Tempur Sealy International, Inc.

Good day and thank you for standing by. Welcome to the Tempur-Sealy first quarter 2022 earnings conference call. At this time, all participants are in the listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1 on your telephone. And if you require any further assistance, please press star 0. I would like to hand the conference over to your speaker today, Ray 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 headings 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 obligations to update any forward-looking statements. This morning's commentary will also include non-GAAP financial information. Reconciliations of the non-GAAP financial information can be found in the accompanying press release, which has been posted on the company's investor 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 2022 first quarter earnings call. I'll begin with some brief comments on this quarter's sales and earnings results, then address certain top of mind issues and how they impact our global operations. To conclude our prepared remarks, Bhaskar will discuss our record first quarter financial performance in more detail. In the first quarter of 2022, net sales grew 19% year over year to 1.2 billion and adjusted EPS grew 8% year-over-year to 69 cents. This was a record first quarter financial performance. But as we shared in our market update at the end of March, sales came in below what we had initially expected entering the year, and commodity prices, primarily energy, moved against us. However, taking into account the turbulence of the global operating environment, we were pleased to report another quarter of double-digit sales growth, the 10th out of the last 11, as well as EPS growth. I should also note there were no adjustments in our operating performance this quarter. The team achieved several noteworthy non-financial accomplishments during the quarter as well. We began the rollout of our new premium Sealy product in the U.S., continued the successful launch of our new ERP system in the U.S., launched the new Stearns and Foster e-commerce platform, and fully returned to normalized order-to-delivery times for both Tempur and Sealy. I should also mention that our new plant, our new Tempur plant that we're building in Crawfordsville is on plan to be operational next year. Now I'd like to take a moment and address a few macroeconomic issues and discuss how we're managing the business in this rapidly changing operating environment. Like you, we are watching the tragic events that are unfolding in the Ukraine in absolute horror. In an effort to support those displaced by the war, the Tempur-Sili International Foundation contributed financial aid to support Ukrainian children and families. And our European operations have donated over 1,000 bedding products to the refugee centers with more on its way. In the terms of the impact to our business, when we do not have any operations in the Ukraine or Russia, the war has introduced elements in the near term risk to our international supply chain, which has been largely mitigated at this point. It is also having a ripple effect on consumer confidence in Europe, which has negatively impacted our trends in the region. To give you an idea of the impact, our order trends were running up approximately 30% in Europe in the eight weeks pre-invasion, and have turned negative in the eight weeks since the invasion. Given the uncertainty around the evolution of this conflict, we expect these pressures on the European market to continue in the near term. As previously announced, given the circumstances, we've elected to postpone the launch of our new Tempr International product line that was planned for 2022. We now expect to begin the launch in the first quarter of 2023 to allow time for the international retail market to normalize. Consequently, this will be moving 20 million of associated costs into 2023. Additionally, we'll have to move expected sales growth from the new product line out a few quarters. Turning to the U.S., U.S. consumer confidence has been shaken by the rampant inflation and geopolitical uncertainty in recent months. Yet, we also see signs in the market that point to a resilience in the U.S. consumer, such as record wage gains, low unemployment, and a projected 3% domestic GDP growth in 2022, despite significant pressures from COVID and supply chain challenges. We anticipate that once we work through the immediate shock to the recent macro developments and we lap the impact of stimulus in the prior year, we should see a modest improvement in the U.S. retail market, most likely in the back half of 2022. The third external factor is commodity inflation. As we've previously discussed, input costs for the entire betting industry have been rising over the last two years. In response, we've been able to neutralize the dollar impact of these commodity increases through multiple pricing actions. Last time we reported, we had fully passed on price inflation. Subsequent to reporting, another wave of inflation driven by oil and fuel supply issues generally caused by the Ukrainian war hit the market. Our latest outlook for 2022 commodity cost has increased. So we have announced another round of pricing actions for both our domestic and our international markets that will take effect in the second half of 2022. We expect these additional pricing actions will offset the expected incremental inflation headwinds, resulting in normal profitability on a dollar basis once fully rolled out across the markets worldwide. Turning to COVID, COVID continues to impact operations. Although cases have been decreasing globally, benefiting our operations in many of the markets we serve, recent flare-ups of variances in China have negatively impacted our wholly owned and joint venture operations that operate in Asia. As a ballpark number, we expect a $10 million EBITDA headwind in the second quarter as a result of this most recent COVID outbreak. Lastly, I want to update you on the ongoing supply chain disruptions. The global supply chain is in better shape overall this year than it was this time last year, although certainly continues to have some challenges. For example, the recent challenges in China that have materially impacted the supply chain in Eastern Asia, though it has had minimal impact on our North American and European supply chains, as most of our supplies come from the U.S. and Europe. We do source adjustable bases from East Asian suppliers, but we've largely mitigated that risk in the near term, as we are well stocked for 2022. As I mentioned, our supply chain has improved, although we are still experiencing some plant inefficiencies. and it may take a few more quarters for the plant's operations to normalize. We've taken many actions to secure our global supply chain against future disruptions, including diversifying our supplier base, improving vendor and customer communications, and strengthening our inventory positions of both temper-finished goods and adjustable bases. The team is focused on driving long-term growth of the company, through delivering on key initiatives which we believe will facilitate future EPS growth. These include, first, develop the highest quality bedding products in all the markets that we serve. Second, promote worldwide brands with compelling marketing. Third, optimize our growing omni-channel distribution platform. And fourth, drive increased EPS and prudent deployed capital. Over the last few years, our long-term initiatives have led us to diversify our brands, products, channels, markets, and technologies to meet the needs of more consumers wherever and however they want to shop. This diversification of our business has significantly broadened our addressable market worldwide, securing our position in the global betting industry. These same initiatives are driving the building blocks to our next stage of growth. These building blocks include investing in innovation to meet consumer needs, seeding Stearns and Foster to be our next billion-dollar brand, growing our global wholesale business through existing and third-party partnerships, investing in our operations to position our business for significant growth, expanding our direct-to-consumer business worldwide through growing our e-commerce and company-owned store presence, increase our international total addressable market through launching all new temper products in Europe and Asia, and executing on our capital allocation strategy. With that, I'll turn the call over to Bhaskar.

