Somnigroup International Inc.

Hello, everyone. Thank you for joining us and welcome to the Somni Group's second quarter 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I'll now hand the conference over to Lauren Averitt, Director of Investor Relations. Lauren, 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 filings, including its annual reports 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 FCC. Our comments will supplement the detailed information provided in the press release. And with that, it's my pleasure to turn the call over to Scott.

Good morning. and thank you for joining us on our second quarter 2026 earnings call. I'll begin with a review of our quarterly highlights before turning the call over to Bhaskar who will discuss our financial results and 2026 earnings outlook in greater detail. I'll then provide you with a brief update on a proposed Leggett and Platt combination and then open the call up for questions. We are pleased to deliver a record second quarter in adjusted earnings per share. against a cautious consumer background and ongoing macroeconomic uncertainty. We generated net sales at 1.8 billion, adjusted EBITDA of 297 million, and adjusted EPS of 58 cents, a 9% increase from the prior year. These results reflect our brand strength, the diversified global business model, and consistent discipline execution across our operations. This in a market that we believe to be down mid to high single digits over prior years. Turning to our first highlight, Mattress Firm delivered results ahead of the broader U.S. market supported by its industry leading scale, effective marketing strategy and broad product assortment that's designed to meet the wide range of consumer needs. We continue to refine our merchandising assortment at Naturist Firm to better align it with customers' preferences. Following very encouraging results from a three-month pilot program of Kingsdown's products in 200 Naturist Firm stores, which demonstrated improved performance versus certain other products, we have expanded our relationship with Kingsdown and expect to meaningfully increase the brand's presence across the floor over the next six months. The collection is expected to be available in nearly 800 stores nationwide and brings customers luxury traditional innerspring options focused on elevated comfort, premium craftsmanship, and lasting support. Our differentiated fleet expert model supported by ongoing technology investments and a highly trained sales organization continues to resonate with customers. Also, we've made steady progress on our store refresh program on track to be completed in 2027 and on our brand wall program expected to wrap up this year. Both programs are designed to elevate the in-store shopping experience. The improved store environment combined with enhanced product training and new technology are supporting an improved store experience for customers, which we believe over time will drive future sales. Our second highlight is the continued success of our international growth strategy. While the operating environment remains volatile, our international business once again delivered solid results and gained share across many of our key markets. Our legacy Tempur international business again outperformed the broader industry, benefiting from the strength of the Tempur brand, ongoing marketing investments, and strong local execution. Dreams continued to strengthen its brand assortment, customer engagement, and its best-in-class operating model while managing through a difficult macro backdrop, a highly promotional competitive landscape, and an ERP implementation that is going well but has created some transitory challenges. Over the past several years, we've advanced our global vertical integration strategy by expanding company-owned retail footprint through expansion of our own temporary retail stores combined with targeted acquisitions, such as Dreams in the UK, Sova in Sweden, and our recently announced acquisition of Danish retailer Sing. Each acquisition deepens our ability to connect directly with consumers, showcase our brands, and strengthen our market position. Our third highlight is the execution of our new Stearns and Foster product launch, which remains on track and is expected to strengthen our price architecture across the portfolio and drive higher average selling price. The refreshed collection features an upgraded cooling system, a more robust microcoil support layer, and a new approach to hybrid technology. This redesign positions the brand more distinctly in the premium segment and is designed to expand our footprint. To optimize pricing across our portfolio, we're increasing the entry level price of Stearns and Foster so that it minimizes the overlap with the high end of our ceiling. And we're focusing on the higher end products of Stearns and Foster. We've increased the number of high end models by over 50% in the new collection. Our planned national advertising campaign will highlight the craftsmanship and heritage of Stearns and Foster brand as the longest tenured mattress brand in America, while also reinforcing the connection between our advanced materials, quality sleep, and the overall health and wellness. Our marketing strategy balances investments in broad reach channels with highly targeted digital media. The launch will begin at the end of the third quarter and continue to roll out through the early 2027. Most of the expected financial benefit will materialize in 2027 and beyond. Our fourth highlight is the continued resilience of Tempur-Sealy North America's business despite softness in a broader betting market and supply chain disruptions. Our investments in high quality advertising, disciplined cost management, and increased balance of share at Mattress Room, each contributed to another quarter of solid performance. We also benefited from the strength of our manufacturing supply chain operations, which effectively navigated a dynamic global environment. The operational discipline remains an important differentiator of our business and supports our ability to execute during complicated market conditions. With that, I'll turn the call over to Bhaskar. Thank you, Scott. In the second quarter of 2026, consolidated sales were a solid $1.8 billion and adjusted earnings per share was 58 cents, up 9% over prior year. There are approximately $16 million of pro forma adjustments in the quarter, all of which are consistent with the terms of our senior credit facility. As a reminder, we have now fully lapped the mattress firm acquisition in the first quarter of this year, and we have lapped the related divestitures of Sleep Outfitters and certain mattress firm retail locations in May. We will present like-for-like commentary for Tempur-Sealy North America on a standalone basis, which will include the intercompany sales to mattress firm and adjust for the divestitures. Now turning to Mattress Firm results. Net sales through Mattress Firm were approximately $922 million in the second quarter, and same-store sales grew slightly. Mattress Firm adjusted gross margin decreased 240 basis points to 33.3%, driven by product mix, consumer financing costs, investment in Mattress Firm stores, and deleverage. The impact of product mix on gross margin percentage was primarily driven by the increased balance of share of Tempur-Sealy products as Tempur-Sealy's supply contract is structured to provide a portion of mattress firm economics in the form of cooperative advertising credits. This reduces mattress firms