Tempur Sealy International, Inc.

Good day and thank you for standing by. Welcome to the Tempur-Sealy International Inc. Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Aubrey Moore, 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. After prepared remarks, we will open the call for Q&A. 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. under the heading Special Note Regarding Forward-Looking Statements and Risk Factors. 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 non-GAAP financial information can be found on the accompanying press release, which has been posted on the company's investor website. website at investor.tempersealy.com and filed with the SEC. Our comments will supplement the detailed information provided in the press release. And now, with that introduction, it's my pleasure to turn the call over to Scott.

Thank you, Aubrey. Good morning, everyone, and thank you for joining us on our 2021 fourth quarter and full year earnings call. I'll begin with a few highlights from our fourth quarter. Bhaskar then will review our record financial performance in more detail. Finally, we'll conclude with some comments on how our long-term initiatives will drive growth. The team continues to deliver strong results across the world and our omnichannel footprint. In the fourth quarter of 2021, net sales grew 29% year over year, driven by our successful company initiatives, our pricing actions, improved order to delivery times, and a solid industry backdrop. The full year and fourth quarter results were outstanding overall, especially considering the unexpected flare-up of COVID in the fourth quarter, causing disruption in most of our markets. We delivered strong performance across the international segment ahead of our expectations. U.S. order trends in the fourth quarter were slightly below our expectations, particularly with low-end consumers. In the U.S., the rapid spread of the Omicron variant, combined with major retailers' inventory positions being stronger than anticipated, negatively impacted orders in the fourth quarter. But I should note, we still achieved a record performance. The inventory dynamics have largely normalized by the end of January. Adjusted earnings per share for the fourth quarter was 88 cents, an increase of 31% versus the same period last year. This represents double-digit adjusted EPS growth for 10 out of the last 11 quarters. Consumers' trend in health and wellness, advances in sleep technology, and ongoing innovation in sleep products bode well for the long-term growth of our sector. We are well positioned to capitalize on those trends as the industry leader in innovation. As a testament to our confidence and our potential, from 2016 through 2021, we have repurchased approximately 80 million shares of our stock, approximately 32% of our shares outstanding, at an average cost of about $23 per share. Those repurchases were made while maintaining low leverage closing strategic acquisitions, and, of course, reinvesting in the business and driving product innovation. To date, in 2022, we have opportunistically repurchased approximately 8 million additional shares, and we expect our diluted share count to be 189 million for the first quarter. I would now like to review some of the key highlights from the quarter. our ability to service our customers improved throughout the fourth quarter. As you may recall, we entered the quarter with a record backlog of about 100 million in U.S. Tempur-Pedic orders, and our U.S. Sealy business and OEM customers were on forced allocation due to supply chain issues. As expected, in the fourth quarter, normal seasonality allowed us to make significant progress in working down our Tempur-Pedic backlog We were able to successfully take our customers off allocation for Sealy products at the end of October. Our U.S. Tempur-Pedic product delivery time significantly improved as well, and today Tempur is operating under a normalized order-to-delivery time. Second, I want to highlight the outstanding performance of our direct channel, where sales more than doubled compared to the prior year. driven by strong organic growth and the acquisition of dreams. Our temper retail stores, sleep outfitter stores, dreams, all of our company owned stores had robust same store sales of over 25% this quarter. We also continue to invest in growing our e-commerce channel, which had a solid fourth quarter performance considering the difficult comp in prior years and inventory constraints. which were partially offset by double digit increases in their conversion rate. We continue to leverage our direct channel to get closer to the customer. Over the last three years, we've increased the number of customers in our database by nearly 50%, leading to increased conversion and more effective and efficient direct marketing. Regarding our own stores, we now operate over 650 retail stores around the world through our wholly owned companies and joint venture operations. These stores vary in format based on local market and consumer preferences, which results in a wide variety of sales on a per-store basis. Our average sales per store in 2021, including e-commerce, were over $2 million each, with our U.S.-based Tempur retail stores averaging over $4 million each. We see potential to continue to open additional retail locations as we see market opportunities arise. Third, I want to call out some exciting awards and recognitions we've received. Our Tempur-Pedic brand was awarded number one in customer satisfaction for the retail mattress category in the J.D. Power 2021 mattress satisfaction report. but this is the third year in a row we've won that award. We're thrilled to share with you that for the first time, our Tempur-Pedic grant also was awarded the number one in customer satisfaction for the online mattress category in the same report. In addition to being ranked number one overall in customer satisfaction, Tempur-Pedic earned number one ranking across all factors in the retail mattress category, which includes support, durability, comfort, variety of features, value, warranty, and contact with customer service. In addition to the awards received by Tempur-Pedic, our Sealy brand achieved the number one selling mattress brand in the U.S. for the second year in a row in 2021, while also being named America's number one trusted mattress by Consumer Report. This recognition from our customers is a testament to our commitment to providing innovation, high-quality product solutions that address their sleepy needs. It is also an important recognition of the growing importance of our online and retail businesses, which continue to be growth drivers for the company. A little later, I will discuss our 2022 product launch plans that will allow us to continue delivering industry innovation. Fourth, despite the many changes and challenges that we faced in 2021. We continued steadfast in our commitment to protecting the environment and the communities in which we operate. Success at Tempur-Sealy is defined more broadly than just financial metrics, and it is inclusive of our environmental, social, and governance impact. We firmly believe that ESG initiatives create value for our stakeholders and contribute to the long-term financial success of our business. Last month, we published our 2022 Corporate Social Value Report. The report detailed the significant progress we've made on our environmental goals in 2021. Notably, we furthered our goal of achieving zero landfill waste through improving the percentage of waste recycled in our U.S. manufacturing operations to 94 percent. We also achieved 8.4 percent reduction in greenhouse gas emissions per unit produced, furthering our progress towards our goal to achieve carbon neutrality by 2040. The full report includes additional information about our 2021 initiatives in progress and can be found on our website. Finally, before turning the call over to Bhaskar, I want to take a moment and welcome two new members of our Tempur-Sealy Board of Directors. Meredith Siegfried Madden, and Simon Dyer. Meredith currently serves as a director and the chief executive officer of Nordam Group Inc., a global aerospace manufacturing company, and brings over 25 years of experience to our board. Simon currently serves as chairman of the board and chief executive officer of the Dyer Group, which, among other things, operates our international joint ventures. Simon brings 35 years of leadership in mattress and bedding industry to the Board, including extensive knowledge of the international bedding market. Meredith and Simon both have multiple areas of expertise, including international markets, strategy, sales, logistics, manufacturing, and finance. We are thrilled to have them join the Board of Directors. With that, I'll turn the call over to Bhaskar.

