Q2 2023 Tempur Sealy International Inc Earnings Call
[music].
Good morning, and thank you for standing by welcome to the temper Cle second quarter 2020 Street earnings Conference calls at this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
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Opry more Investor Relations. Please go ahead.
Thank you operator.
Good morning, everyone and thank you for participating in today's call.
Me today are Scott Thompson, Chairman, President and C E O.
Executive Vice President and Chief Financial Officer.
Prepared remarks, we will open the culprit.
This call foods forward looking statements.
To the Safe Harbor provisions private Securities Litigation Reform Act of 1995.
These forward looking statements involve uncertainty 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.
It's annual reports on foreign parasites and quarterly report on Form 10-Q under the heading special note regarding forward looking statements and for soccer.
Any forward looking statements speaks only as of the date on which it is me.
The company undertakes no obligation to update any forward looking statements.
This morning commentary 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 <unk> Dot <unk> Dot com and filed with the S. P. C R.
Our comments will supplement the detailed information provided in the press release.
And now with the introduction it is my pleasure to turn the call over to Scott.
Thank you all right.
Good morning, everyone and thank you for joining us on our 2023 second quarter earnings call.
I'll start by sharing some highlights.
Our second quarter performance, and then Bosker will give you a worldwide financial performance in more detail.
After that I'll share some closing comments before we open to call up for Q&A.
Today, we are pleased to report one of the strongest second quarters in the company's history.
<unk> to the same period in two.
Thousand and 21.
Accordingly.
<unk> will deliver it against headwinds.
From a less favorable market and we expect it <unk>.
<unk>, which was partially mitigated by company specific performance.
The quarter with five per cent.
Adjusted G. P S for the quarter with consistent with prior years after absorbing higher interest costs major launch path.
Taxes.
E T S through two per cent.
These results are a reflection of our innovative product strong sales culture solid expense controls and our passion for execution.
Our largest market B U S.
We believe industry units declined at least low double digits and a quarter.
And historically low aggregate industry volumes for the quarter and first half of the year.
Overall, we believe the U S market has stabilized at 12 noon.
With the upper end of the market demonstrating a bit more resilience compared to the entry level market.
Today's results demonstrate the robust earnings power.
Dash flow attribute to the business.
As we realized solid earnings and cash flow against this challenging backdrop.
As we look through the back half of the year, we anticipate U S produced matrix units trends will slowly improve but remain negative year over year Foster will have more information on the 2023 gardens 10 minutes.
Turning to a few highlights for the quarter.
First we continued to extend our Lee is the largest global bedding company in the world.
All three of our leading U S brands temper, Seeley, and Stearns and foster performed well in the quarter significantly ahead of where we believe the industry trends.
We were pleased with the second quarter performance of our international business success.
The successful temper international launch combined with the dreams Crisp retail execution are driving continued outperformance worldwide and positioning as well for the future.
Second we opened our third domestic foaming Corey plant in <unk>, Indiana, expanding our manufacturing capacity to meet expected demand for years to come.
Design the state of the art facility to optimize our manufacturing capabilities across steady products and components.
In addition to pointing Tempur pedic material.
The ability to leverage the plants phone important capacity.
With extra bedding products and components for Steely drinking foster brands as well as our Nonbranded OEM operations.
The facility enhances our ability to service our customers in the northeast market, creating opportunities to shorten lead times and reduce per unit logistics cost.
It also provides additional storage for chemicals mitigating the risk of future supply or pricing disruption.
With the opening in this facility we've completed our three year strategic capitalist Capex program and expect to see Capex investments moderate significantly going forward.
Second half of this year, we expect capex to be down by 50 per cent versus the same period last year.
Really beneficial to free cash flow.
Third highlight we completed the rollout of our new temperate breeze products and our new smart base in the U S.
Next generation Kemper brief mattress built on the success.
<unk> legacy Breeze products to delivered next level of sleep solutions would enhance temper.
Repeat it fee or characteristics.
Between new technologies designed by our Tempur Pedic scientists.
The new line that presents the next generation of consumer centric solutions focused on helping to alleviate aches and pains.
