Somnigroup International Inc.

Good morning, ladies and gentlemen, and welcome to the Summary Group third 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 me to assist, please press star zero for the operator. This call is being recorded on Thursday, November 6, 2025. I would now like to turn the conference over to Aubrey Moore of Investor Relations. Please go ahead.

Thank you, Operator. Good morning 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. 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 filing, including its annual report on Form 10-K and quarterly report 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 is posted on the company's website at www.somnigroup.com and files with the SEC. Our comments will supplement the detailed information provided in the press release. As a reminder, year-over-year comparisons are impacted by the acquisition of Mattress Room in the first quarter of 2025 and the related divestiture of sleep outfitters in certain Mattress Room retail locations in the second quarter. At certain times in the call, to better illustrate underlying business trends, we will focus on like-for-likes numbers, defined as reported numbers adjusted for the acquisition and divestiture impacts. We would also like to mark the calendars for March 4th, 2026, as we will be having our Investor Day in New York. That will include various members of executive management from Somnigroup, Semper Sili, and Mattress Farm. Formal invitations will be sent out closer to the event. And now with that introduction, it's my pleasure to turn the call over to Scott.

Good morning and thank you for joining us on our third quarter 2025 earnings call. I'm pleased to share with you that Somnigroup International delivered a record quarter across nearly all key operating metrics. These results were driven by the early benefits from the mattress firm combination and successful execution of our key operating initiatives. Importantly, We achieved this strong financial performance while the U.S. betting market remains basically flat from a sales perspective, and it is still at trough levels, while the U.S. housing market has yet to recover and international markets continue to face numerous challenges. Additionally, we have not fully realized all of the benefits from the mattress firm combination. This backdrop underscores the potential of our business, the strength of our competitive position, and the meaningful opportunity ahead as our markets improve and we continue to deploy capital and optimize our vertical structure. In the third quarter of 2025, we're pleased to achieve record net sales, adjusted EBITDA, and adjusted EPS. Net sales were up approximately 63% to $2.1 billion. Adjusted EBITDA was up approximately 52% to $419 million. And adjusted ETS was up approximately 16% to $0.95 per share. Now turning to some highlights for the third quarter. First highlight, our aggregate like-for-like sales growth was 5% over the same period last year. led by strong performance in our international operations, which I'll discuss in a minute. Kemper Sealy North America reported 5% like-for-like sales growth, which is the strongest quarterly sales trend in nine quarters. This performance was broad-based across our portfolio price points, as we significantly increased our balance of share at Mattress Firm and experienced growth with our other third-party retailers. Both Tempur-Pedic and Sealy Brands reported solid growth in the quarter, driven by our new Sealy Posturepedic products and our strong commitment to advertising, including over $110 million invested in the third quarter to keep our brands top of mind and drive valuable customer traffic to all retailers. Our collaborative marketing approach focused on delivering high-quality, brand-centered advertising and retail partners continues to drive strong results for us and the industry. Retailers who have actively participated in our brand activation program have seen a significant boost in sales of Tempur-Tedic and Sealy products. In short, we continue to win in the market with great product, robust advertising, and a dedicated sales force to help our customers improve their business. Second highlight. Mattress Room continues to outperform the market, reporting strong same-store sales growth of 5% in the quarter. The strong third-quarter performance was possible due to our relentless focus on delivering superior in-store execution and equipping our sleep experts with the tools and training they need to meet customer sleep needs. Further, we continue to invest in consumer experience for our store refresh program, including installing temper brand walls to support increased customer engagement and education. Where placed, temper brand walls have shown to drive higher retail tickets, resulting in strong return on investment. We began scaling this initiative in the back half of the quarter, and expect to finish rolling out to all 2,200 store locations nationwide by the end of next year. Other retailers have also taken part in this program, as we are committed to an omni-channel approach. Additionally, we are ramping up our previously disclosed three-year program to invest a total of $150 million between 2025 and 2021. and 27 to refresh certain mattress from stores, ensuring all locations meet our brand standards. Third highlight, our international business continues to deliver impressive sales growth despite a challenging operating environment. Our Kemper international sales grew 11% in the quarter and continue to outperform the market by a solid clip, driven by the refreshed Kemper product lineup, expanded distribution, Strong local execution combined with meaningful investments in advertising that significantly boost brand visibility and consumer engagement resulted in this double-digit performance. We continue to refine our late-stage customization manufacturing process to support this momentum. This approach allows us to efficiently tailor products for specific markets, channels, and customer segments. with a solid foundation and significant long-term potential, we're confident in the growth trajectory of our Tipper international operations. Dreams, our UK-based betting retailer, also delivered strong quarterly market outperformance, driven by same-store sales