Q4 2024 Somnigroup International Inc Earnings Call
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Speaker Change: Naveen Kumar, Sardeep Kankare, Mohit Chandra Smith, Anuj Gaddafi Emily Cahan, Nicole Dean, Roger Ginard WBLA plagiarism
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Speaker Change: Good morning ladies and gentlemen, and welcome to the SOMNY Group 4th Quarter 2024 Earnings Call.
Speaker Change: At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session.
Speaker Change: If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, February 20, 2025. I would now like to turn the conference over to Aubrey Moore with Investor Relations. Please go ahead.
Speaker Change: Thank you. Good morning, everyone, and thank you for participating in today's call. Joining me today are Scott Thompson, Chairman, President, and CEO, and Bhaskar Rao, Executive Vice President and Chief Financial Officer. This call includes forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Speaker Change: 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.
Speaker Change: These factors are discussed on the company's SEC filings, including its annual reports on Form 10-K and quarterly reports on Form 10-Q. Any forward-looking statement speaks only as and when the date it is made. The company undertakes no obligation to update any forward-looking statement.
Speaker Change: 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.
Speaker Change: which is posted on the company's new investor website at investor.somnigroup.com and filed with the SEC. Our comments will supplement the detailed information provided in this press release.
Scott Thompson: And now with that introduction, it's my pleasure to turn the call over to Scott.
Scott Thompson: Thank you, Aubrey. Good morning, and thank you for joining us on our first ever earnings and business update call at Somnigroup International, SGI on the New York Stock Exchange.
Scott Thompson: As we previously reported, we successfully completed the merger of Mattress Firm and Tempur-Sealy on February 5th.
and we subsequently changed our parent company name.
Scott Thompson: from Tempur-Sele International to Somnigroup International, and as I mentioned, changed our common stock ticker from TPX to SGI.
Scott Thompson: We're excited to start this new chapter for our company as a global provider of sleep solutions with a portfolio of outstanding businesses and iconic product grants.
Scott Thompson: As we've previously shared, Tempur-Sealy, Dreams, and Mattress Firm will all operate under their own name as Decentralized Business Units under Somnigroup International.
Scott Thompson: Mattress Firm and Dreams will continue to operate as multi-branded retailers.
Scott Thompson: and Tim Persily, primarily a manufacturer, will continue to serve third-party retailers as well as mattress firm Dreams and Tim Persily's direct-to-consumer channel.
We'll begin reporting Masters Firm's operations next quarter.
Turning to today's earnings release.
Scott Thompson: I'll begin with some highlights from the fourth quarter and full year 2024 and then turn the call over to Bhaskar to review our financial performance in more detail and discuss our 2025 guidance.
Scott Thompson: After that, I will share some thoughts about the opportunities unlocked by the transaction before opening the call-up for Q&A.
Bhaskar Rao: In the fourth quarter of 2024, net sales were approximately $1.2 billion and adjusted EPS was $0.60.
Bhaskar Rao: We outperformed our fourth quarter expectations led by strong performance in our international business.
Bhaskar Rao: Our North America business continued to extend its lead in the industry, as we delivered fourth-quarter sales consistent with prior year, despite an estimated single-digit decline in the overall industry.
Bhaskar Rao: Excluding the negative impact from foreclosed distribution resulting from an unanticipated customer being acquired, our North America sales grew low single digits in the quarter.
Turning to a few highlights.
Bhaskar Rao: First is the enduring strength of our business model, which allows us to invest in growth initiatives and aggressively explore long-term opportunities while remaining responsive to near-term industry conditions.
In 2024, Temper Steely outperformed the industry worldwide.
differentiated by its strong fundamentals of its business model.
Bhaskar Rao: We delivered the strongest sales and gross margins in Tempur-SeaLeaf's history and reinforced our strategic third-party partnerships by upholding our commitments to industry-leading product quality and service.
Bhaskar Rao: We also delivered our strongest operating margin in three years, even as we continue to invest the future.
Bhaskar Rao: We've ramped our advertising spin, opened more than 100 company-owned stores, and invested in e-commerce platforms for Sealy, Hamsterns, and Foster in the U.S. over the three-year period.
Bhaskar Rao: We reported a robust $569 million in free cash flow, our strongest annual free cash flow since 2021.
Bhaskar Rao: from 2.9 times at December 31st, 2023 to 2.3 times at December 31st, 2024, as we prepared for the mattress firm transactions.
Bhaskar Rao: demonstrating our disciplined cash management and ability to quickly deleverage a business.
Bhaskar Rao: Our results are particularly notable when put in context to the broader industry trend.
Bhaskar Rao: 2024 was another challenging year for Betty, as we believe industry demand declined high single digits in the U.S. and the trend similarly in many other key markets in the world.
Bhaskar Rao: Looking at the last few years, we believe the U.S. industry volume declined more than 30% from peak mattress sales in 2021 to 2024.
Bhaskar Rao: However, we are confident in the fundamentals of the betting industry remain solid.
Bhaskar Rao: We believe the market is clearly poised for growth driven by GDP and population growth, housing turnover, and ASP expansion.
Bhaskar Rao: We anticipate the market will begin to normalize in 2025 and return to some growth in the back half of the year.