Thank you, Scott. I would like to highlight a couple of items as compared to the prior year. Sales increased 19% to $1.2 billion, and adjusted earnings per share increased 8% to 69%. As expected, we neutralized the dollar impact of commodities through our pricing actions in the first quarter. This affected our gross margin as sales increased with no change in gross profit dollars. This accounts for 260 basis points of the year-over-year change in consolidated gross margins for the quarter. Turning to North American results. Net sales increased 5% in the first quarter, On a reported basis, the wholesale channel increased 6% and the direct channel increased 2%. The direct channel increased 78% on a two-year stack basis, highlighting its strength in a particularly challenging prior year comp. North American gross profit margin declined 340 basis points to 37.8%. This decline was driven by pricing benefit to sales without a change in gross profit, and operational inefficiencies related to supply chain disruptions. These factors were partially offset by favorable mix. As Scott mentioned, we implemented multiple price increases to offset the highly inflationary environment and recently announced additional pricing actions across our domestic and international markets. Global inflation has recently surged, and we expect approximately $15 million of incremental commodity headwinds in the second quarter. However, we expect that the second quarter impact will be neutralized on a dollar basis for the full year once the most recent pricing actions take effect in the back half of 22. North American first quarter operating margin was 16.7%, a decline of 290 basis points as compared to the prior year. This was driven by the decline in gross margin, partially offset by operating expense leverage. Now turning to international. Net sales increased 92% on a reported basis, primarily driven by the acquisition of dreams. On a constant currency basis, international sales increased 99% as we experienced $10 million headwind this quarter from unfavorable foreign exchange rates. As compared to the prior year, our international gross margin declined to 55.3 percent. This decline was driven by the acquisition of DREAMS and the pricing benefit to sales without a change in gross profit. As a multi-branded retailer, DREAMS sells a variety of products across a range of price points. Their margin profile is lower than our historical international margins. This is driving the major change in year-over-year margins internationally. Excluding dreams, the underlying margin performance was in line with our expectations across both Europe and Asia-Pac. Our international operating margin declined to 21.7%. This was driven by the decline in gross margin and operating expense deleverage as costs in the current year have returned to a more normalized level. Now moving to the balance sheet and cash flow items. We generated first quarter operating cash of $86 million. Our inventory days extended throughout the quarter as we continued to build safety stock to be able to better support our customers across our global operations. At the end of the first quarter, consolidated debt less cash was 2.6 billion, and our leverage ratio under our credit facility was 2.2 times. Our leverage ratio is down nearly one turn from where it was two years ago. highlighting the flexibility of the business model. Our highly variable cost structure gives us the ability to swiftly adapt to changing conditions. Our fortified balance sheet and robust cash flow attributes give us the optionality to continue to invest in the business to drive long-term growth even throughout challenging periods. Now turning to 22 guidance. The company has updated its earnings guidance and now expects adjusted EPS to be in the range of $3.20 to $3.40 in 2022, which includes the impact of the acquisition of Dreams and our share repurchase program. Our EPS expectation contemplates the expected benefit from year-over-year sales growth of at least 10%. driven by the pricing actions we have taken to neutralize the commodity cost inflation and the acquisition of dreams. We expect that 2022 will be a heavy investment year for the business, which will lay the groundwork for future growth. First, we expect to make thoughtful marketing investments to drive long-term brand awareness. Our brands are among the most highly recognized, recommended, and desired in the industry. and we plan to make record investments of more than $500 million in advertising this year and will also be up on a rate basis year over year as we continue to invest. Second, we expect to continue to invest in our operations to deliver the best service for our customers. Our global supply chain has been improving, although we are still managing through some plant inefficiencies as we strive to deliver high-quality product to the market. These investments to secure our supply chain and retain our valuable employees are expenses that otherwise would naturally have flexed with sales. They equip us to fully support our customers while managing through supply chain disruptions and a tight labor market. We experienced $10 million of incremental operational inefficiencies in the first quarter and anticipate a similar amount in the second quarter. As Scott mentioned, there are still uncertainties related to the war in Ukraine, rampant inflation, and the resurgence of COVID-19 variants. We expect these factors to challenge our second quarter sales and EPS versus our prior expectations. For the second quarter, we anticipate sales growth of at least 10% with EPS declining year over year. Internally, we are targeting that on a two-year basis, second quarter sales will grow nearly 100% and EPS will grow approximately 200% over 2020. We would expect the third and fourth quarter to be up year on year for sales and EPS as pricing actions go into effect and the U.S. retail market stabilizes a bit. 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 the new foam flooring plant. DNA of about $200 million, interest expense of $90 million on a tax rate of about 25%, and a diluted share count of 183 million shares, which includes our assumption to repurchase at least 10% of our shares outstanding. With that, operator, would you please open up the call for questions?