growth and new store openings. Dreams continues to drive cost efficiencies, advance strategic growth initiatives, and deliver exceptional product satisfaction. Our final highlight is related to the progress on our sales and cost synergy initiatives following the combination of Mattress Firm. Mattress Firm is focused on retailing high-quality products with differentiated innovation at all price points while driving industry demand with market-leading advertising investments. On synergies, we are ahead of our expectations in achieving a more market-driven distribution of Tempur-Sealy brands and private label products at Mattress Firm. We now expect Tempur-Sealy to represent a mid 50% of Mattress Firm's total sales in 2025, up from our previous estimate of low 50%. In total, we now expect sales synergies to result in $60 million of benefit to adjusted EBITDA this year. Looking to 2026, we expect an incremental $40 million of EBITDA benefit from the wraparound impact of these share gains, and is on track to comfortably achieve our targeted $100 million of un-rate sales synergies. As a reminder, we held mattress firm sales flat in estimating the balance of share opportunity. As the U.S. bedding industry recovers and mattress firm sales increase, we expect the dollar synergies to grow. Our increased scale and vertical integrated operations are unlocking efficiencies throughout manufacturing, logistics, and sourcing. Additionally, improved insights into end-consumer to optimize production, upcoming product introductions, and product end-of-life strategies. We remain on pace to achieve a minimum of 100 million in annual run rate net cost synergies, beginning with 15 million projected for 2025, an incremental 50 million in 2026, and a further 35 million in 2027. Long-term, we're excited about the potential to align Tempur-Sealy and Mattress Room's messaging to increase our advertising efficiency, an opportunity which is not yet quantified in our cost synergy targets. Today, as a unified Somni Group entity, we're positioned to deliver more cohesive, high-impact advertising to support both our brands and the broader U.S. betting market. Our new mattress firm advertising campaign, Sleep Easy, launched mid-third quarter, aligns our messaging with a cohesive voice. The campaign educates consumers on the importance of a well-suited mattress for restorative sleep and activates them to take the next step in their purchase journey. It highlights some of the most common impacted sleep disruptors and shows how certain products and Mattress Firm's sleep experts can effectively address these important sleep issues. We're very encouraged by the strong consumer response to Sleep Easy Campaign. Initial research identified it as the highest performing campaign in Mattress Firm's recent history across all metrics. Subsequent studies have reinforced this finding, showing the campaign significantly outperformed both industry benchmarks and Mattress Firm's previous messaging. Although it's still early in the campaign's rollout, we're confident that we're on the right path. We expect the positive impact to grow as the campaign becomes more established in the marketplace. Overall, we're pleased with the rapid progress in both sales and cost synergy efforts and remain excited about the long-term opportunities for retail customers, Somni Group employees, and shareholders. And with that, I'll turn the call over to Bhaskar to review the financial statements. Bhaskar? Thank you, Scott. In the third quarter of 2025, consolidated sales were $2.1 billion, and adjusted earnings per share was a record 95 cents, up 16% over the prior year. There are approximately $40 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 and connection We expect pro forma adjustments to decline going forward. 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. I will be highlighting like-for-like comparisons to normalize for these items in our commentary. Now turning to Mattress Firm results. Net sales through Mattress Firm were approximately $1.1 billion in the third quarter. On a like-for-like basis, Mattress Firm sales grew 3% over the prior year, which includes strong same-store sales growth of 5%. Mattress Firm's adjusted gross margin was 35.6%. and adjusted operating margin was 9.4% in line with our expectations. Now turning to Tempur-Sealy North American results. Like-for-like net sales through the wholesale channel grew approximately 10% in the third quarter, normalizing for the previously disclosed foreclosed distribution. Without this normalization, the wholesale channel grew approximately 6%. Like-for-like net sales through our direct channel declined 4% in the third quarter. North American adjusted gross margins increased 1700 basis points to 58.6%, primarily driven by the elimination of the intercompany sales to mattress firm from Tempur-Sealy. On a like-for-like basis, North American adjusted gross margins declined 40 basis points versus the prior year. primarily driven by merchandising mix, which includes strong ceiling performance. This was partially offset by operational efficiencies and fixed cost absorption. North American adjusted operating margins improved 940 basis points to 29.5%, primarily driven by mattress firm intercompany sales elimination. On a like-for-like basis, North American adjusted operating margins increased 60 basis points versus prior year, primarily driven by fixed cost leverage, partially offset by the decline in gross margins. Now turning to Tempur-Sealy international results, international net sales grew a robust 11% on a reported basis and 7% on a constant currency basis. Our international gross margins declined 40 basis points versus the prior year, primarily driven by competitive UK marketplace, partially offset by operational efficiencies. Our international operating margin was consistent with the prior year at 18.1%, with fixed cost leverage offsetting the decline in gross margins. In July, Tempur-Sealy rolled out a price increase equating to approximately 2% of total North America sales, largely focused on the higher end products in our portfolio. We believe this price increase was generally lower than the industry peers and succeeded in offsetting implemented tariff headwinds with no discernible impact and