We also continue to raise the bar and cooling performance with our new Lex Breeze model ceiling 10 degrees cooler all night long presenting the best in class solution, the more than 60% of the households have at least one person.
Todd.
Retailers and consumers response to the incremental technologies have been <unk>.
Overwhelmingly positive.
And we and retailers are seeing positive mix and higher average ISP.
In tandem with the Breeze mattress refresh we also introduced and updated adjustable baseliner.
Which is driving all time high retailer advocacy and attachment rates, reaching new records in May and June .
Our new Smart base features are new sleep tracker 2.0 technology.
The accuracy of which was validated by a Stanford medical study and offers industry, leading automatic smart detection and response addressing the leading sweet concern among consumers.
New lineup also features incremental Multisensory relax Asian features to help consumers wind down and prepare their bodies and minds <unk> rejuvenating sleep.
Over the memorial holiday, we supported these temper.
Wind ups with all new breathe and smart base multimedia advertising campaigns.
Stroke incremental search interest and temper year over year and drove solid.
E Commerce traffic trends over the memorial day selling period.
All of our new tipper products and supporting advertising initiatives are strengthening tempers appeal to the premium.
Wellness minded consumer and driving <unk> and attach rates and E. S. P for a third party retailers.
Fourth highlight are investment concerns and foster products distribution and marketing continued to drive meaningful failed growth and expand brand recognition.
Second quarter Stearns delivered its third sequential quarter of year over year sales growth significantly outperforming broader market trends.
This was possible thanks to the recent investment brand and the rollout of our all new Stearns and Foster collection with superior innovation and elevated design can enhance step up opportunities.
The new product lineup if delivery strong results.
We've grown Stearns as third party retail distribution by more than 20% compared to the previous collection.
Gaines at both legacy and incremental Stern three taylors.
Received this product resonate with historically underserved premium inner spring consumer, resulting in strong mix and again driving ASPD expansion.
Our channel and diversification strategy is also driving strong brand momentum disturbance in Foster E. Commerce site. We launched last year continues to drop drive brand recognition and highly profitable incremental sales.
Finally.
Our launch it we're all new international temper products continued to track with our expectations.
We are launching a new international lineup and over 90 markets worldwide.
The first half of the year, we kicked off our tipper European and Asian markets. We.
We expect to be fully floored and our last market in the U K and the first half of 2024.
K has some <unk> tree specific fire retardant regulations, which I have some complexity launch.
Launch.
The consumer centric innovation and new collection will appeal to our legacy ultra premium consumers and prices of 3000, and the pulse, but also broadening our price points to expand our addressable market to meet the need to consumer shopping for mattresses between 2003 thousand.
We are streamlining the manufacturing process with this lineup to unlock the incremental price point without materially altering the margin profile of our temporary international business.
As we continued to stagger the rollout by individual markets. We're currently manufacturing folks that new line and the old line of products and our international temperate plan, we plan to Optimise production of the new line. After the transition period, providing a tailwind gross margin in 2020.
Four.
No alternative call over to <unk>.
Thank you Scott.
In the second quarter of 2023, consolidated sales, where approximately $1.3 billion in.
And adjusted earnings per share with 58 cents.
We have approximately $13 million or pro forma adjustments in the quarter.
All of which are consistent with the terms of our senior credit facility.
These adjustments are primarily related.
Primarily related to cost incurred in connection with the planned acquisition mattress firm.
A $4 billion U S bedding retailer.
Turning to North American results.
Net sales increased a solid 5% in the quarter.
Reported basis, the wholesale channel increased 6% and the direct channel increased 3%.
North American adjusted gross margin improved to 39.9%.
Driven by pricing actions and favorable commodities, partially offset by increased product launches and operational headwinds.
North American adjusted operating margin improved is $17, 4% driven by the improvement in gross margins.
Now turning to international.
International net sales increased 3% on a reported basis and 4% on a constant currency basis.
Our current year for your expectations for 2000 twenty-three contemplates neutral FX, both the sales and adjusted EBITDA.
As compared to the prior year, our international gross margins improve 254.9% driven by favorable mix and pricing actions.
Alright, your national operating margin declined to 13.4% driven by launch related expenses, including discretionary advertising investments, partially offset by the improvements in gross margin.