As a reminder, to ask a question, you need to press star 1 on your telephone. To withdraw your question, press the pound key. In the interest of time, please keep questions to one per person. Please follow the Q&A roster. Our first question will come from the line of Bobby Griffin from Raymond James. Your line is open.

Good morning, Bobby. Thanks for taking my questions. Hey, Bobby. Scott. Hey, thank you. Scott Bosh, can we unpack the inventory numbers a little bit? It's up pretty big year over year and on a two-year basis as well. Just a little concern, you know, given that the channel probably has a little extra inventory in it, and then you're passing through another price increase. Does that give you any type of concern? And then can you maybe just unpack what some of the big drivers are of the inventory increase? I know you've got product launches coming here in the U.S. too.

I'll let Bosh clean me up a little bit. First off, you have to realize prices have gone up. So we've got each inventory at SKU. It's going to cost more than it did last year. We certainly are fully stocked for temper because, as you remember, we were short on temper last year. And so we've got more safety stock in temper to make sure that we can keep our order-to-delivery times in line with our expectation and our retailers' expectation. And then, obviously, there have been challenges in China. And so we made a very good decision early on to increase our safety stock on an adjustable basis by a good bit to protect us from any disruption in China, and that's ended up being a real good call. I think those are the main items, because obviously Sealy is bill to order. So what you're looking for is a price increase on the items, safety stock and temper, and a lot of safety stock and adjustable basis. I think from our position, I'm not worried about the inventory levels at all at the current level. Going into the busy season, which has got to do with what I should point out.

And our next question will come from the line of Peter Keith from Piper Sandler. Your line is open.

Hey, thanks. Good morning, everyone. So with the revised revenue outlook, there's kind of a lot of moving pieces with some pricing and dreams. I guess at this point, just to help frame it up for us, what are you guys expecting from an overall organic demand standpoint that's baked into that revenue outlook?

Absolutely. So just to go through the pieces, a very good call-out as it relates to dreams, that should be a tailwind for us, as well as from a pricing standpoint, that should be a tailwind for us. Think about that as, let's call that mid-single digits from both of those particular items. As you think about organic, what we would anticipate is that the underlying business, we would see a bit of growth outside of those big drivers.