operating expenses, but delivers a lower product gross margin percentage versus other products. When looked at on a conforming basis, there is no material impact on operating margin from the product mix change. It is just landscaping within the income statement. Mattress firm adjusted operating margins declined 130 basis points to 6.5%, driven by consumer financing costs, the investments in store, and deleverage I mentioned a moment ago. Turning to Tempur-Sealy, North America, sales were flat on a like-for-like basis, with like-for-like net sales through the wholesale channel also flat. Our sales with third-party retailers decreased 5% after normalizing for floor models, representing continued outperformance relative to an industry we believe was down mid to high single digits. Like-for-like net sales of the direct channel decreased 1% in the second quarter. North American adjusted gross margins increased a robust 680 basis points to 61.8%, driven by the achievement of synergies, operational efficiencies, and mix, partially offset by commodity cost inflation for four pricing actions. We achieved $30 million of net benefit from sales and cost synergies in the second quarter. North American adjusted operating margins improved 400 basis points to 26.7% in the quarter, driven by the improvement in gross margin, partially offset by investments in cooperative advertising, as noted a moment ago. Turning to Semper Stele International results. International Net Sales grew 2% on a reported basis and 1% on a constant currency basis. Our legacy international business delivered another strong quarter supported by the continued execution as we broaden our consumer reach. Our dreams business, as noted by Scott, continues to navigate a difficult environment given a very tough UK market in the recent ERP implementation. Our international gross margins declined 80 basis points to 47.4%, driven by commodity cost inflation before pricing action, partially offset by operational efficiencies. Our international operating margin declined 120 basis points to 12.4%, primarily driven by the decline in gross margin. Now I'd like to give a brief update on commodity inflation and related pricing actions. We implemented modest pricing actions following the July 4th promotional period to offset higher input and freight costs. As we discussed last quarter, the timing of the cost increases preceded the implementation of our pricing actions, creating an approximately $10 million one-time headwind to temporary profits in the second quarter. We expect those impacts to be offset by pricing actions in the second half of the year. I want to point out we grew earnings in the quarter almost 10% while fully absorbing the inflationary environment. Now moving to Somnigroup's balance sheet and cash flow items. At the end of the second quarter, consolidated debt less cash was $4.3 billion, and our leverage ratio under our senior credit facility was 2.99 times, returning to our target leverage range up two to three times, demonstrating our strong cash flow generation and disciplined capital allocation approach. We also further strengthen our capital structure through the refinancing and upsizing of our credit facility. The amended facility extends maturities to 2031, increases liquidity, and allowed us to reduce higher cost debt, lowering future interest expense. Turning to our cash flow performance. In a muted market, we delivered record operating cash flow of $236 million and free cash flow of $182 million. We have reduced our net debt by more than $500 million over the trailing 12 months while fully supporting growth initiatives and returning over $160 million to shareholders in the form of dividends and buybacks. Now turning to 2026 guidance. As a reminder, our guidance considers the elimination of intercompany sales between Tempur-Sealy and Mattress Firm, which we expect to represent approximately 24% of global Tempur-Sealy 2026 sales. Intercompany eliminations in accordance with GAAP will reduce Tempur-Sealy sales, but will be margin accretive and neutral to dollars of operating profit. We expect adjusted earnings per share to be between $2.85 and $3.15 for the full year. This guidance range contemplates a sale at the midpoint of approximately $7.6 billion after intercompany elimination. Our annual guidance also reflects our expectation that the global betting industry will be down mid-single digits year over year. Tempur-Sealy North America like-for-like sales growing low single digits, international business growing low single digits, and like-for-like mattress firm sales down slightly. We also expect reported gross margin slightly above 45% driven by 100 basis points of net margin expansion from operational efficiencies including synergies and operating leverage. are partially offset by the impact of Tempur-Sealy's pricing actions, which are intended to neutralize commodity inflation but are margin dilutive. Our 2026 outlook also contemplates our assumption for Tempur-Sealy brands and private labels to be in the mid-60s percent of mattress firm total sales. This represents an incremental $65 million of adjusted EBITDA benefit for 2026 versus 2025 and approximately $690 million of advertising investment. This all results in an estimated adjusted EBITDA for 2026 of approximately $1.39 billion at the midpoint of our guidance. Regarding capital expenditures, we expect 2026 capex of approximately $225 million, including capex of $75 million under our mattress firm store refreshes and brand wall program. We expect our capex to normalize to $200 million in future years and for at least 50% of our fee cash flow in 2026 to go toward quarterly dividends and share repurchases. Now I'd like to flag a few modeling items. For the full year 2026, we expect DNA of approximately $310 million, interest expense of approximately $230 million on a tax rate of 25% with diluted share count of 213 million shares. With that, I'll turn the call back over to Scott. Thank you, Bhaskar. Well done. In closing, our second quarter results reflect the strength and resilience of our business model, the dedication of our teams, and the benefit of a disciplined long-term strategy. We continue to execute well across our global operations, driving growth and creating long-term shareholder value. Lastly, I'd like to give a brief update on our proposed combination of Leggett and Platt. a leading diversified component manufacturer and longstanding supplier to Somni Group. We have made significant progress towards finalizing the combination. We have received nearly all regulatory approvals required to consummate the transaction. And the required Leggett and Platt shareholder vote is scheduled for August 20th. We're expecting to close the transaction before the end of the third quarter. This timing is considerably ahead of our original expectations. Legging Platte will be incorporated into our guidance post-closing. We believe the combination will further strengthen our vertical integration framework and enhance consumer-centric innovation. It is expected to expand our addressable market in betting and into non-betting industries. It's going to reduce our financial leverage, drive operating cash flow, and deliver immediate adjusted EPS accretion before synergies with opportunities for future shareholder value driving synergies across the combined organization. We look forward to welcoming Leggett and Platt into our portfolio of industry-leading businesses. Operator, that concludes our call. Open the call up for questions.