Global commodity prices continue to trend largely in line with our expectations.
We continue to expect favorable commodity prices into the back half of the year.
Remaining significantly elevated to 2020 levels.
Now moving to the balance sheet and cash flow items.
At the end of the second quarter consolidated net debt was $2.7 billion in our leverage ratio under a credit facility with three one time.
Slightly ahead of the target range of two to three times.
We expect to return to our target leverage range in the back half of the year.
We generated second quarter operating cash flow of $150 million.
In total we had more than $250 million of operating cash flow in the first half of the year.
Continuing to demonstrate the attractive cash flow attributes of the company.
As expected our inventory levels declined in the quarter as we have completed the vast majority of our domestic product launches.
This resulted in a sequential six day improvement and the cash cycle.
As we entered the back half of the year, we expect inventory levels to further decline as well as some improvements in working capital further improving our cash cycle.
We are temporarily suspended repurchases under our share repurchase authorization as we work towards closing the mattress firm transaction.
Over this interim period, we expect a significantly deleverage as we plan to use the cash to pay down debt head of the closing.
After the acquisition closes we would anticipate our leverage ratio to be between three and 3.25 times.
Now turning to 2000 twenty-three guidance.
Due to revise industry expectations, we are trimming the midpoint of our 2000 twenty-three guidance by approximately 3% on both sales and adjusted EPS.
We now expect adjusted EPS to be in the range of $2.50.
Two $2.70.
Just consider sales to be consistent to slightly up over the prior year.
This includes the execution of our key initiatives.
New product launches in the wraparound impact of pricing.
Because also assumes global industry headwinds primarily in the low end.
Sales and marketing investments of $20 million to support our product launches.
And maintaining our commitment to record advertising spend of over $500 million as we continue to support our leading brands and new products.
This will result in adjusted EBITDA of approximately $940 million at the midpoint of the range.
Our guidance also considers the following allocations of capital in 2023.
A quarterly dividend of 11.
Representing an increase of 10% relative to 2022.
And capex of approximately $200 million, which includes $90 million of growth Capex, primarily to fund the completion of our crawfordsville facility.
I should note that going forward, we expect our capex to return to a more normalised level of spend.
We think of annualized capex as approximately $150 million driven by maintenance Capex of 110 and growth capex of approximately $40 million.
Lastly, I would like to flag, if you're modeling items.
For the full year 2023, we expect DNA of approximately $190 million to $200 million.
Interest expense of about $135 million to $140 million.
A tax rate of 24% to 25%.
In a diluted share count of 178 million shares.
With that I'll turn the call back over to Scott.
Thanks, possibly a great job.
Before opening the call up for questions.
I want to provide a couple of updates first I want to address the cyber security event affecting certain parts of our I T system, which was disclosed Monday and R. A K.
Following the discovery of the event or team activate it it's C. E O approved incident response in business continuity plans.
Plan was approved years ago that designed to contain incidences.
The plan include proactively shutting down certain systems, resulting in the planned temporary interruption of our operations.
We began bringing our systems back online Friday is expected to take time to return to normal operations.
Our investigation remains ongoing and we continue to work to determine.
<unk> of the disruption.
If we determined that any personal information was involved we would of course comply with any reporting obligations, we have under the applicable all.
Currently we are working hard to catch up with the loft production from the shut down and.
Total our systems were down for a week and we are currently working to get back to school production.
We expect with fiber related expenses and that will be adjusted for my third quarter financial results.
Lastly, I would like to provide a brief update on our pending acquisition of mattress ma'am.
We're currently responding to the Federal Trade Commission second request and continued to expect to close the transaction in mid to late 2024.
Oh <unk> interim period <unk> leadership team provides us with a high level update the financial performance.
After storms recently quarter quarterly results, which they reported yesterday were consistent with our expectations and we look forward to bringing the mattress firm team on board.
And with that I'll open up the call for questions operator.
Thank you.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question <unk>.
Press Star one one again, please limit yourself to one question and then re Q.
Please stand by while we compile the Q&A roster.
Our first question comes from Bobby Gerson with Raymond James Your line is open.
Good morning body. Thanks for taking my questions and congrats on a good quarter with a lot of moving parts.