Bhaskar Rao: Over time, we are confident in the return to the historical mid-single-digit growth rate driven by innovation, population growth, replacement cycle, and ASP expansion.
Bhaskar Rao: Additionally, based on the volume decline in the last three years, we also believe that pent-up demand from deferred purchases could provide additional upside to growth assumptions.
Second highlight is the outperformance of our U.S. business.
Bhaskar Rao: supported by innovative new products, targeted advertising initiatives, and expanded distribution.
Bhaskar Rao: Our temper brand outperformed the market and delivered profitable sales growth in 2024, supported by the success of our new products.
Bhaskar Rao: refreshed Temper lineup with its new Breeze products and SmartBase launched in 2023, followed by the rollout of our updated ADAPT collection and Active Breeze Halo product in 2024, drove retail traffic and ASP.
Bhaskar Rao: These products are attracting a growing number of health conscious consumers.
Bhaskar Rao: and include our newest innovative features which address key barriers to achieving better sleep, including cutting-edge cooling technologies, advanced pressure relief, and AI driven sleep insights.
Stearns and Foster also performed well in 2024.
Bhaskar Rao: driven by last year's newest product launch, our ongoing investment in advertising, and over 20% growth in our Stearns and Foster e-commerce platform.
Bhaskar Rao: Our Sealy and OEM business performed well relative to the industry. Promoting industry pressure over the last three years resulted in consolidation, restructuring, and bankruptcies across the U.S. industry. In 2024, results include the negative sales impact of these events on our Sealy and OEM products.
Bhaskar Rao: as well as incremental provisions for losses triggered by these events.
Turning to our 2025 product launch.
Bhaskar Rao: We're excited to share that after months of incredible retail excitement and feedback, the launch of our all-new Sealy Pastapedi product kicked off last month.
This is the largest product launch in betting history.
Bhaskar Rao: Orders for the new collection are on track, with an estimate 80% floor samples to be shipped before Memorial Day. This highly anticipated line is a significant reimagining of the Posturepedic products, brands, and marketing.
Bhaskar Rao: and is aimed at reigniting growth in the value to mid-tier price point where we and retailers see tremendous opportunities.
Bhaskar Rao: This updated coelpostropedic collection is clearly differentiated from competitive offerings with all new proprietary coil technology.
Bhaskar Rao: These patent-pending, precision-fit coils were expertly designed and engineered in-house to provide superior support, which has been the mission of Sealy Posturepedic since its inception in 1950.
Bhaskar Rao: The 2025 Posturepedic Collection also features a bold new look, thoughtfully designed to offer a fresh style and appeal to a broad audience while staying connected to the Sealy brand legacy.
Bhaskar Rao: Our new precision fit coils have an initial feel that is highly flexible and conform for lighter support and body types.
Bhaskar Rao: It then reacts progressively to an individual's unique weight and shape to give the right amount of total support. These new Posturepedic products deliver a demonstrable step change, improvement in comfort and support.
This has resonated well with customers and retailers.
Bhaskar Rao: This top-of-funnel, multimedia campaign is designed to reinforce the posture-pedic difference and drive excitement and purchase intent for the company's largest product brand and America's number one mattress brand.
Bhaskar Rao: As evidenced by the above, we continue to make high return investments in brand and product to drive retailer success.
Bhaskar Rao: Turning to our third highlight, we are pleased to report strong international business performance in 2024, driven by both continued strength in our legacy temper operations and our dream business.
Bhaskar Rao: They delivered solid mid-single-digit growth and expanded operating margin for the full year 2024, reflecting robust momentum despite a generally subdued
Global Market
Bhaskar Rao: A key driver of this performance has been the continued success of our all-new International Temper Collection.
Bhaskar Rao: which completed its main rollout mid-2024 with several channels and customer-specific products continuing to roll out in 2025.
Bhaskar Rao: This collection of mattresses, bed bays, pillows has significantly outperformed expectations in key markets such as the UK, Germany, China, and Australia.
Bhaskar Rao: Since the start of its launch in 2023, we've expanded wholesale distribution by more than 10%, and we see substantial opportunities for further growth in distribution over the long term.
Bhaskar Rao: The strong demand for these products coupled with the additional expansion opportunity underscores our confidence that the international temper collection will remain a key growth driver in the years to come.
Bhaskar Rao: Our fourth highlight is our significant growth margin expansion. In 2024, we achieved year-over-year improvement of 130 basis points in our consolidated gross margin.
Bhaskar Rao: Driven by our ongoing investment in new product innovation, an improved product mix, and the optimization of our manufacturing processes and cost reduction initiatives.
Bhaskar Rao: These strategic initiatives have allowed us to increase operating efficiency, which in turn has provided us with more resources to reinvest in advertising, product development, and our people.
Bhaskar Rao: While we've made strides to grow and fortify the business in 2024, we believe that significant opportunities still lie ahead.
Bhaskar Rao: Our continued focus on key growth and cost efficiency initiatives will ensure that we are in an optimal position to benefit from the global betting industry recovery.
With that, I'll turn the call over to Bhaskar.
Thank you, Scott.
