Somnigroup International Inc.

Good morning, ladies and gentlemen, and welcome to the Somni Group first quarter 2025 earnings call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. 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, May 8, 2025. I would now like to turn the conference over to Aubrey. more from Investor Relations. Please go ahead.

Thank you, Operator. 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 Security Litigations Reform Act of 1995. These forward-looking statements involve uncertainties, and actual results may differ materially due to a variety of factors that could adversely affect the company's business. These factors are discussed in the company's SEC filings, including its annual report on Form 10-K and quarterly reports on Form 10-Q. Any forward-looking statement speaks only as of the date on which it is made. The company undertakes no obligation to update any forward-looking statement. This morning's commentary will also include non-GAAP financial information. Reconciliations of this non-GAAP financial information can be found in the accompanying press release, which has been posted on the company's website at www.somnigroup.com and filed with the SEC. Our comments will supplement the detailed information provided in the press release. And now, with that introduction, it is my pleasure to turn the call over to Scott.

Good morning, and thank you for joining us on our first quarter 2025 earnings call. I'll begin with some highlights from the first quarter 2025, and then turn the call over to Bostra to review our financial performance in more detail and discuss our revised 2025 guidance. After that, we'll open up the call for Q&A. A quick call out. This is the first quarter since we acquired Mattress Firm, so the financial statements are a bit complicated. when looking at trend performance. We'll focus on like-for-like numbers adjusted for the acquisition's impact to provide insight into the underlying business trends. In the first quarter of 2025, net sales were approximately 1.6 billion, and adjusted ETS was 49 cents. We're pleased with these results given the weakness of the President's Day holiday period and the decline in U.S. consumer confidence. We continued to outperform the U.S. betting market, which we believe was down high single digits, which was below our expectations. Turning to the first highlight of the quarter, we reported continued strong performance in our international business. We reported mid-single digit sales growth. Excluding the negative impact of FX, sales grew at a healthy single, high single digit rate. This is the eighth quarter of mid to high single-digit sales expansion on a constant currency basis for our legacy international business, while clearly operating in a soft market. Our new collection of temper products continue to be a leading catalyst for growth, fueled by expanded price points that have broadened our total addressable market and the improved late-stage customization manufacturing process that allows us to seamlessly tailor products to individual markets and channels. These strategies have already resulted in over 10% growth in distribution with third-party retail partners with additional expansion opportunities underway. Strong demand for these products coupled with our ongoing expansion opportunities reinforce our confidence in that the international temper collection will remain a key growth driver for years to come. Our UK-based retail business, Dreams, also had a strong quarter, delivering solid mid-single-digit growth against a backdrop that continues to be pressured. Our second highlight was the market outperformance of our Tempur-Sealy North America and Mattress Firm business units. Like for Like Net Sales for our Tempur-Sealy North American business unit were down 3% in the quarter, excluding the mid-single-digit headwind from the foreclosed distribution discussed last quarter. Our first quarter performance was highlighted by the successful launch of our all-new Sealy Posturepedic Collection, a comprehensive reimagining of our Posturepedic product branding and marketing strategy. We expect the product to be approximately 80% floored by Memorial Day. Early results from locations where the product is already floored are encouraging with solid performance and share gain. We're supporting launch with a national advertising campaign throughout the Memorial Day holiday selling period, which starts this week. Our mattress firm business unit also outperformed the broader industry, reporting like-for-like sales down 1% from the prior year. The team remained agile throughout the quarter as we faced unexpected choppy demand periods and managed through post-acquisition transition activities. Our third highlight for the quarter is our mitigation strategy regarding recent tariff announcements. While this is an evolving situation, we are confident that we are well positioned to effectively manage through it. First and foremost, it's important to remind everyone. that our direct exposure to tariffs on finished goods is structurally mitigated, as the vast majority of the products that we sell in the U.S. are manufactured domestically. For our Tempur-Sealy business unit, we estimate approximately $750 million of our cost of goods sold are exposed to tariffs. We estimate this could have resulted in approximately $120 million of incremental annual cost before any mitigation actions. However, our operations team acted swiftly to collaborate with our suppliers and resolved about half of the impact. The balance of the estimated impact of tariffs is being passed through the market via a modest price increase, which we announced earlier this week and will take effect in the third quarter. The price increase represents a 2% increase in annual sales for our North American standalone business unit. There'll be a bit pricing between products, but it's 2% overall. Based on historical price increases, we would describe this pricing action as average in size. We expect beginning in the third quarter, the combination of the actions just discussed will fully offset the impact of the tariffs currently in place. Due to the timing lag between when the tariffs were enacted and when our pricing adjustment takes effect, we expect a one-time tariff-related