My first one too maybe follow up on the guidance reduction and just maybe get a little more clarity on Sunday, we're moving parts assumed in there so is.
The reduction earnings.
In sales all just a function of the industry, maybe being a little bit softer than we originally anticipated when we laid out or are you bacon and some conservatism that this I T event or the cyber event, what we'll have some type of impact on earnings and revenue in the second half.
Yeah, let me.
Let me get answers to a little bit of a long answer, but let me be clear about it you know first of all from cyber event, you know great job by the I T internal I T Department.
Great job in fact, it was an enterprise.
Enterprise wide effort and congratulations to all people internally. We also had a lot of help from external I T T.
Teams that we had on retainer.
For these kind of events and a great job by Microsoft Elite team.
Let me go kind of go through the estimates and what we know today you know obviously this is not an easy estimate, but let me tell you what we know based on all the information that we have right now.
First of all the event itself is certainly not material to the intrinsic value of the enterprise.
Not material to our 2023 expected sales were EBITDA.
Uhm before insurance and we have an insurance limit of 5 million, but before any insurance. Our best estimate is about 10 to 20 million dollar negative impact and EBITDA in the third quarter.
Okay. We expect the vast majority will qualify as add back adjustment.
The third quarter.
In the estimate that I gave you on the impact of EBITDA, It really breaks out into kind of two pieces.
One, which is clearly incremental cost related to the activity and should be cleared by covered by insurance.
At some point.
But of course, it will count for that as we receive it and then 50% of it is from potential lost sales.
When you look at the potential loss sales for the third quarter, you're talking about $20 million to $30 million that's.
2% or give or take the quarter sales potential.
And the vast majority of that would be silly U S. Because we had plenty of inventory.
<unk> organization.
We have not experienced any material changes in our balance of share and retailers quite frankly have been very understanding and the situation now lastly, more kind of directly to your guidance question.
For the 2000 twenty-three guidance.
The advent has been considered but as we mentioned before we would expect an AD back in the third quarter.
For that the cost and certainly we will count projected the insurance whenever we ever was file a claim for call that out.
Any other impact on changing the guidance.
Totally macro.
When you when you look at look at the second quarter.
Okay. So say, we just got scraped out second quarter.
The market wasn't as strong as we expected it to be but we also performed better and outperformed the industry by a greater extent than we expected and when you get the two which we are relatively solid in fact very solid relative to others in the industry in the second quarter and looking forward we brought.
<unk>, we brought down our expectations for the industry.
When that required is 2923.
3% ish from a guy from a guidance standpoint.
Thank you.
Our next question comes from Susan Mcclary from Goldman Sachs. Your line is open.
Thank you good morning, Thanks for taking the morning, and congrats on a good quarter.
Thank you.
Wow.
I think you know staying on as soon as demand Scott.
About the macro setup with rate, possibly add or very close to the peak housing getting a little better feels like you know maybe the consumer we'll start reengaging and spending and some of these other categories as travels starts to starts to moderate a bit in their.
Thinking about the industry has the ability to start to see some level of improved demand as as being Dizzy. The next couple of quarters and your ability to continue to outperform relative to that some of your peers, perhaps move that both of these uhm industry declines at the 25 three.
80 per cent ranch.
Thanks. Thank you for the 33 questions you asked me Susan.
Let me speak to it and see if I can answer like 30 at least three unintended.
First of all you know, we're very happy with the performance of the quarter and we think gives us an opportunity to show the strength of the business even in a little bit of a down cycle and it's cash flow generation.
I would highlight in our numbers because this goes to the consumer question. You asked if you look at our our a S P.
It was up 13% in the quarter.
And all but about is called two per cent of that's price. The vast majority of that is people mixing up and so what they would tell you is the top and the consumers are doing very well and where where you're seeing sales pressure is at the lower end if I do it by brand standpoint, or high end brands did better than our <unk>.
Low end brands, Ie, Stearns and foster did better than Seeley, and Stearns and foster grew double digits in a market that I don't know pick your number but it was clearly down double digits. It grew double digits. So I'm gonna say the strength of the high end customer everywhere. We looked looked very good no we look at individual.