Bhaskar Rao: In the fourth quarter of 2024, consolidated sales were approximately $1.2 billion, and adjusted earnings per share was $0.60.
Bhaskar Rao: We have $45 million of pro forma adjustments in the quarter, all of which are consistent with the terms of our Senior Credit Facility.
Scott Thompson: These adjustments are largely comprised of costs incurred for professional fees related to the acquisition of a mattress firm, and the unexpected foreclosed distribution Scott previously mentioned, including transition and wind-down costs.
Turning to North American results.
Scott Thompson: Net sales in the fourth quarter were consistent to the prior year. On a reported basis, the wholesale channel was consistent and the direct channel was 3%.
Scott Thompson: North American Adjusted Gross Profit Margin improved to 40.8%, primarily driven by operational efficiency.
Scott Thompson: North American Adjusted Operating Margin declined to 14.8%, driven by operating expense deleverage from investments in advertising and fully reserving the balance sheet for the events Scott mentioned a moment ago.
Now turning to international.
Scott Thompson: As compared to the prior year, our international gross margin improved to 58%, driven by operational efficiencies and favorable mix.
Scott Thompson: Our international operating margin improved to 21.2%, driven by the improved gross margin and operating expense leverage, partially offset by a decline in our Asian joint venture performance as it manages through a weak Chinese market.
Scott Thompson: Now moving on to the balance sheet and cash flow items.
Scott Thompson: At the end of the fourth quarter, consolidated debt less cash was $2.1 billion, and our leverage ratio under our credit facility was 2.3 times, within our historical target range of 2 to 3 times.
Scott Thompson: The fourth quarter, we generated operating cash flow of $129 million.
Scott Thompson: Following the close of the mattress firm transaction, our net leverage was approximately 3.5 times.
Scott Thompson: We expect to return to our target leverage range of two to three times and for share repurchases to be minimal over the near term.
Scott Thompson: You should note that under the terms of our credit facility, our leverage capsulation going forward will include the benefit of rent rate synergies.
Scott Thompson: Our expectation is that we will realize at least $100 million in annual run rate synergies by 2028.
Scott Thompson: Before I discuss the 2025 Outlook in detail, I want to highlight how we are reflecting the transaction in our guidance.
Scott Thompson: Our guidance considers the previously announced divestiture and the elimination of intercompany sales between Mattress Firm and Tempur-Sealy.
Scott Thompson: We expect the intercompany sales to represent approximately 18% of global Tempur-Sele 2024 sales.
Scott Thompson: Intercompany eliminations will reduce temporary sale but will be accretive, sorry, will be margin accretive and neutral to EPS.
Scott Thompson: Please note, these two factors will impact our reported sales going forward.
Scott Thompson: I will be highlighting like for like to normalize these items in some of the guidance commentary that follows.
Scott Thompson: We also expect first-year synergies to benefit of approximately $10 million primarily realized in the back half of the year with an anticipated ramp in subsequent years.
Scott Thompson: I should also note there will be some P&L landscaping across COGS and operating expenses to align accounting policies to the two organizations.
Scott Thompson: Please refer to the investor presentation posted to our IR website this morning for further detail on the impact of this policy alignment and other acquisition related items.
Scott Thompson: As we begin reporting Mattress Firm and our consolidated results in the first quarter, we will maintain our historical reporting segment with the addition of a new segment for the Mattress Firm business.
Now turning to our 2025 guidance.
Scott Thompson: We expect adjusted EPS to be in the range of $2.60 to $3.00.
which at the midpoint is a 10% growth versus 2024.
Scott Thompson: Our guidance is based on sales after intercompany eliminations to be between 7.5 and 7.8 billion dollars on a reported basis.
Our guidance also reflects
Scott Thompson: Our expectations of the global betting industry will be stable versus the prior year, which implies slight headwind in the first half and recovery in the second half of 2025.
Scott Thompson: are like-for-like temper ceiling sales growing slightly and on a reported basis down high teens due to the acquisition factors previously discussed.
Scott Thompson: Our tempers ceiling North America sales to be flattish on a like-for-like basis driven by the outperforming the industry due to the continued momentum of our product and channel strategies.
Scott Thompson: and comping over the foreclosed distribution and prior floor models which combined represent mid-single headwind in North America at Tempur-Sele sales.
Scott Thompson: Our international business growing low single digits, which includes the continued momentum of our omni-channel expansion strategy and a slight headwind in the first quarter as we lap prior to launch.
Scott Thompson: We also expect high single-digit growth on a constant currency basis in our international segment.
Scott Thompson: and our like-for-like mattress firm sales growing slightly, supported by in-store initiatives to drive average order value and conversion.
Scott Thompson: We also expect reported gross margins to be similar to a reported 2024 gross margin, which includes a $15 million headwind from foreign exchange.
Scott Thompson: $730 million of advertising investment which implies a slight step up in temporary advertising.
Scott Thompson: all resulting in a just EBITDA of approximately $1.3 to $1.4 billion.
Scott Thompson: Regarding capital expenditures, we expect 2025 CapEx of approximately $250 million, including $50 million in investments to refresh mattress firm stores.
Scott Thompson: Over the long term, we expect normalized run rate SOMNI group, CapEx, to be approximately $200 million.