Thank you, Scott. I would like to highlight a few items as compared to the prior year. Sales increased a robust 29% to approximately $1.4 billion. Adjusted EBITDA increased 24% to $297 million. And adjusted earnings per share increased 31% to 88 cents. Turning to North American results. Net sales increased 19% in the fourth quarter. On a reported basis, the wholesale channel increased 18% and the direct channel increased 24%. North American gross margin declined to 41.6%. This was driven by the operational inefficiencies related to COVID and the pricing benefit to sales with no improvement in gross margin. These declines were partially offset by favorable brand mix. Our fourth quarter gross margins improved sequentially as expected. driven by favorable brand mix resulting from working down our elevated level of temper backlog from the prior quarter. Leveraging our pricing power, we have implemented multiple price increases in the last four quarters to offset the dollar impact of the highly inflationary environment. These increases demonstrate the power of our brands and our products. North American fourth quarter operating margin improved to 21.6%. The improvement was primarily driven by operating expense leverage, partially offset by the change in gross margin. Now turning to international. Net sales increased 82% on a reported basis, inclusive of the acquisition of dreams. On a constant currency basis, international sales increased 85%. As a multi-branded retailer, Dream sells a variety of products across a range of price points. Their margin profile is lower than our historical international margins, which is driving a major change in year-over-year margins. Excluding Dream, the underlying margin performance internationally met our expectations across both Europe and Asia Pacific. As compared to the prior year, our international gross margin declined to 54.8 percent. The decline was driven by the acquisition of dreams, the pricing benefit to sales without improvement in gross margin, and operational inefficiencies associated with COVID. Our international operating margin declined to 20.2%. The decline was driven by the change in gross margin and operating expense deleverage. Now moving on to the balance sheet and cash flow items. We generated a robust fourth quarter operating cash flow of $126 million. Our inventory days extended throughout the quarter as we began to enhance our temporary inventory in the U.S. We expect to further build our inventory in the first quarter to support our expected sales growth in 2022. At the end of the fourth quarter, consolidated debt less cash was $2.1 billion, and our leverage ratio under our credit facility was 1.8 times. As Scott mentioned, in 2021, we executed on our balanced capital allocation strategy to return value to shareholders. We allocated approximately $1.5 billion of capital. This included investing over $800 million in share repurchases to buy back approximately 10% of our shares outstanding, paying $63 million in cash dividends, acquiring DREAMS for approximately $475 million, and reinvesting $123 million back into our operations. Now turning to 2022 guidance. The company expects EPS to be in the range of $3.65 to $3.85 in 2022, representing an 18% growth from the midpoint. This includes expected benefit from strong year-on-year sales growth between 15% to 20%. Specifically, we expect to invest incrementally approximately $50 million in expenses related to new product launches around the world. Additionally, we plan to invest a record amount of total advertising, including seeding the upcoming Stearns and Foster launch and Tempur International products. Our 2022 expectations also include targeted share repurchases of at least 10% of our shares outstanding, including the 4% of share repurchases as we have made through the first quarter thus far. In the first quarter, we have seen softness from the lower-end consumer, which we believe is temporary. We believe we are maintaining labor and advertising expenses that would otherwise naturally flex with sales, For the first quarter, we would anticipate this results in incremental operational expenses and advertising spend that would have otherwise flexed. Lastly, I would like to flag a few modeling items. For the full year 2022, we currently expect total CapEx to be between $250 and $280 million, which includes maintenance CapEx of $100 million and investments in our U.S. manufacturing capacity, including a new foam pouring plant, DNA between $195 and $205 million, interest expense between $85 and $90 million, a tax rate of 25%, and a diluted share count of 183 million shares. With that, I'll turn the call back over to Scott. Thank you, Boss. You did a great job.

