stores.

That's something that we would look at it obviously, we would consider it.

And then we would see how that would impact the future future financials.

So yes, we're going to consider all options because that's what you do when you go to the ft FTC on the revenue side.

Considering synergies on the revenue side, not really I mean, we're not we're not looking to significantly move the floor change the floor. If you look at our previous acquisitions.

We did not push what I'll call our manufactured products onto the floor, we've let the retailers own the merchandising decision and hold them accountable for their numbers.

Now if you go back and looked at generally our floor Pos increase yes.

As we as we work through some of the quality products that were retail insurer.

And then just naturally because of the quality of our products, but no we're not baking in in this acquisition.

Huge amount of revenue synergies in fact, I don't think we're really banking any and we're not we're not Seth. Thanks for the follow up let me clean that up a little bit. So when you think about a year out or so what we've indicated that's accretive and then on that same year, just assume $100 million of synergies and with run rate synergies, let's call that low.

Double digits, what I was giving color to previously was let's think about in a normal economy et cetera, a couple of years out and then thereafter, we see some growth meaning mattress firm continues to growth.

He is growing if you step back from that is that if you look at the industry over the last 2020 or so years, you would expect let's call it 4% to 5% growth. We would continue to believe that mattress firm historically captured market share that would continue so they would grow ahead of the market you put some growth on improved margin flow through.

With those synergies that's how I got to my higher number.

Thank you one moment for our next question that comes from Brad Thomas with Keybanc capital markets. Please proceed.

Hi, Thanks for taking my question and let me add my congratulations on the deal announcement as well thank.

Thank you I wanted to come back to just the.

Current trends in the business and the outlook for this year and I was hoping Scott you could talk a little bit more.

So just on North America about what Youre seeing through <unk> through <unk> and early <unk>.

We've heard about a strong start to the quarter.

Some weakness in March just any more color on what Youre seeing and then you think about the year you made a comment about units hopefully getting a point to where they bottom.

But this is of course happening in the economy that it's still been relatively healthy in terms of employment and consumer credit and so just wondering your latest thinking on potential downside risk.

Sure.

First of all just a couple of points.

One is there is no question that we are.

We've moved back to more traditional seasonality where holiday periods.

Have become much more important than.

And then they were <unk>.

And we'll call it the Covid era.

Our business kind of leveled out throughout the months.

So you have toller peaks and bigger valleys.

That's pretty well the way the industry was pre COVID-19 and we've pretty well move back to that so you can make it all kind of in the holiday period.

Again started probably fair started out pretty robust during the year slowed down a little bit in the first quarter.

Second quarter started out.

Order deliveries deliveries have started.

Good shipments.

Growing.

Which gives us strong.

Conviction that it looks like for our second quarter will be a positive.

From a sales standpoint, so we're feeling pretty good we will stay at the start of the second quarter.

Feel good we feel good about to start in the second quarter.

But we share the same concerns and are looking at the same things you are.

About okay, what's the state of the macro how long can the consumers hold in and how much of their savings accounts that they spent once unemployment blah blah blah, all the stuff that we have.

We all read.

It looks looks okay to us and unemployment looks it looks like its deployments holding.

Well, the kind of people, who buy the products, where we make our money either high and stuff they continued to be.

Very strong and where you see the real weakness is an entry level entry level bedding and entry level bedding and the retailers who focus on entry level betting you can see it there is a clear separation between entry level bedding and then the rest of bedding.

So we'll watch that the good news is that not that impactful to our earnings and retailers earnings.

Thank you for a moment for our next question that comes from Akshay <unk> with Guggenheim Partners. Please proceed.

Hi, good morning, and congrats on the on the transaction if I could follow up Brad and just focus on some of the recent trends.

Can you talk a little bit just about some of the new new customer testing you've been doing.

Just within the opportunity down in the value channel a little bit more what youre seeing with some tougher transient. Thank you.

Yes.

We've.

Good to see.

Our test we've tested.

Testing testing some products.

A large big box retailer.

That's gone very well.

That's about 100 stores expecting run out run another 100 stores out here shortly.

But what I would say is where we've had new customers and put our sealy product in and taken other product out there.

Sealy product has.

Outperformed the products they replaced.

In every situation that I can think of in the last few years.

And so where we're doing well.

In that particular market and in what is a relatively tough entry level market. So no.

Also good sign and we continue to pick up some incremental distribution.

Not just at the entry level, but we should mention that Stearns <unk> Foster's.