Lastly, I would like to flag a few modeling items.
Scott Thompson: For the full year 2025, we expect DNA of approximately $295 to $305 million.
interest expense of approximately $265 to $275 million dollars.
Scott Thompson: on a tax rate of 25% with a diluted share count of 210 million shares.
With that, I'll turn the call back to Scott.
Thank you, Bhaskar. Great job.
Scott Thompson: Before turning the call over for Q&A, I'd like once again to express my long-term optimism about the recently completed acquisition of Mattress Firm.
Scott Thompson: We have collaborately worked with Mattress Firm for over 35 years, and we are thrilled to welcome them into our organization and unlock incremental benefits to all stakeholders.
Scott Thompson: Let me conclude by taking a step back to share our long-term perspective.
Scott Thompson: We've seen our markets performing below their historical trendline growth and despite this our execution has led to adjusted earnings per share growth.
We believe 2025 will benefit from continued execution.
and the Mattress Farm Transaction.
Scott Thompson: Looking beyond this year, we are planning for markets to return to growth, while simultaneously realizing incremental benefits from the mattress firm transaction and continued industry-leading execution.
Scott Thompson: We're internally targeting sales to grow at a compound annual growth rate of mid-single digits starting in 2026.
Scott Thompson: This indicates somnigroup adjusted EPS would increase from the $2.80, the midpoint of the guidance for 2025.
to approximately $4.85 by 2028.
Scott Thompson: That ends our prepared remarks, operator. Please open the call up for questions.
Speaker Change: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Please limit yourself to one question and recue if you have additional questions.
Speaker Change: Your first question comes from Susan McCleary with Goldman Sachs. Your line is now open.
Thank you. Good morning, everyone. Good morning, Susan.
Susan McCleary: Good morning, Scott. I want to start with your expectations for some normalization in the industry this year. Could you talk a bit more about what is driving that outlook, given the macro environment that we're coming into the year with and the state of the consumer? And then just talk a bit about your ability to execute against that and how we should think about first half versus second half.
Susan McCleary: Sure, thank you for the question. Look, I mean, I would say we're still in that bouncing around the bottom, which we've used, you know, here for the last couple of years where you have starts and stops.
Susan McCleary: I would expect the first half of the year to be a little bit less robust than the back half.
Susan McCleary: You know, we had a strong period towards the end of last year and the start of this year, and then ran into a little bit of a.
Susan McCleary: air pocket during President's Day, which I think has been well reported that it's a little bit slow or muted during President's Day.
Susan McCleary: But we're continuing to see what I call steady business, but I wouldn't say we're expecting normalization really until you get to 2026. I think some of that is driven based on new product. We're very optimistic about the Sealy launch.
Susan McCleary: Some of the Sealy products have been in the market for a while. So this is, as we've mentioned, the largest launch in Betty history. That product is just now getting on the floors and where it's being placed, it's being well received.
Susan McCleary: Now, if for some reason the market is different than we expect, I think as you know, the business model is relatively flexible, and we can flex up if we need to, or we can flex down if the market tells us that's what we need to do.
Rafe Jadroshi: Your next question comes from Rafe Jadroshi with Bank of America. Your line is now open.
Hi, good morning. Thanks for taking my question. Thank you.
Rafe Jadroshi: I wanted to follow up on the long-term guidance that you provided the 485. Can you give a little bit more color on how much of that is accretion, maybe relative to core TPX?
Rafe Jadroshi: and is that assuming a hundred million of synergies or is that just getting operating leverage on mattress firm and then just I know it's a long question but then it's a mid single-digit growth you're assuming is that industry or is that CPX and then industry something below that? Thank you
Speaker Change: Great. Let me talk for a while and I'm sure I'm going to miss some of the 12 questions in there and Bhaskar will clean me up a little bit.
Speaker Change: Look, we wanted to give you a perspective, I wouldn't call that quote guidance, but look this was such a transformational acquisition, we knew we'd blow up people's models, and we thought we ought to put something out there to give people, you know, put something that tells you kind of internally.
Speaker Change: Generally, it's got $100 million of synergies in it over the period with what I call a slow start, for lots of reasons we can talk about in a second. Primarily, the FTC wouldn't let us talk to each other for a while, so the teams are just now getting back together.
Speaker Change: and shows the industry, you know, getting back to normal and the 5%, we'll call it for talking terms, that's our revenue growth in the perspective.
Speaker Change: may be conservative, may not, I think we mentioned that there may be pent-up demand, we don't know yet, but I think it's a good baseline assumption.
Speaker Change: And then I hope the teams are going to work harder and have a bigger synergy number, you know, over time. But I think that gives you a good idea of internally what we're targeting. Bhaskar, you want to speak to some of that? Absolutely. So just a little bit of a double tap. So when you think about the category, think about it globally. As Scott mentioned is that we would expect to grow market share ahead.
Speaker Change: from a category standpoint. So as you think about that globally, again, anywhere between three to 5%, as mentioned.
Speaker Change: also synergies absolutely is that we're in for at least $100 million over that period and yes there is a component of incremental product productivity going through a manufacturing process so both leverage as those units start to become that come back interestingly at the end of 2028 assuming the category assumptions units
Speaker Change: We don't have to add any more incremental capacity or incremental CapEx to be able to support that level of business.