These past two years further solidified Tempur-Sealy's position as a market-leading, vertically integrated, omnichannel, global company with solid fundamentals in a growing category. I'd like to take a moment to review the company's initiatives that have driven this performance. We estimate that about half of our growth over the last two years was driven by distribution through new retail customers. Another 35% of the growth is derived from our M&A activities and share gains from previously untapped addressable markets. This includes our acquisition of Dreams and Sherwood Betting and the addressable markets that were unlocked through our direct OEM initiatives. The remaining 15% of our two-year growth can be attributed to the growth in the industry overall. I'd like to review how our four long-term initiatives underpin our confidence and our ability to continue to achieve above-market performance going forward. Our first key initiative is to develop the highest quality bedding products in all the markets that we serve. When you think about our products and brands, you think of award-winning products that provide breakthrough sleep solutions to consumers around the world. We're committed to furthering sleep innovation and are in the process of launching a new line of premium Sealy products in the US. This updated product line includes a significant upgrade to our industry-leading hybrid mattresses and an all-new collection of premium foam mattresses. This line features improved comfort and support and also utilizes innovative technologies that sleep up to 33% cooler than our previous models. By offering superior support and technologies, we aim to grow Sealy's strong position in the industry. Later in 2022, we'll be launching all new temper products in Europe and Asia Pacific. This new line of products will have a broader price range with a super premium ASP ceiling maintained and the ASP floor expanded into the premium category. The expanded price range is designed to unlock a new segment of customers, which is expected to substantially increase our international total addressable market. We plan to launch and invest in this new temper line beginning in 2022, with the first market to be launched over the summer. The team is also working on evolving our Stearns and Foster brand, the oldest American-owned and operated bedding manufacturer in the country. We recently celebrated its 175th anniversary, demonstrating its longevity, which is supported by its history of producing high-quality products. We believe there's currently an underserved segment of customers who are looking for a premium mattress with a traditional innerspring feel The rich legacy and unparalleled craftsmanship of our handmade Stearns and Foster products has attracted a number of these customers to the brand, and we see an opportunity to further expand it in the future. In order to capitalize on this opportunity, we expect to launch a new line of products in the U.S. late in the year. The new line is designed to further distinguish our high-end traditional innerspring brand with superior technology clear product step-up stories, and a new contemporary look. In addition to launching these new products, we're doubling down on our efforts to increase Stearns and Foster's brand awareness with customers. And as Boster previewed, we'll be investing significant advertising dollars to support this goal. Based on these investments in products and brand awareness, we expect Stearns and Foster sales to more than double to become our third billion-dollar brand. We also plan to tap into emerging niche markets through launching new products this year. We expect to launch a Sealy-branded, eco-friendly mattress collection. These new mattresses are designed for the growing segment of consumers who are interested in natural and sustainable bedding products. We also plan to launch a Sealy mattress for the best-in-class pressure-relieving gel grid layer at a consumer appealing mid-market price in 2022. This product is designed to target the relatively small category of consumers looking for a non-traditional mattress feel. This will be priced at a non-premium price point. Our second key initiative is to promote worldwide our brands with competitive marketing. In 2022, We expect to continue to reinforce moat around our business with thoughtful marketing investments that provide strong near-term returns and significant long-term brand awareness across all of the brands and products. Our brands are among the most highly recognized, recommended, and desired in the industry, and we plan to invest a record $550 million in advertising dollars in 2022. to continue to strengthen this leading position. Our third key initiative is to optimize our powerful omnichannel distribution platform. Last year, supply chain disruptions forced us to turn away new customers, put our existing customers on allocation, and extend our order-to-delivery lead times for consumers. As I noted earlier, we entered 2022 an improved position to meet customers' demand for our brand and products. We've removed customers from allocation, and our lead times have normalized. Now that we're able to fully serve demand from our existing customers, we're re-engaging with prospective customers looking to represent our brands and products. We also have a significant opportunity to grow through our direct channel, which is currently running in excess of a billion dollars annual run rate. we see potential growth opportunities for both our e-commerce and company-owned stores going forward. For e-commerce, we'll continue to focus on converting customers interested in purchasing online directly from a manufacturer. In our retail operations, we expect to drive both same-store sales growth and expand our store count. We currently operate over 650 retail stores worldwide, and expect to increase our store count organically through opening an average of 60 new stores per year over the next few years. Turning to our growing OEM business, in 2020, we recognized a white space opportunity for the company to participate in the OEM space through utilizing our best in class manufacturing logistics capabilities to manufacture non-branded products. In 2021, our OEM business grew over 50% over prior years. We're pleased with the results, especially given the significant supply pressure impacting our ability to service OEM demand during the year. Furthermore, we're targeting to grow our sales to 600 million by 2025. This will allow us to earn our fair share of the approximately 20% of the betting market we believe comprises the OEMs by OEM. As a secondary benefit, future OEM sales growth will decrease our cost per unit for all of our branded products as we spread our fixed cost and drive more advantageous supply agreements due to enhanced volume. Our fourth key initiative is to drive increases in EPS and prudently deploy capital. The new product launches and marketing investments and omnichannel expansion opportunities that I just described are all expected to deliver strong returns on invested capital, driving increases in EPS. We'll continue to execute on our capital allocation strategy in 2022. Our capital allocation approach strikes a balance between investing capital back into the business to facilitate long-term growth returning capital to shareholders via repurchase and dividend, and on an opportunistic basis, acquiring businesses that enhance our global competitiveness. For example, in 2022, we'll continue to invest in expanding our manufacturing capacity. Our investment in our third domestic bone-pouring plant, Crawfordsville, Indiana, is underway, and the plant is expected to be operational in 2023. We're also making investments to expand our manufacturing footprint within existing facilities and overall warehouse space in several facilities. We expect to invest an incremental $300 million over the next couple of years to support these initiatives. We also expect to continue to return capital to shareholders via quarterly dividends and share repurchase. We've increased our quarterly dividend in 2022 by 11% to 10 cents per share. Additionally, in the fourth quarter last year, the Board increased our share repurchase authorization to 1.5 billion. Lastly, as Bhaskar mentioned a moment ago, we expect to repurchase at least 10% of our shares outstanding during this year. To conclude, our guidance shows that we're expecting robust sales and EPS growth in 2022. This expected growth is well ahead of anticipated industry trends for the year, and we're confident in our ability to capitalize on our brand strength, new channels, and the acquisition of dreams to achieve that growth. Moreover, we expect to deliver double-digit growth while continuing to make strategic investments to support the long-term trajectory of the business, repurchasing our stock, paying cash dividend, and maintaining low leverage. I think this clearly highlights the strength of our global business model. With that, operator, will you please open the call for questions?