headwind of approximately $5 million in the second quarter of 2025. Turning to our mattress firm business unit, we anticipate some tariff impact will be passed through price increases from some of their suppliers, including Kemper Sea Lake. We expect Mattress Firm will pass along any future price increase to the end consumer or make merchandising adjustments. Thus, we are currently not expecting any headwinds from tariffs in the Mattress Firm unit. Finally, it's worth mentioning that tariffs are most impactful on imported finished goods, which create a competitive advantage for us. While there's no question that tariffs can be disruptive, they also present an opportunity to strengthen our relative market position by making import products more expensive. And the tariffs are likely to exert outside pressure on small domestic manufacturers and retailers. Our final highlight is the progress we've made on our synergy initiatives following the acquisition of Mattress Firm. We're three months post-acquisition and making good progress in bringing Mattress Firm, Emperor Sealy, and Dreams under the Somni Group holding company structure. In the first few months, we've aligned on our leadership organization and established clear goals and objectives to guide our efforts. I'm pleased with the progress made on our opportunities to reduce cost, drive efficiency, and fully leverage our global scale. The teams at Tempur-Sealy and Mattress Firm have collaborated closely to refine and execute our plans, and we're on track to achieve our target of at least 100 million in annual run rate synergies by 2028. In fact, we've already increased our near-term expectations. We now anticipate to realize 15 million of those cost synergies in 2025, an increase from our prior expectation of 10 million. There are many projects actively underway along the Somnigroup organization. One of the opportunities is within our logistics operation is the ability to streamline order fulfillment. We're advancing a project to leverage Mattress Room's home delivery network for Tempur-Sealy. In addition to driving cost efficiencies, we expect this initiative to add value by enhancing oversight of delivery processes. In turn, improving customer outcomes and satisfaction. One of our largest opportunities from the acquisition is our combined advertising power. On a consolidated basis, SomniGroup is now the largest betting advertiser in the industry by a factor of two. We expect to leverage this competitive advantage in a couple of ways. First, our enhanced global scale provides us a unique opportunity to drive cost synergies in our advertising investment. Our marketing teams are actively identifying ways to leverage our combined volume to secure more favorable placement in pricing terms. Second, we see an additional potential to enhance the effectiveness of our combined advertising spend. By aligning our advertising approach and messaging, we can deliver higher quality campaigns, ensuring one plus one equals more than two. As part of this alignment, our strategy is positioning the product as the hero of future ad campaigns, cutting through the noise and better showcasing betting innovation. This approach will help consumers more clearly understand the value of products, drive interest, and increase retail traffic industry-wide. Another key opportunity lies in Mattress Firm's merchandising strategy. We see value in taking a more holistic approach to product selection, leaning into suppliers who offer differentiated, high-quality products at a competitive price point and who drive in-store traffic through investments in advertising. We communicated these expectations at Mattress Firm's first ever major vendor summit. The response was constructive. Consistent with this customer-focused merchandising plan, Mattress Firm recently executed new supply arrangements with Residence Homes, a subsidiary of Ashley Furniture, Purple Innovation, and Leggett and Platt, which provide for the distribution and development of mattresses, foundations, and other bedding-related products across a range of price points. The expanded assortment of products is expected to be available at Mattress Room starting in late 2025 and through 2026. These products and others ensure Mattress Room will meet its objectives of servicing customers with different needs and preferences. At the same time, we're working to optimize SomniGroup's own brand. Mattress Firm's new merchandising philosophy removes the pre-acquisition self-imposed cap on Tempur-Sealy brands, ensuring the floor and sales reflect in consumer demand. Tempur-Sealy manufactured products represented mid-40% of Mattress Firm's total sales in 2024, and we expect to be in the high 40% of Mattress Firm's floor in sales of 2025. This improvement is driven in part by the expanded private label partnership between Tempur-Sealy and Mattress Firm. As of the first quarter of 2025, Tempur-Sealy is now manufacturing the vast majority of Mattress Firm's sleeping private label mattresses. While still in the early stages of implementing this plan, we're confident in its potential. Importantly, we believe we can execute this strategy while continuing to provide third-party suppliers with significant volume and continuing to be their largest customer. We look forward to providing you further updates on these initiatives as we continue to make progress. And with that, I'll turn the call over to Bhaskar. Thank you, Scott. In the first quarter of 2025, consolidated sales were $1.6 billion. and adjusted earnings per share was 49 cents. There are approximately $176 million of pro forma adjustments in the quarter, all of which are consistent with the terms of our senior credit facility. These adjustments are primarily related to cost incurred in connection with our acquisition of Mattress Firm. As a reminder, we have aligned accounting for store occupancy costs across SomniGroup. which resulted in Tempur-Sealy reclassifying their store occupancy costs from operating expense to cost of goods sold. We have adjusted prior year Tempur-Sealy financial information included in today's earnings release to reflect this change for ease of comparability. 