Mattress is within the temper lineup the high end temper products did much better than the low and temper products. So we're we're continued to be fairly bullish on high end customer where you feel the pressure is in the low and and the low end has gotten hit.
Gotten hit very very hard.
So you know you had a question in there about outlaw.
Outlook as far as consumers going forward, we've been bouncing around the bottom and the betting industry for probably three quarters and so I don't know yeah next quarter or two we certainly think that the industry should start doing better some people can point to green shoots.
Yeah, we see some but you know you have some good weeks and you have some slower weeks, but the main thing that from our perspective as we see our products incrementally performing very well in the marketplace against.
Petition.
Question I Miss Parker that you can remember [laughter] about competitive landscape.
Competitive landscape look we've got it's a very competitive market.
Lots of competitors in Betty worldwide.
Other brands that have brand strength that we all know they're out there they're competing every day I haven't seen anything in any of the competitors.
Cause significant sea change in their activities or their strategy, but it's a competitive market and we will continue to beat the best we can.
Thank you.
And we have a question from <unk> with twist. Your line is open.
Yeah, you talked earlier about raw material costs.
Coming down so October 11th can you give any kind of quantification how much they're down either in the quarter or your estimates for the second half of the year.
Absolutely dollars $5 will be helpful.
Sure. So let me let me think about it. This way is is that we did have an expectation from a commodity standpoint as we as we entered the year largely speaking as it does those those commodities are coming in very much in line with those of us with our expectations. We would expect to continue to see incremental commodity benefit as.
Get into the back half however, all contemplated in our in our initial thoughts as it relates to what we bought commodities were gonna do as it relates to the commodity benefit that we saw on our G. P right.
Well, a little bit more information or accused gonna drop here in a little bit, but I'll I'll go ahead and give you a peek on it is from a commodity standpoint is what was one would expect to see about 150 basis points of improvement.
Thank you [laughter]. Our next question comes from a credit Sniggle with Bank of America. Your line is open.
Hi, This is Stephen May turn it on for Curtis Nagel just for your mattress term acquisition Hello, you called out kind of second half of 2024 is there any changes in what you are seeing from a regulatory approval standpoint.
And then as far as gross margins color.
Touch beyond just the commodities how are we thinking about the cadent going into two H kind of I'll be flipping it takes their thank you.
Yeah. Thank you for your question I'll, I'll do FTC and I'll give captain margin and the question on margins look as you as you know the FTC process is as long and complex.
What I would say as we're working through the process there have not been any surprises.
In the process, we are providing them significant information on their second request.
Lawyers and folks are meeting and discussing professionally as.
As we both learn each other's perspective.
And I think that process will continue to go on for several months and probably some time in the fourth quarter, we'll probably get down to the point, where we figure out whether or not we have a meeting of minds or we don't have a meeting of minds, but I would tell you that <unk>.
Process is progressing normally.
Everybody's working cordially together and they have they have responsibility on their side.
We certainly respect and we look forward to continuing to visit with them.
When I think about gross margins going from the first half of the second half first thing I would point out as I would I would anticipate the normal seasonality of the business generally the second half is bigger than the first so therefore, we get some leverage upon our fixed so clearly as I would anticipate that that would happen. In addition to that is that we had some unique events that were invest.
That we made in the first half whether it be product launch expenses, whether it be the four models that we have out there. So as we get into the back half of the year is it that's not going to be a headwind to from a gross margin standpoint, and then finally I will call out is that we've been making some some investments in our in our supply chain in our operations.
Call that we've been doing some EBITDA to make sure that we've been servicing our customers and as we as we think about the back half of the year is that those headwinds turn into tailwinds. So what all that means is what I would anticipate is that gross margin continues to step up with Q3 being the highest at the year. Then I would also say as we think about.
Or just margins overall from a go forward standpoint is is that I feel like we have a number of tailwinds to margin whether it be the product mix, whether it be the operational initiatives.
That we have not only this year, but as those to continue we're very excited about our direct to consumer business DTC should be a tailwind for us when we go forward standpoint, and then finally I'll close it down with international International as we spent many many years and developing a product that will just get a neutral total addressable market generally international margins are higher than the.
U S. So anticipate as international contain.