And that growth is going to be driven by price. We would expect the units probably would be down, we'll call it North America, 3% to 5%. It would be kind of in the range of a guess. But that's basically what it takes in.

Our next question will come from the line of Seth Basham from Redbush Securities. Your line is open.

Thanks a lot, and good morning. Can you just contextualize the first quarter and how it finished up? You guys beat your updated guidance on the top line pretty handily. Just want to understand a little bit better what happened there. And then, secondly, as a follow-up question, Can you give us a sense of why you're not going to flex your costs lower given the demand environment that remains depressed and uncertain? Sure.

Let me work on that a little bit. First of all, on the sales, sales were stronger in the first half of the quarter and got weaker in the second half of the quarter after the Ukrainian invasion. There was a clear change in the marketplace, so we did a pre-release related to sales. But the books weren't closed at the time, so you never know exactly what sales are going to be, and you're sure as hell not going to miss a pre-release. So we'll call that the majority of the overperformance from that standpoint. And then you talked about whether or not we should flex out our cost structure. The way I would say it is, I think on the last earnings call I said the company's positioned you know, from an offensive position. And we continue to be on offensive footing, whether it be in advertising, new product launches, capacity, new ERP system, growing our retail store base. Clearly, the market has decelerated some. And we had, you know, March was not particularly strong. And April is the toughest comp of the year. And April has not started off very well for the industry. Good news is April is also the smallest part. of the quarter, and what's key really is the holiday period. When we look at the overall trends, whether it be GDP, whether it be unemployment, and other things that we look at, it still looks like to us that the world looks pretty good, not as robust as it was, but certainly are not on a recessionary footing. If we were to see different trends, we would pivot. And you've known us for quite a while. You saw how we pivoted during when COVID hit. We can pivot pretty fast in a cost structure that's 70% variable. But currently, we're taking what we believe to be a good amount of share, both in sales and certainly in profits. And we're continuing to be on an offensive footing.

Next question comes from the line of Atul Maheswari from UBS. Your line is open.

Good morning. Thanks a lot for taking my question. Scott and Pascal, your guidance implies mid to high single-digit revenue growth for the back half of the year. Can you maybe provide some more color on how this breaks down into North America and international outside of dreams? And then really for you to achieve this guidance, are you assuming that the macro material improves in the back half, or you can achieve this outlook if the macro remains where it is?

You want to do the detail, then I'll do the macro? Sure.

So as we think about it from a growth standpoint, our expectation would be that North America would continue to grow, really driven by price and et cetera. as you think about from an international standpoint is that we do what's contemplated is that the ukraine situation will continue for the balance of the year with the international growing primarily from dreams specifically as we get into the back half of the year yeah i mean it depends on what country now you want to look at it but you just take north america you know what we said was we're thinking three to five percent unit decline uh

That's not a very good betting market. And if you compare that to like the worst betting market in history would be more like 2008. That was probably a 7% to 10% unit decline. So I guess what I tell you is our read is that the retail market was surprised, stunned, shocked by the Ukrainian invasion and the resulting increase in oil prices and consumer confidence. It has certainly fallen. I think we're, you know, like 107 today. I think we're more like 115 at the beginning of the year. And certainly sentiment has come down into the, you know, 50s. But it also doesn't look like a recession. So we think this is a kind of shock to the system. And as long as you don't have another shock to the system, which would be the expansion of the Ukrainian war or another round of oil price increases, We think people get used to some of this and it stabilizes. If we go specifically to Europe, which is obviously one of the more challenged areas, as I said in the prepared remarks, we were running up 30% in orders pre-invasion. After invasion, those orders turned negative. And as we sit here today, the orders are pretty much back to flat to, you know, up one or two percent. I'm pointing out the rebound once things kind of semi-normalize in a different world. Not different than what we've seen in the COVID situation. COVID hits, it's pretty bad for a little while, and then people deal with their environment and things begin to kind of normalize. So I would say to hit our guidance, we're expecting no more surprises of the type that we've had, but also not expecting anything to get a whole lot better than where we're sitting today.

Our next question will come from the line of Keith Hughes from Truett.

Thank you. Just to dig in the quarter a little bit more, can you give us some more detail on how much DREAM is added to the quarter and what overall worldwide pricing was up year over year?