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. We ask that you please limit yourself to one question. Our first question comes from Keith Hughes with Truist Securities. Your line is open.

Thank you. This question on pacing of sales, you talked about some order weaknesses towards the end of the quarter. If you could just talk about the last couple months, specifically here in February around President's Day and how the pace has gone.

Sure. Thank you for your question. I think you're primarily talking about the U.S., but to be fair and balanced, I would bring it out for the whole world to The international group started off the first quarter, I'd say, strong to solid. When you move to the US, you got a little bit of story of two different segments. If you look at the high end, the high end's doing well. with increasing ASP both from a pricing standpoint and quite a bit of mixing up. So we've seen solid business at the high end as evidenced. If you look at our temper flagship stores, they started off the first quarter solid, and then when you moved into President's Day, I would call it strong with same-store sales so far in President's Day running over 20%. If you look at entry-level vetting, lower-end customer, that's been a challenge probably beginning in the fourth quarter, continued into the first quarter. And we don't have good information yet on President's Day. But in general, I would say that you should expect the entry-level customer, or we'll call it the stimulus-motivated customer, to be somewhat of a challenge or a little bit weak here for a period. with the higher-end customer continuing to be very strong. And I also think the other thing that's happening in the vetting industry is we're normalizing from what we'll call a COVID period, where during the COVID period, the valleys were not that low and the peaks weren't that high, a little more steady. I think we're going back to more of the traditional trajectory on a month-to-month basis or a promotional, non-promotional period where Where non-promotional periods, the comps will be difficult and maybe even negative, then the promotional periods, the comps will be positive is what it feels like. But I'd call it back to normalized, you know, betting business.

Thank you. Our next question comes from Curtis Nagel with Bank of America. Your line is open.

Good morning. Thanks for taking my question. So maybe just piggybacking a bit off of Keith's question. I guess how should we think about the proportion of sales and sales growth in each half, right? So you talked about 1Q, at least the low end a little weak, still dreams, of course, adding in the first half, pricing from last year still there. But as you go into 2H, right, you have all these product launches, maybe new business. Not sure if that's in the guide or not, probably not. But, yeah, proportionally, how should we think about the makeup of the year between the two halves?