Speaker Change: As I think about the rest of the investments as we continue to support our brand through advertising.
Speaker Change: Also, we had called out that we're going to invest some dollars in refurbing.
Speaker Change: the mattress firm stores. So that cash flow is embedded in that as well as the incremental depreciation that would come to that. So you put all that together, you get to a mid-single-digit growth on the top line with EPS growing at 20% CAGR.
Speaker Change: Your next question comes from Bobby Griffin with Raymond James. Your line is now open.
Speaker Change: Good morning, everybody. Thanks for taking my questions and congrats on getting the deal done. Thank you.
Speaker Change: kind of level set us then. And then my second part, I'm going to do a two-part question that Scott loves.
Speaker Change: The 260 low-end of guidance versus reporting 255, can you maybe just connect that? Is that just industry down again in 25, just you know that that basically flat despite having mattress firm in there, just curious on the low-end of guidance the drivers behind that?
Speaker Change: So maybe I'll start with some gross profit standpoint. Absolutely, Bobby, is it that when I think about the opportunities from a go-forward standpoint on a temporally stand-alone, and just from a definitional standpoint, we'll introduce the like-for-like. The like-for-like is everything outside of acquisition items.
Speaker Change: So, yes, nice gross margin expansion in the fourth quarter, caught over 100 basis points. And if I think about the big driver of that, it's really the productivity and the leverage going through the plants. And as an expectation going forward, is I would think about that on a like-for-like basis as we get into 25 and beyond on a temporary stand-alone basis.
Speaker Change: What I would further say is as it relates to non-recurring good guys, in fact, if you look at our fourth quarter, we did eat some items. So we called out the foreclosed business, a large big box retailer that is now fully reserved. So that was about a $10 million of bad debt we had to step over.
Speaker Change: of our OEM business, or a piece of our OEM business, and that cost us, say, a couple of percent in the fourth quarter as it relates to the top line. So, in fact, when I look at the fourth quarter,
Speaker Change: We're pleased with how revenue came in. International was super exciting, as well as the landscaping across the P&L. Gross profit continues to be a great story. A bit of de-leverage, however, that de-leverage is really talking about fully protecting our balance sheet.
Speaker Change: So you really, what you're saying, you were under-earning on your assets in 2025. And then you had a question on guidance, the low end of guidance with mattress firm in the pot.
So, when I think about the 260 to 280,
Speaker Change: is a long year. We've talked about the category. When I think about, it's been a fast two weeks, I think, since the acquisition. We remain getting our head around it. So, I think specifically the question is, what would you have to believe as it relates to hitting that low end of guidance? I think you'd feel good about it. The industry would have to be down. Exactly. Which is what Bobby's asking. Exactly. Yeah, I would say the low end of the guidance is...
Protecting us a little bit, the 2025, the industry.
Speaker Change: Scott Thompson is down as opposed to bouncing around the bottom might be the, I think that high level to say it. You know, the other interesting things here is it's been it's been a couple of years in the making. And we're excited about the, as Scott said, mattress firm coming into the family. There are some open items we still gotta work through. So the investigators are happening.
Speaker Change: and the expectation is that by May 1st, is it that the vestitures both on the mattress firm side as well as the sleep outfitter side, is that those will be transferred or those will be part of the mattress warehouse family. You put all that together, you know, as Scott mentioned as well, is that President's Day is less than stellar, is that we expect that the acquisition will start to be accreted in the second quarter and for obviously the balance of the year and beyond.
Speaker Change: Your next question comes from Peter Keith with Piper Sandler. Your line is now open.
Peter Keith: Hey, thanks. Good morning. Nice finish to the year. Congrats on the acquisition. If we just think about that EPS range for the full year, 260 to 280, is there a way you could break out how you're contemplating the EPS accretion from that mattress firm acquisition?
Speaker Change: Absolutely, so just leveraging off the last question that that came in.
Peter Keith: The expectation is that the acquisition would start to be accretive beginning in the second quarter and ramping throughout the year.
Peter Keith: A couple of items that are happening is, as I mentioned, the divestiture of stores, so that's a body of work, as well as it's just a process. You got people involved. So it's a process that we have to work through. And you think about.
Peter Keith: looking forward to the continued relationship with Mattress Warehouse. So when I think about the accretion starting in the second quarter and then ramping as you go into the third and fourth.
Speaker Change: Your next question comes from Michael Lasser with UBS. Your line is now open.
Good morning, this is Dan Silverstein out for Michael.
Speaker Change: All right. Good morning. Thanks. Thanks. Thanks so much for taking our question.
Speaker Change: Our question is on the potential for synergies beyond the $100 million that you've identified specifically around advertising. Do you think you could see some benefit from consolidating your buying power, or will you lean in further and explore some new opportunities? Thank you.
Speaker Change: Sure, you know on Synergy, it's just everybody's ground. I mean the hundred million
Speaker Change: are the cost synergies. We haven't ever budgeted any revenue synergies. That would be...
Speaker Change: in addition to the extent their revenue synergies and then specifically on your question you're drilling down on on advertising.