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. I will be highlighting like-for-like comparisons to normalize for these items in our commentary. Turning to Temporary Sealy North America results. Like-for-like net sale through the wholesale channel declined approximately 8% in the first quarter. Normalizing for the previously disclosed or closed distribution wholesale declined 3%. Net sales through the direct channel declined 2% in the first quarter. North American adjusted gross margin increased 760 basis points to 45.3%, primarily driven by the elimination of the intercompany sales to mattress firm from Tempur-Sealy. On a like-for-like basis, North American gross margins improved 50 basis points versus the prior year. primarily driven by operational efficiencies and the mixed impact of foreclosed distribution, partially offset by due leverage and commodity costs. North American adjusted operating margin improved 190 basis points to 17.2%, primarily driven by mattress firm intercompany sales elimination. On a like-for-like basis, North American adjusted operating margin declined 70 basis points compared to the prior year, driven by the improvement in gross margin, partially offset by reduced leverage on our investment in advertising as we continue to support customers. Now turning to Tempur-Sealy international results. International net sales grew 6% on a reported basis and 8% on a constant currency basis. Our international gross margin improved 130 basis points to 49%, driven by lower launch costs. Our international adjusted operating margin improved 130 basis points to 16.8%, driven by gross margins. Now on to mattress firm results. Net sales through Mattress Firm were $594 million in the first quarter, which reflects a partial quarter following the acquisition close in February. On a like-for-like basis, Mattress Firm sales declined 1% over the prior year. Mattress Firm's adjusted gross margin was 35.1% and was consistent on a like-for-like basis before purchase accounting, and was slightly down versus the prior year, including the impact of purchase accounting. Mattress firms reported adjusted operating margin was 7.2%. Now moving on to the balance sheet and cash flow items. At the end of the first quarter, consolidated debt less cash was $5 billion, and our leverage ratio under our credit facility was 3.5 times We expect to return to our target leverage range of two to three times and for share repurchase to be minimal over the near term. In the first quarter, we generated operating cash flow of $106 million. Before turning to full year guidance, I want to remind you of a few considerations. As a reminder, our guidance considers the elimination of intercompany sales between Mattress Firm and Tempur-Sealy. We expect the intercompany sales to represent approximately 18% of global Tempur-Sealy 2025 sales. The intercompany elimination will reduce Tempur-Sealy sales, but will be margin accretive and neutral to EPS. Consistent with the prior quarter, our guidance also reflects the previously announced divestiture of Tempur-Sealy Sleep Outfitters retail business, as well as 73 mattress firm stores. This divestiture was completed last week as expected. Now turning to 2025 guidance. We have revised our adjusted earnings per share to now be in the range of $2.30 to $2.65. Our guidance is based on sales after intercompany elimination to be between approximately $7.3 billion and $7.5 billion on a reported basis. This revision reflects our lower U.S. betting industry outlook driven by recent softness in consumer confidence and estimates of 2025 economic activity. We now expect that the betting industry will be down mid-single digits versus prior year, with trends improving slightly into the second half of 2025. our prior guidance had an expectation for the betting industry to be consistent with the prior year. Our guidance also reflects life-for-life Tempur-Sealy sales to be down low single digits and reported sales to be impacted by the intercompany elimination I referenced a moment ago. Tempur-Sealy North America sales declining mid-single digits on a life-for-life basis, which includes our continued market outperformance, a mid-single-digit headwind from foreclosed distribution, and the industry pressures. The international business growing mid-single digits and high single digits on a constant currency basis, which includes the continued momentum of the omni-channel expansion strategy. And our like-for-like mattress firm sales declining low single digits, supported by in-store initiatives to grow AOV and conversion, and the industry pressures. We also expect gross margins to be slightly above 44%. This expectation includes the impact of the one-time tariff headwind to the second quarter and the impact of the recently announced pricing action. And our outlooks also contemplate $700 million of advertising investment. all of which we expect to result in adjusted EBITDA of approximately $1.2 to $1.3 billion. Regarding capital expenditures, we expect 2025 CapEx of approximately $225 million, including $25 million of investments to refresh mattress firm stores. Over the next three years, we expect to invest a cumulative $150 million to refresh mattress firm stores. 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. For the full year of 2025, we expect DNA of approximately 295 to $305 million. interest expense of approximately $260 to $270 million on a tax rate of 25% with a diluted share count of 210 million shares. With that, I'll turn the call back over to Scott. Thank you, Bhaskar. Nice job to you and your team. It was a heavy lift this quarter. In closing, our results this quarter reflect both the transformational impact of the mattress firm acquisition and our ability to navigate a weak global market. Across all of our business units, domestically and internationally, we've made meaningful progress on our competitive position by leveraging our core strengths of our business. It's people, iconic brands, diverse distribution, scale, operational flexibility, and manufacturing capabilities. The board and I continue to be grateful and impressed by the dedicated and talent of all of our people all around the world. By staying focused on execution and our customers, we are driving share gains and delivering solid financial results across the entire Somni Group Enterprise. And with that, operator, please open the call.