Sure. Sure, great question, and I'll handle it, and I'll pass it off to Bhaskar to probably give you a little more color. Look, we expect a reasonably solid first quarter. We don't do quarterly guidance, obviously, but we would expect certainly double-digit sales growth in the first quarter. I think you do need to think about some of the investments we're going to be making during the year, and let me point a couple of those out. First of all, we've continued to advertise throughout the fourth quarter and the first quarter as we precede some of the product launches, which is not normal for us. We're doing something a little different because the product launch for Stearns and Foster is so important to us as we build a billion-dollar brand, and the expansion of the International Temper product is so important to us. We're advertising before those products are in the market incrementally. The other thing we're doing, obviously last year was a tough year of having our customers on constraint, and we've committed as a management team to get back to the service levels that our customers expect. And so we've pre-hired, and we are carrying, I don't know, 250 to 300 extra people, extra, okay, during the slow period of the first quarter from a seasonality standpoint. because we want to be ready for the second and third quarter. That's different than we normally do, but in the current labor market, we think it's the right thing to do. And, you know, we're committed from a management team to do everything necessary to make sure that this next year that we deliver in a way that we're used to, you know, for our customers. So you're going to get some different seasonality on the EPS growth line is what I'm walking you to, but from the sales line. should be very good. Is that a good way to explain it?

Absolutely. When you think about the sales phasing, and you called it out, Kurt, is dreams, absolutely, you get the other side of that, really principally for the first seven months. The pricing, if you think about what happened during the year. So what all that means is that we would expect that the first half, from an overall growth standpoint, to be higher than the back half. And what naturally is that given our guide of 15 to 20 is that we would expect growth in all the quarters in 2022.

Thank you. Our next question comes from Seth Basham with Wedbush Securities. Your line is open.

Thanks a lot and good morning. Just to follow up on some of those questions, if you could think color that you have on Tempur-Pedic and how that brand performed through the President's Day weekend, And then secondly, what gives you the confidence that the low-end consumer softness we're seeing is temporary?

Great. First of all, you have to realize our information on President's Day obviously takes a little while, so we're probably two or three days ahead of having what I'll call hard information. So let me hedge my comments. It's mainly on verbal calling out there. Look, I think Tempur-Pedic had a great President's Day presentation, It feels like, and although we don't have all the public companies reporting at this point, it feels like we continue to take share at the Tempur-Pedic level, and we're hearing very positive things from the Tempur side, U.S. Tempur. And as I mentioned, probably the best information we have is our own stores, which, of course, we get that information instantaneously. And from the same store standpoint, our Tempur flagship stores are running same-store sales of over 20% in President's Day. So that part of the question, quite frankly, is kind of a softball, and I appreciate it. The second part of the question is more like a fastball towards the head, which is when do you think the entry-level customer is coming back and why do you have confidence in that area? First thing I have to point out is, quite frankly, that customer we don't make that much money on. As you know, the lower ASP beds don't have great margin on them. They do cover a lot of good fixed costs from that standpoint. I think in the near term, we've got some tough compares when you look at March and the stimulus checks and the timing of that. But if you step back and look at the U.S. market, you've got consumers' debt levels are in good shape, including the lower end that you're talking about. They've got great wage growth. in that segment. They've got, I don't know, what is it, call it 3.94% unemployment and can quite frankly get a job anytime they want to. So, if you look at that segment, you know, it looks like it should be in a really good shape throughout the year. Now, the timing of stimulus checks being pulled out of the market and wage growth coming into the market Whether that matches up perfectly on a month-to-month basis, who knows? I'm not smart enough to know. But that segment, to me, looks like it has pretty strong economics. And so that segment's usually shown the propensity to, when they have money, spend it. So as long as the gas prices don't get too high and as long as wage growth continues with what we've seen, I think that segment's going to be in good shape. But it may be a quarter. It may take a little while as the stimulus check compares. We've got to benchmark it against them. But it really is interesting. When I segment our customers, it's more about not the size of our customers, but whether or not they focus on the high end or the low end. And the customers that focus on the higher end, they're certainly doing better than the customers that are focused solely on the lower end. So I do think that is an uncertainty when you're trying to put together a forecast. But like I said, the good news is that segment is not usually the segment that drives our profitability.

Thank you. Our next question comes from Bobby Griffin with Raymond James. Your line is open.

Good morning, bud. Appreciate you taking my questions. I guess, Scott, I just want to – you called out a couple times in the release, I mean, or throughout the year, really, inefficiencies due to COVID, supply chains, different things like that running through the P&L. What's assumed in the guide for the efficiency of the operations in fiscal year 22? Do we get closer back to normal, halfway there? Kind of what are you guys assuming when you bake that in? Yeah.