Speaker Change: There's no question that advertising is a big bucket and a big opportunity.
I think the consolidated basis...
Speaker Change: you know, Somnigroup will be the largest betting advertiser in the United States by a factor of two. Okay, to be clear. So it's a it's a big number. It's a strong competitive
Speaker Change: We'll call it weapon or asset for us, and it is a focus point. I think the synergies in advertising come in two ways.
Speaker Change: yeah buying power and we'll call that kind of a dollar synergy just a traditional volume versus price
Speaker Change: But I think the big unlock is the quality of advertising and, to an extent, the coordination of the advertising so that 1 plus 1 equals more than 2 when you spend it.
Speaker Change: and I think both teams will work collaboratively together to get that efficiency and it will take a little while you know when I say a little while talk of quarters not years
Speaker Change: But I think that there's great opportunity, but primarily in the effectiveness of advertising, more than just the absolute dollars. Of course, it'll flow through the income statement, through improved sales, both for us and, I believe, the industry.
Speaker Change: Your next question comes from Keith Hughes with Truist Securities. Your line is now open.
Keith, are you with us?
Speaker Change: So, building on the last question, I know you haven't been able to, as you said, really talk to Mattressworm much during the trial. At what point do you think you have a better view of what other things you could do together? Is that something you could be getting next year? How long do you think it will take?
Speaker Change: Oh, it's not going to take that long, and to just get everybody grounded, during the trial, basically the teams were not talking.
Speaker Change: and so everything having to do with synergies got shut down we seven months ago yes so we got a little bit of a start and then when we went to litigation we'll call it walls were put up and these would be hard hard walls
Speaker Change: And so we're just getting restarted. There are groups that are meeting starting next week to get to get reengaged.
Speaker Change: and I think, you know, we'll know a lot more by the end of the second quarter and by the end of the third quarter I think we'll be, we'll know a lot more, okay. So no, I don't think it's going to take very long.
Bhaskar Rao: But as you can see in Bhaskar's prepared remarks, you know, we're not budgeting an aggressive amount of realizing synergies in the first year, letting the teams get together, make sure that we have buy-in from both sides.
Bhaskar Rao: Any time you're doing synergies, you know, this affects people. And when I say affects people, I don't mean their jobs are going away. I mean, they have to change what they're doing or the way they're doing it, by the way. But I think we'll get some of that implemented this year. We'll get full benefits.
Bhaskar Rao: in 2026, and I think we'll have a robust funnel of activity for several years.
Bhaskar Rao: from a synergy standpoint. So I think we've got a pretty good idea of what we what we want to look at, but we need to process it through both organizations and get buy-in.
Speaker Change: Your next question comes from Seth Acheban with Wedbush Securities. Your line is now open.
Thanks a lot, good morning, and congratulations.
Speaker Change: Just on the long-term guy and Scott, in terms of 20% EPS growth, maybe you could break that down for us.
Speaker Change: and tell us how much you expect from deleveraging. In other words, how much growth do you expect over the time period in EBITDA versus EPS? Thank you.
Okay, I'll let Bhaskar give you...
Speaker Change: you know, the details. As I remember, that particular calculation doesn't have any stock buyback in it. I think we're just through the cash in deleveraging just to make the model simple. That's right. But on the Ibidagro, do you have that number off the top of your head?
Speaker Change: I would say, I mean, what does happen is, as Scott said, from a capital allocation standpoint, we don't have any buyback in it.
Barree Moore, Bhaskar Rao, Scott Thompson
Speaker Change: of the growth is coming from EBITDA. Yeah, you gotta have EBITDA growth in double digits. 150, that's right. But there's still questions. There's some coming from deleveraging.
with nothing coming.
Scott, bye-bye.
or
Speaker Change: future accretive acquisitions. So I think it's a relatively conservative computation, but it is fair. We did benefit for cash flow and reduced debt. That's right. So Seth, again, vast majority coming from EBITDA growth.
Speaker Change: with the Delta being just debt pay down. No share, bye-bye.
Speaker Change: Your next question comes from Bradley Thomas with Capital Market. Your line is now open.
Hi, good morning. Congrats again on closing the deal here.
Bradley Thomas: My question was just, Scott, if you could talk a little bit about the recent trends that you've been seeing at Mattress Firm, and if you could talk a little bit about how you're thinking about same-store sales for the business in 2025, and then maybe lastly, if you could just address the leadership transition underway at Mattress Firm. Thanks.
Bradley Thomas: Let me take a crack at some of those. First of all on trends, which again, I think it's been fairly well published.
Bradley Thomas: We've got a, we'll call it a benefit, in the fourth quarter with the peaceful transition of government in the U.S., which may not have been expected, and we'll call it the Trump bump, and I think you saw that in various places.
Bradley Thomas: and that went through certainly December, went through January, and then you I'm going to call it the activities in Washington.
Bradley Thomas: which have created some uncertainty in the U.S. and maybe the world began to kind of felt like it probably hit the market like right at February 1st, okay, and President's Day in in the U.S.
Bradley Thomas: was less robust or muted compared to expectation. No question, some of that is weather, but weather does not explain what I would call the muted impact for President's Day overall. So again, not too troublesome.