Continues to grow is that that will be a tailwind as well. The only thing that made me think because you were talking to Oscar as margins I, probably should have called out in the second quarter.
Our advertising expense, we spent the same amount as last year I, even though the market was choppy we didn't pull back on advertising to try to optimize EBITDA or something like that and in fact, if you look at our direct advertising.
Our direct advertising to support quite frankly, a little weaker market is up double digits in.
In the second quarter it in support of the marketplace.
Thank you.
Our next question comes from Peter Keith with Piper Sandler Your line is open.
Hey, good morning, everyone. Congrats on the continued share games I guess, a two part question hopefully related to a number one could you give us the the sales lift in the second quarter.
From the product launches that you had.
Then secondarily it looks like now your guidance in place of revenues Gonna slow in the back half at the same time I take the industry trends, what we're seeing general agreement out of the things, we're gonna getting less bad.
I'm in your kind of got it for things to get worse. So hopefully you can reconcile that dynamic.
Sure you want to work on that absolutely. So the way I would think about it as specifically as it relates to four models in the second quarter, let's call that 2% to 3%.
So that's that's that's all if we got there what I think about the back half.
Reasonable as it relates to what the back half looks like from a sales standpoint, however, here's the way I think about it is in the first half of the year. We did have some benefit from the <unk>. The last round of pricing actions that we took in 2022 that lapse in the first half meaning that we don't have that benefit as we think about the back half of the year.
Finley at that are four models, which are again I'm going to support future growth is that those are largely in the first half of the year. So when you think about our expectations in the back half of the year would that does imply is is that from an organic standpoint is it that those initiatives are going to continue to allow us to to grow and Ah.
Very challenged market. So how I think about that is from a sales being flat to slightly up.
What that would imply in the back half of the year is that we would see a bit of growth and really being fueled by those initiatives and a very challenged market.
One moment for our next question.
Our next question comes from Seth Basham Trauma Wedbush Securities. Your line is open.
Thanks, a lot and good morning, I'd follow up question Peters just on the outlook for the industry for the balance of the year. If you take into consideration what's happening from the macro standpoint, <unk> availability standpoint.
Stepping industry units to do for the full year after the back half of the year that underpins your guidance.
Good question. So the way we think about it is this let's call. It mid single digit mid to high single digit decline and what that would imply as for the back half of the year call at mid single digit declines, it's our expectation that for the for the second quarter is that when the when the information comes.
Zhao our estimate is is that we'll see low doubles from a decline standpoint.
Thank you and our next question will come from Brad Thomas with key Bank capital markets. Your line is open.
Hi, Thank you a couple of follow ups, if I could Scott I believe you talked about thinking that you.
You may not have as much from share gains in the back half as what you've been seeing in the first half I was wondering if you could elaborate on that anymore and then Bosco I was hoping you could talk a little bit more about the commodity component of of margins.
And maybe how you're thinking about that from a big picture standpoint.
And perhaps may maybe have that set up as a potential tailwind for ya, even as you move into 2024.
Yeah. Thanks for the question might be little clear.
More of the way, we do budgeting more than expectation when it when it comes to share gains are outperforming outperformance in the marketplace.
Clearly, we continue to take us quite.
Quite a bit of outperformance in the marketplace, but when we actually put our budget together and we do guidance we.
We don't anticipate that activity, we let that we let that activity flow into the numbers.
Is a good guy maybe it offset an unknown bad guy.
But as far as like you've just asked me like Okay. What do you really think you share gains are gonna be we haven't seen anything in the market place from any of the competitors.
Would make us think that our share gains would would slow down.
Are.
All of our brands had really strong second quarter, and we haven't seen anything that would make us think that the that wouldn't continue.
In the third quarter, so that's probably meanness speaking or thinking about our budgeting process more than anything else.
As it relates to the components of gross margin just cleaning up one of the questions that I got earlier from Keith let's call it about $15 million a commodity benefit in the quarter and that will triangulate to the best of 150 basis points of rate improvement as we think about commodities largely speaking is that we had a perspective on what the full year would look like.
That person and what we assume there is is that we continue to see some favorability as the year progressed.
Within some puts and takes I would say largely as it that is coming.