Interesting and great and complicated question. You know, first of all – Let me point out a couple of things that we may not have talked about directly. One thing that's happened in the recent spike in COVID is staffing issues, not at Tempur-Sealy, but at our customers. And so specialty betting retail stores, where they only have one or two staff maybe in the building, they've had trouble keeping some of the stores open. So we've got some closures related to COVID this time around that may not be apparent. So that's hurt us a little bit. If you go to the supply chain, I think the supply chain is the good news. Is it perfect? No, it's not perfect. Is it significantly better than it was at the beginning of the fourth quarter? Yes, without question. Are we damn near close to normal? I'm going to say we're damn near close to normal on the supply chain. And there might be still some inefficiencies in the manufacturing from people's standpoint, from absenteeism, COVID-related stuff. But the supply chain is generally in pretty good shape. I mean, the chemicals are back. The inventory levels for temper are close to normal, if not normal. And we'll take a little bit more inventory into the second quarter because we're fairly bullish on the second quarter. Springs, obviously, are certainly in good shape, and Leggett's done a great job there. So I think the inefficiencies that are, quote, left in the system have mainly to do with people and have to do with absenteeisms. So in order to protect ourselves and our customers from that risk, which we felt like we were in control of, look, we've overstaffed. We've hired early. We're training people, and as I mentioned before, We're carrying extra people in U.S. manufacturing, primarily on the Sealy side, to make sure that we can get back to normal. There will be some cost that will absorb in the first quarter, but I think by the time you get to the second quarter, with no unforeseen events, I would say in the second quarter we'll be back to normal operations both from time of delivery and efficiencies. Is that fair, Bhaskar, in the budget? So we're not quite there, but look, we feel, look, the major accomplishment in the fourth quarter, although the numbers are very strong at 29% growth, but the major accomplishment is we're back to normal and we're servicing our customers. And we've got our sales force back in hunter mode as opposed to try to service customers and chase orders down. And we think that puts us in a very strong competitive position going into 22.

Thank you. Our next question comes from Atul Maheshwari with UBS. Your line is open.

Good morning, and thanks a lot for taking my question. I got a multi-part question, so I'm going to apologize in advance.

I got one. my pen out so I can write them down very quickly because I can't remember them.

Thank you. So what is the level of industry unit growth that you assumed in this guidance of 15 to 20% revenue increase for 2022? And then related to that, can you maybe provide more granular color on the contribution from the various building blocks that get you to this level of revenue growth? Then finally, if low and softness were to persist through the year, do you still believe you can achieve this guidance? Just trying to understand how conservative the guidance is.

Sure. I'll work on some of that, and then after I mess it up, Bosco will clean it up. Look, you know, I think one thing that's kind of interesting, unit growth in the fourth quarter, because we know our unit growth, look, it was negative, but we still grew sales 29%. So I think that's the first thing. Not that unit growth isn't important, but probably mix is more important than unit growth. I think some other industry experts have been talking about unit growth for 2022 in the U.S. at somewhere between probably zero and 4%. It kind of sounds like to me it's been the chatter. Look, that's probably a good estimate. I mean, if I were guessing. But again, mix to us is probably more important than actual unit growth. The second question was, oh, the building blocks. And, Bosco, you want to walk them through. You've got dreams in there. You've got pricing in there. You've got the retail stores that we're opening. And, obviously, you've got some new launches going in there. So I'll let you do the building blocks.

So the way I think about it is with those components, what I would say is, overall, outside of the items I'm specifically going to call out, we'd expect growth in all of our channels, all of our segments, all of our geos. Then building upon that, what I would say is that we do have DREAM, the other side of that, and let's call that mid-single digits. We have price, the wraparound effect from the 2021 price increases that we took, as well as the new one we put in place during the first quarter, and let's call that mid-single digits. Then on top of that, what we'd anticipate is, again, disaggregating a little bit, OEM had a great 2021. We'd expect

growth from oem as we get into 22 dtc as scott mentioned nice momentum both in our online business as well as our bricks and mortar business and we expect that to drive uh growth in 2022 as well and i think there's a question as to to the extent that the the entry-level betting uh didn't return um you know how are we thinking about i would say our estimate for entry-level betting is is not particularly aggressive uh We don't do it in granular detail where you can just pull it out of the forecast, but certainly we're expecting the entry-level vetting for the months compared to when the stimulus checks really hit to probably be very difficult in the forecast.

Thank you. Our next question comes from Peter Keith with Piper Sandler. Your line is open.

Hey, thanks. Good morning, everyone. I just want to look back to Q4. I'm just having a little bit of difficulty reconciling some of the commentary. So you had the $100 million backlog going into the fourth quarter, but then you mentioned that retailer inventory positions were stronger than expected. So can you bridge me to those two comments because they seem to conflict? And then where did you finish the year with backlog that's carrying over into the new year?