consumer demands. As the tariff landscape has continued to evolve, we see another $20 million of incremental cost exposure primarily on our adjustable basis. To offset this headwind, we announced a small price increase earlier this week that will go into effect in early 2026. We remain confident in our ability to adapt to tariff changes supported by our strong product offering, agile team, and supportive supply partners. Now moving on to Somni Group's balance sheet and cash flow items. At the end of the third quarter, consolidated debt less cash was $4.6 billion, down $300 million versus the second quarter, and our leverage ratio under our credit facility was 3.3 times, down 30 basis points or 8% versus the second quarter. We expect our leverage to return to our target leverage range of two to three times early in 2026. We achieved record operating cash flow of $408 million and record free cash flow of $360 million in the quarter, demonstrating the power of our business model even in a soft market. Our strong cash generation positioned us well to continue to optimize our debt structure. We expect to continue to pay down debt and benefit from lower market interest rates and improved cost of our variable price debt as we return to our target leverage range. We expect this trend to add to future EPS growth. As a reminder, our guidance considers the elimination of intercompany sales between Mattress Firm and Tempur-Sealy, which we expect to represent approximately 20% of global Tempur-Sealy 2025 sales. Intercompany eliminations in accordance with GAAP will reduce Tempur-Sealy sales, but be margin accretive and neutral to dollars of operating profit. Consistent with prior quarter, our guidance also reflects the divestiture of Tempur-Sealy Sleep Outfitters retail business, as well as 73 mattress firm stores in May of 2025. Before turning to our annual guidance, let me also share our perspective on the fourth quarter. We expect continued like-for-like sales growth across all of our business units with an underlying assumption that the demand environment will be stable. Now to our revised 2025 guidance. We have raised our adjusted earnings per share guidance to be between $2.60 and $2.75. This guidance range contemplates a sales midpoint of approximately $7.5 billion after intercompany elimination. This revision includes our expectation for the bedding industry to be down low to mid-single digits versus prior year, a slight improvement from our prior outlook. Our annual guidance also reflects like-for-like temporary sale to be flattish, and reported sales to be impacted by the intercompany elimination I referenced a moment ago. Temporarily North America sales declining low single digits on a like-for-like basis, which includes our continued market outperformance, a mid single digit headwind from foreclosed distribution, and the industry pressures. International business growing low double digits on a reported basis, and constant currency basis, which includes the continued momentum of our omnichannel expansion strategy. And our like-for-like mattress firm sales to be flattish, supported by in-store initiatives to grow AOV and conversion and reflecting the industry pressures. We also expect gross margins to be slightly above 44%. Our outlook also contemplates our updated assumption for Tempur-Sealy to be in the mid-50s percentage of mattress firms' total sales. This represents about a $60 million EBITDA benefit for 2025 compared to 2024, and $700 million of advertising investments, all of which we expect to result in adjusted EBITDA of approximately $1.3 billion at the midpoint. Regarding capital expenditures, we expect 2025 CapEx to include approximately $150 million of normal recurring CapEx and an investment of approximately $25 million to bring stores acquired by mattress firm prior to the acquisition up to our standards. We expect to invest an additional $125 million over the next couple of years to refresh these stores. Over the long term, we expect normalized run rates on the group CapEx to be approximately $200 million. Lastly, I would like to flag a few modeling items. For the full year 2025, we expect DNA of approximately $295 million. Interest expense of approximately $260 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. Well done. Just a couple of thoughts on capital allocation. First, we are pleased to report our investment in Kingsdown, acquiring 25% passive interest in this leading North America luxury mattress manufacturer and valuable supplier to mattress firms. This will allow SGI to participate in expected growth in Kingstown sales and profits as their presence on mattress firms floor expands and they pursue other growth opportunities. This decision reflects our discipline capital allocation strategy, which is focused on high return investments. It strengthen our competitive position and drive long-term value for shareholders. Second, We're ahead of our financial plan, and we believe that we've mitigated significant risk over the last few quarters, including those related to the mattress firm combination. As a result, in the first quarter of 2026, we intend to begin to allocate approximately 50% of free cash flow to capital returns to shareholders in the form of dividends and share repurchase. At the same time, we will continue to deleverage targeting our historical range of two to three times adjusted EBITDA. After we are comfortably back within our targeted leverage range, we'll reevaluate this allocation. In closing, this quarter's performance reaffirms our strength of our strategic direction and underscores our momentum we've gained through the combination with mattress firms. We've demonstrated our focus on long-term growth and our ability to navigate a complex industry backdrop. Across our Tempur-Sealy Mattress Firm and Dreams operations, we're positioned as a global industry leader committed to delivering products that provide customers innovative solutions that can change their lives to improve sleep. Our operational agility, strong manufacturing capabilities, trusted brands, retail leadership, and exceptional workforce drive Somni Group's performance, and we expect will drive future value creation. That ends our prepared remarks, operator. You can open the call up for questions.