Absolutely. So when you think about DREAM, initially when we came out, we indicated it was about $400 million on an annual run rate basis. And the way that we think about that is that it has performed ahead of our expectations, so a bit ahead of the 450. When you think about global pricing is that we did call out that it was about, let's call it 250, 260 basis points improvement or a drag on gross margin. When you reverse engineer that math, that would apply about $70 million from a price standpoint globally.

Yeah, and I think what I'd add in there is just look, our capital allocation program is certainly enhanced EPS this quarter, and that's part of our core business is allocating capital, and because we're allocating generally operating cash flow, we think of that as kind of core operations.

Our next question will come from Brad Thomas from McKay Bank Capital Markets. Your line is open.

Hi, thanks. Scott, I was wondering if you could talk a little bit more about what you're seeing in terms of the promotional landscape and how you're thinking about promotions and advertising as we go through the year. And do you get more aggressive? Do you need to get more aggressive because of the backdrop? And then, Bhaskar, if I could just ask a quick question on the second quarter guidance. I think the math, if I'm doing it right, implies earnings around the 50-cent level. Just any help on making sure I've done that math right? and how the margins may play out in 2Q. Thanks.

Yeah, I'll talk about promotions, and I'll go through the second part of the question. First of all, you remember from previous calls, we didn't pull back on promotions, even though demand was robust. And so from a manufacturing standpoint, we plan to be on the same promotional calendar costs that we had last year, and don't expect any change there. We advertised last year. This year we're going to advertise. Now, there's other promotions, which I'll call those retailer promotions. And I do think the environment at the retail level was less promotional last year than maybe in previous years. And the retailers are getting back in the game from a promotion standpoint and from an advertising standpoint. Some retailers last year pulled back on their advertising. And in fact, some retailers didn't earn their full co-op. because they pulled back on the advertising so far. And I think one of the things of a slower first quarter has taught the retailers they've got to get back in the game. They've got to be a little bit more promotional. They've got to spend the advertising dollars. And that's what we're seeing them do, and that's what they're working on. And with the holiday period coming up will be critical to understanding the full year. What we've seen so far this year is during holiday periods, good growth. year over year, and during the valleys when you're not on holiday period, negative same store, if you want to call it same store or growth.

Brad, good call out on the quarter. So the way that we were thinking about that from a math standpoint, it was closer to 60 cents. Let's call it a bit in and around 60 cents. And when you think about that specifically is that we do expect that to be the most challenging when you think about the full year on a quarter EPS standpoint. And the big drivers there is we did announce another price increase. However, that does not go into effect until the back half of the year. So we will be exposed on commodities by about $15 million. In addition, we've got the challenges happening specifically over in China with the COVID variant. So there's a headwind resulting from that as well. And then, as Scott mentioned, we're going to continue to invest and come out of this stronger than our competition. So we have the advertising investments that will happen later. throughout the year but in the second quarter as well.

Our next question will come from Curtis Nagel from Bank of America. You may begin.

Good morning. Just a quick one on 1Q. Scott, I guess could you talk to March performance relative to the other two months in the quarter? What was it down, or could you say how much, at least directionally? And just a quick follow-up on the Stearns and Foster website launch, really interesting, just curious how that's trending so far, and should we expect a Healy transactional website launch as well later this year?

Sure. I tell you, in the first quarter, business was booming. solid in January and February, and post-invasion, business was very soft, is the way I would tone it. And early April is soft, with Europe having some recovery here recently. Stearns and Foster is certainly a highlight. Stearns and Foster's growth rate in the first quarter was the highest of any of the brands, as I recall. And we did just launch the Stearns and Foster direct program website, too early to have any real report. But I think our early investments in Stearns and Foster are showing progress, and we feel really good about it, and we're gonna continue to lean in. And what I'm hearing from retailers is we've got good support from the retailers, so there could be more to report throughout the year on Stearns and Foster.

Our next question comes from Laura Champagne from Loop Capital. Your line is open.

Thanks for taking my question. It's on the outlook for 10% growth at least this year. How much of that do you contemplate coming from price mix?