Yeah, good observation because they do conflict. Look, we left – let's go back. We left the third quarter earnings conference call. You know, there hadn't been – COVID hadn't picked back up. Strong backlog in temper, 100 million. We got comfortable, normal, and everybody in the industry, I'd say manufacturing, kind of got caught up. And the manufacturers, industry-wide, were providing retailers bedding at a more normal pace. And then we hit a little bit of a slow spot. And here's, from talking to retailers, and we don't get perfect information because the retailers don't give us their inventory positions that we can tick and tie to it. But here's what I believe happened. Remember, we had the industry on constraint for over a year, probably almost 18 months, okay? Which, of course, we've never done before. And during that period, we were on hard allocation. The retailers were aggressively kind of, we'll call it gaming the system, and we were monitoring it to make sure we were doing what was fair for everybody. And over the 12-month period or 18-month period, I believe that retailers in general went from what I'll call a natural inventory in the system, which we normally don't talk about because it's not that much. It's of two to three weeks. It would be kind of like normal industry inventory. And I think they squirreled away some beds and hoarded some beds. And they probably got their inventories up to more like three to four weeks as they tried to build some safety stock because all of the manufacturers in the industry were not delivering quote on time, and over that period of time built up an extra week or so of inventory, which again doesn't sound like a lot and makes perfect sense. But then in the fourth quarter, when everybody opened up and it's seasonally a little softer quarter naturally, they right-sized their inventories back to the two to three weeks, which call it a 5% to 7% catch-up as the industry normalized their inventory from the safety stock that they had kind of squirreled away on us is how we reconciled it. But it was a surprise to us. At the time, retailers were screaming for more inventory, but I think they were probably a little bit of gaming of the system as they provided us the information demands that they were seeing.

Thank you. Our next question comes from Laura Champine with Loop Capital. Your line is open.

Thanks for taking my question. I wanted to ask about what looks like an inventory build as you exited the quarter. Did sales trends weaken relative to your expectations as you exited the quarter, or did you build inventories because of the supply chain issues that kind of plagued the whole year last year?

Well, we certainly are building inventory of temper all year. We were light on temper. We weren't optimized from an inventory standpoint. And certainly the message in business plan is to go into the busy season this year heavier on inventory than we were last year. And since the product never becomes obsolete, it makes sense for us to carry some inventory and make sure that we're top of mind. Having said that... I would say probably from a phasing standpoint towards the end of the fourth quarter, probably sales were a little lighter. And I think it has to do with some of this normalization of inventory levels at the retail level. So I'd call it slightly softer in December. But if you're seeing an inventory build, I would say the lion's share of that is strategic.

That is correct. And Laura, just to double tap on that a bit, is yes, we did get in a better inventory position the majority or most of that build is associated with adjustables. So we have a very long lead time, and we want to make sure that, as Scott said, as we get into these 2022 and around these holidays, we want to make sure that we have plenty of supply, not only of mats, but of adjustables, foundations, et cetera.

Yeah, I really think one of the key competitive advantages a company like Tipper Sealy has is we've got the financial strength to make some strategic investments. And at a time when the world's a little complicated, we certainly are making some investments to make sure that we service our customers in the best way possible and hopefully industry-leading.

Thank you. Our next question comes from Brad Thomas with KeyBank Capital Markets. Your line is open.

Hi, good morning. Thanks for taking my question. Two, maybe more housekeeping items. First, Bhaskar, if I missed it, could you just remind me what the expectation is for commodities as an impact in dollars or basis points as we're thinking about this year. And then I was wondering if you all also could maybe put a little more context around what percentage of your business you think is addressing the low end versus the middle versus luxury. Just be curious of your take of how much you think you have exposure to low end. Thanks.

As it relates to commodities, what I would say is over the last couple of years, 2021, The amount of commodities that inflation that we've seen is really unprecedented. What I do also feel good about, though, is the power of our products and our brands. We've been able to fully neutralize the impact of commodities on a dollar basis, not only in 21, but our expectation is that in 2022 that the impact of commodities will be able to fully offset that with the price increases that we've taken. Don't want to get into the magnitude of what we're seeing in 22. But what I would say is that we had an expectation leaving 21, as we talked about in our third quarter call, we've seen some slight increases since that point in time, however, still within the range of reasonable limits. And in our guidance, what we've assumed is that they stay at the peak in the second quarter and they remain for the rest of the year. So if there is deflation, that would be a bit of upside for us.

Yeah, I think it's probably fair to say that obviously it could change quickly, but what we see today, we probably aren't anticipating another price increase in the near term. We feel pretty good about what we've done from a pricing standpoint versus a cost standpoint. So we think we're in pretty good shape there. Things could change, but that's where it sits today. And then he asked about what percentage of our business is entry level. I don't think it's always how you define entry level. And I don't know, Bob, what do you think, 10%, 15% is probably maybe kind of within the realm. And profitability of that sector is obviously, as I talked about before, not the same as the higher end. So again, when we talk internally as we run our business plans and think about the business, not that you're not interested in that segment. But let me tell you, mix is what it's about. And that's one of the reasons why we're very interested in our Stearns and Foster brand. And mix is much, our P&L is much more sensitive to mix than it is. Good news is, retailers' P&L is also much more sensitive to mix. And so we're aligned with our customers from that standpoint.

Thank you. Our next question comes from Jonathan Matuszewski with Jefferies. Your line is open.

Great. Thanks so much. Appreciate all the colors, Scott and Bhaskar. You know, following up on the topic of mix, maybe from a different angle, there's been some more data points here and there regarding mattress size preferences evolving during the pandemic.

And maybe if you could just share the degree to which TBX has been benefiting and how sustainable you see that shift that we've seen from queen to king over the past, call it 24 months. Thanks.