N as in and around what we would anticipate that would that does apply for the rest of the year that we could continue to stay on a sequential basis <unk>.
Commodity improvement as well as obviously year over year as well now all of that said is that we are still well off the R 2019 levels from a commodity standpoint. So when you think about that mathematical equation that was happening where we had taken price and without any gross margin.
That will fall through from a <unk> standpoint is that phenomenon is still there. Yes. We have received some of that as commodities that come in however, we are well well off of where we used to be from a historic standpoint commodity prices versus 2019, you would anticipate with the fullness of time is that things would would normalize however.
It would be it.
I think there's some things that are just going to be more stickier than others as it relates to getting back to those pretend as levels.
Thank you.
Our next question comes from Ah two <unk> Laurie from UBS. Your line is open.
Good morning, Thanks, a lot for taking my question.
<unk> just to follow up on the commodity piece of cross marching.
Uh-huh based on your estimate <unk>, how much of it.
If I back up a step I think in the past 40 mentioned instead commodities have collectively being a 400 basis points headwind.
Gross margin over the last few years as at the end of 23.
How much of that do you expect to recover just so that we can properly calibrate what's left outstanding for 2024 MPR.
Sure. Let me do that let me do that math kind of as I'm thinking about it. So I think we're well off of our of of where we were in the pre pandemic levels. I don't think we're approaching let's call half of where we were before so somewhere between 100 5200 basis points, perhaps is.
What we've captured and that's consistent with what we've seen let's call. It in the first half of the year. So I anticipate that to play through a little bit and and really that reinforces. The point is that things are things are better than where they were obviously during the pandemic. However from just from a pure inflation standpoint is that we still got a ways to go.
Thank you.
Have a question from.
Laura Champine with Luke capital Your line is open.
Thanks for taking my question, if I looked through the quarter that mattress firm just report it looks like their sales declined 6% do you view them as holding on to market share in a weaker market or is there a.
Issue there that that you would need the turnaround should you become the owner of the mattress firm assets recognizing that it would be here.
Sure.
We don't we don't have all the information yet we get in the market place to fully answer that question, but certainly the early indications are that you know from the retail perspective, I suspect the retailers were down double digits in total I'm looking at masker to agree because we don't have all the numbers, we triangulate and so they were down.
6% in sales and up I think three per cent and if it <unk> in a market that I would say probably sales for retailers were double digit. So I I think they they probably took a little bit of sure. If you were to segregate the market between what I'll call the big retailers and the small retailers they were proper.
<unk> I'll call. It in line may be with the large retailers.
Because generally the trend has been larger retailers had been taking share from smaller retailers, but their their their report which is there a third quarter. Our second quarter that came out last night was very much in line with our expectations of what they were going to do this year.
Pre signing the definitive agreement so they're tracking to our internal expectations.
Thank you.
Again, if you would like to ask a question. Please press star one one on your telephone.
Our next question.
Comes from William Reuter from Bank of America. Your line is open.
Good morning, I just have one.
Came out a little bit of a weaker demand at the lower end.
D U N N lower commodity prices do you expect that you may either more promotional do you expect you would reduce list prices have your retailer partners come to you with any suggestions on how to increase.
Sure that's.
No I don't I don't really see any pricing actions at the lower end is it promotional yes.
The low end is always very promotional and in the industry the low and doesn't have much profit in it. So there's not a lot to work with it.
At the low end and where we've seen retailers aggressively try to promote and drive will call. It lower end.
Generally we've seen those activities not be successful from a return on advertising or promotion dollars.
The low end market is is just is just not right not there right now.
Be in marketing terms, the fish aren't there right now.
So notebook as far as but are we continually looking for ways to help stimulate the market yes.
But I don't I don't think it's really a pricing issue.
But you know if I got to be King for the day, what I'd like to see us.
More advertising in the marketplace.
Other manufacturers.
And others to helps stimulate activity because I think there's there's quite a bit of dollars out there in the middle of the market in the upper end of the market, but entry levels entry level is just tough right now.
Thank you and our last question comes from Carla Casella with J P. Morgan Your line is open.