Bradley Thomas: Kind of what we've been seeing is we get these starts where where there's clear solid growth for a period of time.
Bradley Thomas: year-over-year and then you hit a period where it's soft and it's negative.
Bradley Thomas: And so that's kind of what I call the current trend.
Bradley Thomas: on the same source sales growth. On the same source sales growth at Mattress Firm, generally the history of Mattress Firm is share gain. We'll call it minor share gain, but share gain. And so their same source sales growth is going to be dependent somewhat on the market.
Bradley Thomas: And then we have not gotten into their real estate strategy in detail and store expansion and all of that, and some of that may or may not have an impact on how we think about it, so it's a little early.
Bradley Thomas: But most of their same-source sales will be dependent on market.
Bradley Thomas: Then I think the third part of your question was management change.
Bradley Thomas: We recently made a change in the leadership at Mattress Firm. We'll continue to work with the team at Mattress Firm and make sure that we've got the right team, people in the right positions, with the right authority.
Bradley Thomas: for success in the future and you know that's my day job right now and we'll have that knocked out I mean within a quarter I think we'll be able to give you some more information in that area.
Thank you.
Speaker Change: Your next question comes from Jonathan Matuszewski with Jeffreys. Your line is now open.
Speaker Change: Great, good morning and thanks for taking my question. It was the follow-up on synergies, recognizing kind of those hard walls are just coming down now.
Speaker Change: But just curious about kind of the cadence of that realization, obviously $10 million in the second half.
Speaker Change: That'll ramp in 26 and 27, but just trying to understand how the buckets
Speaker Change: will evolve over time in terms of, you know, what that ten million dollars is initially coming from, whether it's logistics or manufacturing efficiencies or lifecycle management, etc., and kind of how those buckets evolve as those synergies ramp in 26 and 27. Thanks so much.
Speaker Change: Yeah, let me talk about the process and then you kind of answer his question. Let me make sure people understand the process.
Speaker Change: The process is each leader of each of the companies will get together and form a committee and in their area of responsibility they will come up with proposed synergies.
Speaker Change: and then they will present them to top management to for us to kind of pick.
Speaker Change: which ones we want to go after. And so like operations and logistics, actually they're meeting next week, and actually they probably met a little bit this week, but the big groups next week.
Speaker Change: Absolutely. So just to put some color on the 10 million, again, you got it right, back half, primarily loaded. And where I think of that coming from is, let's call it sourcing initiatives, principally in those corporate type of functions, where we get the power of scale. So think about it that way. Also, I would imagine that there's going to be a bit of manufacturing efficiencies as well, now that we can, being observant from a firewall standpoint, however we can more.
Speaker Change: Scott Thompson, the founder and CEO of the Lighthouse, a nonprofit organization that supports people to easily work with each other. I imagine there are some opportunities in that area. As I think about the cadence, let's call it a slow build. Big round numbers. We have a 10 million. It doubles a little bit more than doubles thereafter.
Speaker Change: But to get 10 million in your numbers this year with already going to be in the second quarter by the time you're doing implementation, what you're actually getting done is much bigger than 10, and you'll get the wraparound effect in 26 even just for the start of the year.
and plus a little bit more.
Thank you.
Speaker Change: Your next question comes from Laura Chappin with Loop Capital. Your line is now open.
Laura Chappin: Thanks for taking my question and sorry if it's duplicative. I'm juggling calls this morning, but once you digest Mattress firm, what's your outlook for retail location growth call it 26 and beyond?
across your platforms US and UK.
Speaker Change: Yeah, great question. Let me do Dreams first of all, because I'm very familiar with it because I've known them for a while. They still have opportunities in the UK for store expansion, and that team has a long-term plan for
Scott Thompson: I guess I'd call it single-digit percentage growth in stores. That's right, Scott. Something like that. So they've still got that opportunity. In the mattress firm, Real Estate, we've not gotten into the details of their stores. They have a very sophisticated department.
Scott Thompson: that has worked through their real estate over the number of years that we've got confidence in. But we haven't been fully through that, and we have not seen any store-level data. We'll start that next week. And so I don't really have a perspective, you know, at this point.
Scott Thompson: So, you know, I'm going to say, you know, let's just call it store count flat. Today would be kind of my guess. Again, not, not fully.
Scott Thompson: knowledgeable of the detail, but within that, quite a bit of rotation from some markets that are over-concentrated and then new markets or new areas where there are growth opportunities, but we'll have more information on that in detail throughout the year as we get, we'll call it, fully informed on their real estate strategy.
Speaker Change: Your next question comes from Philip Blea with William Blair. Your line is now open.
Philip Blea: Hi, good morning. Appreciate your time. Can you talk a bit more about the upcoming Sealy launch? How do you think about that brand's growth potential this year compared to Tempur-Stern's over the past few years during their product launches? And what kind of contribution that can have this year? And then Bhaskar, on the margins side, I know that there's a lot going on with gross margin this year, but how should we think about any headwinds related to brand mix going forward? Thank you.
Thank you. As you know, Seeley is the largest.
Philip Blea: brand in the U.S. and this is what her bedding was in the U.S.