Sure. No question that there's been a shift, and we'll call it skew size, and that king is leading the way. I'm sure that's coming from housing formation. Certainly moving out of an apartment into a house gives you an opportunity to upsize your bed, probably a little bit of pandemic and you're spending more time. Some people are working in their beds and living in their beds. And it is. It's part of the growth that we see in ASP. And I think it's going to continue. And if you want to see anything add, it's good. Yeah, I agree with that.

Thank you. Our next question comes from Carla Casello with J.P. Morgan. Your line is open.

Hi. Just on that same question about the promotional market and the lower end, I guess you talked about the valleys and the peaks and valleys and how promotional spend will go this year and things returning to more normal. Does that imply that the more of the product will be sold on promotion so we could see margin pressure from that?

Yeah, we did not change our promotional cadence or discounts last year during that program. Maybe some of the retailers did. So, you know, from Tempur-Sealy's standpoint, being more promotional isn't going to be significant to the financial statements. And the promotions that we have during the period, even though there may be more units sold in there, won't be material to our financial statements. I think what I'm really talking about is retailers. Some retailers, because you have to look at it from a retail standpoint, they were having trouble getting supply last year, and so they pulled back on their promotions and pulled back on their advertising because they couldn't service the customers that were just walking in the door. When I said the industry is going to be more normal, It is the retailers are going to have to get back to spending historical amounts in promotion and advertising and doing the things that they normally do. And now that we're able to service them at the volumes confidently, I think the retailers will step up and do their part. But we didn't change advertising or promotions last year, so we don't have a bad comp going forward in that area.

Thank you. Our next question comes from Seth Basham with White Bush Securities. Your line is open.

Thanks for taking the follow-up. Just a couple questions on the margins. First, in terms of the fourth quarter performance, with most of the sales impact at the lower end, which doesn't carry that much in terms of margin contribution, your margin degradation, so to speak, did seem pretty high. I'm just trying to square that away. Secondly, for 2022, When you think about the building blocks for the cost pressures, advertising, $550 million, what was that versus in 2021? And similarly, for launch costs, what was that in 2021? Sure. Dreams is probably your margin in the fourth quarter.

Well, the fourth quarter. I actually, I think margins were very much aligned with how we thought they would come in. If you think about the sequential improvement that we saw going from the third quarter to fourth quarter, we expected some improvement, principally driven by the high end and that backlog filling. Yes, there was a bit of weakness on the low end and the inventory rebalancing, which was across both brands, but we were very pleased with the gross margin performance in the fourth quarter. Year over year, when you look at it, yes, there is a variance, but it's caused by the fact that the power of our brands and we're able to offset the commodity inflation that we're seeing with price. What was the second question?

In 2022, talk about advertising launch costs.

Oh, launch costs. Incremental launch costs and incremental advertising. as a dollar and probably as a percentage of sales is probably where he was shooting for. Absolutely.

So when you think about that, our K will drop this evening, so you'll have it in front of you to do it. What I would say is that both on dollars as well as rate, we would expect incremental advertising to be able to support our brands and really see the market in advance of the new products that we have coming out. As it relates to launch costs, the incremental investments that we're putting around these would be $50 million.

And I think when you talk about advertising, there's two ways to think about it. We're not advertising aggressively to sell current product. We're not having higher costs for customer acquisition costs. And that's what I've been trying to make sure it's clear. What we're doing is something different. We have two major market moves that we're trying to do. And it's required a little bit of pre-investment. And the That is Stearns and Foster. We're talking about taking a brand that has been relatively minor and moving it into a category of a billion-dollar brand at very good margins for us and very good margins for the retail. So this is a major move. It is not a normal Stearns launch. And so there's some incremental expenses we're going to spend to stand us up for the long term. And then as we've talked about numerous times, the Tempur-Pedic launch internationally, again, is not a normal launch. This is something we've been working on for three or four years to hit a much broader addressable market. And when you do that, you're not doing a normal launch. You're willing to spend some money to make sure that this goes right. The good news is there's clearly green shoots in both areas. Our Stearns and Foster brand in the fourth quarter grew at like 35%, and this is before we had the new product in the marketplace. And the international group has continued to perform, I'll call it, above our expectations and, quite frankly, above trend line, again, before the product even hits the market. So we're feeling pretty good about it, and we'll get a really good read on it. It's going to be a few quarters, whether we'll know whether this strategy worked and whether this money was productive. But right now we feel good. very good about both of those strategic moves we're making from an advertising standpoint.

Thank you. This concludes the question and answer session. I would now like to turn the call back over to Scott Thompson for closing remarks.

Thank you, Operator. To the over 12,000 employees around the world, thank you for what you do every day to make the company successful. To our retail partners, thank you for your outstanding representation of our brands. To our shareholders and lenders, Thank you for your confidence in Tempur-Sealy's leadership team and the board of directors. This ends our call today, operator. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.