Swaps I think incremental youre going to be up north of 20% Thats right and Thats. Those are all from competitors and we bring that up because <unk> is a very powerful product for us and for the retailers.

Thank you and for our next question that comes from the line of Laura Champine with loop capital. Please proceed.

Good morning.

Check your mute button.

Maybe I can take the next question Sam.

Yes, I clearly answered a question earlier.

Our next question will come one moment please.

From the line of William Reuter.

Bank of America. Please proceed.

Hi, I only have one you you provided the LTM EBITDA for mattress firm.

I was wondering if they had provided to you their outlook for where the numbers could be this year and the question is a little bit in light of the fact that historically you have had such a variable cost structure and I'm sure that they have a much more fixed cost structure. I was wondering if you could speak to how their fixed cost stack up.

I'll come to your own to the extent that you have that information at this point.

Sure we've got we've got the management's projection.

Of the future.

Which we're comfortable with we've stress tested.

Both our numbers and their numbers under under various.

Under various scenarios I think the interesting thing about the fixed cost comment you made because before we did the analysis and work through it I would have said, yes to your comment but actually when we worked through the fixed cost variable cost as part of our stress testing.

What are we 75% boss can you go to 70% once you give the details but I was surprised it was it was.

It does it's not as impactful as you might think it is when you think about the needle mover. We were historically $35 65, let's call. It 40 60 now.

So a mattress firm has done a which which fixed and variable.

40% fixed 60% variable when you think about when you think about.

What mattress firm has done coming out from a bankruptcy process is that they've done.

<unk> improved their footprint remained in those profitable stores and manage their cost very effectively so when you look at it from a totality standpoint, the fixed variable nature of the of our <unk> of our consolidated business does not change that much.

The thing that.

I Didnt pick up originally but as we work through this thing over the years if.

If you think about a downturn you play the downtown downturn scenario the other thing Thats doesn't.

It doesn't pop immediately is it is really beneficial to have certainty and distribution and so.

If there is if there's a downturn having actual certain distribution of your product is actually maybe even more important that a little bit of change in fixed and variable. So.

Think about it in total.

It is I don't think its any harder to go through a downturn with mattress firm than it would be to go through it without mattress firm in total when I think through of all of the variables.

Of a downturn, but on financial standpoint, yet slightly more fixed cost.

One of the items that we gave in our Investor presentation was also a way to think about leverage not only this year, but when this transaction is contemplated to be complete so as we mentioned what the expectation is that will be complete in the second half of the year second half of next year. So when you think about that leverage profile at that <unk>.

And time.

The way, we're thinking about it it would be somewhere between let's call. It three to five and 3.0.

Thank you and our next question comes from the line of Carla Casella with Jpmorgan. Please proceed.

Hi.

And youre going to sign the deal with cash secured unsecured financing.

Is that something we could see sooner rather than later or is that something that just wait till you get closer what hurdles getting to see before you're comfortable going out there with financing.

We'd probably be closer in.

Don't think there'd be any reason to do it early but.

Not wait until the very end, either we can be opportunistic and we've got a fairly large time period here to to work on it. So if the market were to.

Soften up we'd have tendency to do it earlier.

If not we can can wait a little while.

Thank you and our final question comes from the line of Jonathan Mattresses key with Jefferies. Please proceed.

Great Good morning, and ill add my congratulations.

My question is just on the future.

Future of the store base, So I guess Theres 'twenty 300 mattress firms today.

As you mentioned Scott over the next couple of months, maybe we'll hear from the FTC regarding.

Any any concessions like divestitures.

Absent that how do you think about go forward unit growth.

When the chain is under your ownership. Thanks, so much.

Yeah look.

Hi.

We will still we will listen to the current management team in more detail about their thinking as it will be important for them to drive their business plan.

But I would say our initial reaction is there are probably still too many stores.

So I would expect the store base.

Total number to come down over time.

And it actually becomes more important as to where the stores are rather than how many there are so there'll.

Be quite a few that might move around to better locations, but the absolute number of stores I would expect the unit numbers to continue to kind of trickle down a little bit but.

But theres still quite a bit of opportunity.

But it's more moving around stores as opposed to just closing stores. So I think youll see activity on both sides, but total number down some.

Thank you and with that I'll turn the call back to Scott Thompson for any final comments.

Thank you operator.

Two are over 13000 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 lenders. Thank you for your confidence in Tempur Sealy leadership team and its board of directors. This ends the call today.

Thank you operator.

Thank you everybody and you may now disconnect.

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Q1 2023 Tempur Sealy International Inc Earnings Call

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