Hi, I'm wondering about inventory and working capital and your thoughts on the third quarter I noticed usually a big cash flow quarter for you do you think are you expecting that again this year and for the full year do you still expect working capital relief.
You expect to be.
Fully paid on your revolver and the next corner.
Absolutely here's the way I would think about it. So we made some investments in working capital as we exited 2023, whether it be in advance of the new product introductions that we have as well as just carrying more safety stock as a supply chain was a little uncertain at that time as we sit here today are cash cycle.
We've seen some nice improvements specifically about six days and inventory as the year plays out is what I would anticipate is that when you see some continued improvement and working capital overall, a little bit from inventory, but I would expect something from the other components as well that being payables and receivables as we exit the year, what I would anticipate is.
Is that working capital will continue to be a source of cash and let's say from a historic standpoint is at the flow through on EBITDA to cash flow is we will see we should continue to do that same relationship absolutely. The back half of the year is that we generate more cash in the first half so I would say.
That we would expect that again this year what I would further say is is that we feel very excited about what we've done from a nuclear plant standpoint, that's in Crawfordsville that was a 300 million dollar investment and growth Capex that we made over the last couple of years and we're very excited to say that that we've got some units coming out of that plant also what that means is from a cash flow staff.
Point of free cash flow is that that investment is behind us. So on a year over year basis free cash flow should should be greater by about 50% than what it was in the prior year and then I guess the other part is we were not doing stock buyback, while we're preparing for the masters from acquisitions. So we're gonna be drowning in cash.
Ash.
The leverage ratio should be following significantly over the next few quarters. That's right I think what we're anticipating is obviously and this will get back within our range in the third quarter as we sit here today I would expect to be somewhere at the midpoint of a range of two to three as we exit the year.
Thank you and we have one last question from Brad Thomas with Keybanc capital markets. Your line is open.
Oh, Thanks for taking the follow up question Uhm a.
A couple of things that investors have been asking us. This morning, I was wondering if I could ask for.
For one you know, it's it's been an exciting year with some new retail partnerships like Sam's club. Scott was just wondering if you could give us any update on distribution and how.
Partnership to go on an empty floor space and then and then secondly, just a question on the cyber security issue is the expectation that operations are normal for labor day, selling season or do you think it goes into that at all thanks again, okay, well congratulation on slipping in one more question and then making it a five question.
So let me see if I can <unk>.
First first of all you mentioned a large just just customer Sam's we think that that's.
Thats going well and we think that if you ask them. They would say it's going well. So we're we're thrilled.
With that relationship I think you know the Stearns and foster captured 20% increase in swaps.
And we certainly feel feel good about that and clearly from our sales numbers relative to the industry, whether you want to compare it to other public companies or spring volumes or anything we are clearly taking share.
So.
Floor space is increasing and velocities within those slots.
Have been increasing.
And then I think he has a little bit more about what kind of where is the organised cyber thing normal labor day, Yeah. I mean look yeah. We obviously have the 8-K out we're generally building and shipping beds I mean right now we're taking orders right now we.
We in generally last about a week's worth of production around the world and then as we bring up the system's it usually takes a few days to get back to kind of normal efficiency.
So yeah I don't know that we also had some some parts of the organizations that weren't impacted by any of the the cyber event like the Asian joint venture dreamed Sherwood sleep outfitters, they weren't affected at all our worldwide e-commerce, it wasn't affected except for Ah.
A bit slow shipping.
So no I mean, I I think we're working off a backlog, but I think we're going to get caught up and I don't really expect to leave the third quarter with any significant backlog. So I don't think it's going to have an impact and we've certainly tried to work through that we gave you estimates.
Of the impact.
Of the event.
Thank you that's all the time, we have for questions I would like to turn the call back to Scott Thompson for closing remarks.
Thank you operator.
To our over 13000 employees around the world. Thank you for what you do everyday to make the company successful special call out again to our our I T folks and a very difficult quarter and a great job in dealing with the uncertainty that we faced to a retail partners. Thank you for your outstanding representation of our brands to our.
Shareholders and lenders. Thank you for your confidence and temper Sealey's leadership team and.
And its board of directors since the call today operator.
This concludes today's conference call. Thank you for participating you may now disconnect.
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