Philip Blea: And Sealy has been challenged in 2025 as the product, we left it in the marketplace and it's last year before end of life. And so this is, this is a big refresh.
Philip Blea: and I would expect the growth potential for Sealy in 2025 to probably exceed Stearns and Foster and Temper, Bhaskar. I'm looking at Bhaskar, but I've never really answered that question directly, but I think that would be our expectation.
Philip Blea: because of the freshness of the product, the innovation that's in it, and the excitement that we feel through the retailers and where it's been placed, it's performance.
Philip Blea: and but I think the other thing that's going to impact that is, I think you know this, is that Sealy is generally a lower ASP than Kemper and Stearns and Foster and over the last few years the lower-end customer has been more challenged.
Philip Blea: So it is, it would be impacted some by that, but I think even with that I would expect Seeley's growth to be more than Timper and Stearns and Foster this year.
Philip Blea: When I think about gross margins and just some drivers, let's talk about temper for a moment, for 2025, on a like-for-like basis.
Philip Blea: is I would think productivity again continues to drive. I would expect, again, a lot of ground spaces in September to grow about 100 basis points, maybe a little bit above. The primary item of that is going to be productivity, which will be offset by some commodities. Sitting here today, it looks like we're going to have a bit of commodities headwind. However, you put those two together, it's still going to be favorable for us.
Philip Blea: The other item that we call that was FX. So within going through gross margin line, is that there are some countries, geos where we buy in U.S. dollars. The U.S. dollar is strong relative to those currency. So causing us an FX headwind of about $15 million.
Philip Blea: The mix sitting here today is that we've seen the industry, the category is going to be kind of stable, which would imply a little bit down, a little bit up in the back half. So we're not assuming that that low-end consumer comes back, which would be great for EBITDA, however dilutive to rate. So at this point, we're not considering any of that. But the one thing to be mindful of is that mix will be favorable for a couple of reasons. One, the foreclosed business that we talked about.
Philip Blea: foreclosed business was associated with some of our OEM as well as the big big box. And then the other item that will be that will help from a favorability standpoint is the international sitting here today is expected to grow a bit faster which will be favorable as well. That's all on a temporary lack for life which should drive at least a hundred basis point of growth.
Speaker Change: Our last question comes from William Reuter with Bank of America. Your line is now open.
Hi, I just have one.
Speaker Change: I was wondering if you've given any thought to the new potential reciprocal tariff that may be put into place.
Speaker Change: And if you've done any work around what that could mean if the policies that were announced last Thursday, so February 13th, were put in place in terms of margin headwinds. That's it. Thanks.
Speaker Change: When I think about tariffs, they are moving around a lot. You're right. Whether it's the reciprocal tariffs or the Canada-Mexico tariffs, the ones that we're thinking about, or they're out there from China, the aluminum and steel. The way that we're thinking about it is, to date, it feels like maybe one of those have stuck around China, relatively de minimis as it relates to how we're thinking about it currently, because it's not only the impact of the tariff.
to morning.
Speaker Change: We have that forecast. As it relates to the reciprocal tariffs, the one thing that often comes to mind is our adjustable-based business. I believe one of those countries that may be impacted by that is Vietnam. So, again, we have flexibility. We have the opportunity to move things around.
Speaker Change: so as-those tariffs in those finished goods are coming into the U.S. So, it's-it's an opportunity for us as well. Yeah, I mean-it obviously is complicated right now but, yeah, we're gonna benefit from any tariffs that are put on imports etcetera. I kinda-we call that a good guy
Speaker Change: in our terminology, then probably just tariffs in general, the ones that get our components and stuff.
Speaker Change: you know, from a competitive standpoint, it's actually an advantage to us because of our size and our volume, it's easier for us to deal with the suppliers.
Speaker Change: on that issue than the smaller people who don't have that buy-in. So, as much as it's kind of, we'll call it a pain, from a competitive position standpoint, I think it actually puts us in a better...
competitive position relatively speaking.
Speaker Change: and then all of it is all before you do any mitigation. And, you know, from an industry standpoint, the industry has had the history of, if you have true cost increase in your components,
Speaker Change: the industry passes that on to the consumer if that's what ends up happening.
Speaker Change: and then quite frankly all our suppliers are working through this and
Speaker Change: working on where to move production. And when we're talking about components, if that's most of what you're talking about, that production can be moved within a reasonable period of time. It's not like the auto industry where you can't move it very quickly.
Speaker Change: So, all in all, the way I think about it, with no guarantees, because I don't think any of us know exactly where things are going to land.
Speaker Change: is we may have a little impact for a quarter or two.
when, depending on how they carry us.
Speaker Change: land. But within a few quarters, I would expect the impact to be insignificant because of mitigating factors in our competitive position.
Speaker Change: There are no further questions at this time. I will now turn the call over to Scott Thompson for closing remarks.
Speaker Change: Thank you, Operator. To our 20,000 associates around the world, including our new 8,000 mattress firm employees, thank you for what you do every day to make SomniGroup successful.
Speaker Change: To our retail partners, thank you for your outstanding representation of our brands, and to our shareholders and lenders, thank you for your confidence in Somni Group's leadership team and its board of directors. This ends our call today, operator.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.