A lot. A lot. If you look at the price increase, probably that's double digits. almost itself. When you look at it on a like-for-like basis. On a like-for-like. And then because you're also getting a little bit more higher end rather than lower end, you're getting some benefit. Then you've got some dreams certainly going in there. So if you were to strip out price increase and you were to strip out acquisitions or capital allocation issues, you'd see we've got a pretty good headwind in the business. But I think that's – I don't – we don't really – we're not ashamed of that. That's really part of the strength of the business is because of the broad diversity and capital allocation program, the free cash flow of the business. It allows you to continue to stay on your business plan and plow right through these softer periods. Right.

And, Laura, the way to think about that from a pricing standpoint, when you put all that together and you think about it globally, is think about price being mid-single digits. Think about dreams being mid-single digits. We still have growth drivers, as Scott said, investing in the business from a DTC standpoint, OEM, et cetera.

And although we don't have other people's numbers yet, and we'll keep looking at it, all indications are Certainly in the fourth quarter, we took a good bit of share, and I suspect when we see all the first quarter numbers and analyze, I suspect we took even more share in the first quarter. So from a competitiveness and strategic standpoint, we really like where we're positioned and think that we continue to get stronger from a competitive standpoint.

And as a reminder, that's Start follow-ups. Our next question is from Guggenheim. Your line is open.

Hi, good morning. Just a couple of quick questions. First, Scott, on the industry at retail inventory levels, can you just give us a little more color around any sequential changes or improvement that you saw sort of Q4, Q1, and into Q2? And then, Oscar, on the marketing side, I think you had said previously $550 million in marketing, and I think you said this morning at least $500. Is the $50 million, is that sort of a little bit more discretionary as you think about the rest of the year, or is that really the magnitude of the cut that you're looking, you're giving some of the push into 23 for the international side?

Scott, if it's okay, I'll deal with that, the advertising. So one of the attributes of our business, the strength of the business model is the natural flex of it. So as you think about advertising, there's a couple of components. One is cooperative advertising where we provide dollars to our retailers to advertise on our behalf. So as the revenue flexes, what you're going to see is that the cooperative advertising flexes as well. In addition to that is that we have the direct advertising, national advertising. We believe that's a good driver from a growth standpoint over the long term. So what you're seeing is good call out, 550 is how we were previously thinking about it, and now given what our latest expectations are is what you're seeing is advertising is flexing primarily from co-op and a bit through the advertising, our direct advertising.

And what was the first part of this question, Oscar? Macro? Industry.

Just the inventory levels at retail.

Got it. Look, we had some, we'll call it unusual activity last year in inventory, and we called that out on some calls. I would say that we think it got normalized by the end of January, so I don't think we really have a lot to talk about going forward on inventory. Other than what I can tell you, look, it's been a little slower, so the retailers do have a little bit more inventory, but it's not the same kind of activity we had last year, and I don't think it's significant to the numbers. We are feeling some pressure from what we'll call the furniture stores. is the warehouse space is getting challenged as they have a lot of furniture product that was on the water that was headed to North America and it needs a place because the furniture sales have slowed down significantly. And so that's squeezing some of the retailer's warehouse space, which is causing some pressure to decline or lower their bedding inventory. But again, I would consider those almost normal business. It's a little bit of a hiccup here, but not significant at the level you're thinking of when you're thinking about earnings, guidance, and those kind of things.

Our next question comes from William Reuter from Bank of America. Your line is open.

Hi. My question is on M&A. Given that the environment is pretty uncertain, Does this leave you more cautious on potential transactions, or there may be smaller targets that may be having more challenges contending with inflation, so there may be better valuations, and as a result, there could be more transactions?

Well, there's certainly better valuations, both from if you want to compare it to the public market or risk-free rates. Certainly, the pricing for acquisitions has moved down as a more challenging environment, and especially for companies that are tied to the Internet. You know, the changes that were made by Apple, Google, and cost of customer acquisition for just pure online playing companies, that's been kind of a game changer. So their growth rates, their cost structures have changed quite a bit. So like always, the market changes up and down. Now, from our perspective, I don't think anything's really changed. I mean, we continue to look at deals, occasionally price deals. We're in the market. Everybody knows that if it's in the betting industry anywhere in the world, we want to look at it. And if we think that that company can be bought at a reasonable price and can make us stronger and more competitive, we're not, I don't think we're hesitant by any means to transact. So one of the reasons we've kept the leverage low and our cash flows are very strong. And if we don't invest in other companies, then we'll buy some more stock back. And so, you know, we continue to do that trade-off. Probably what has more impact on the acquisition market is our stock is trading for, I don't know, a PE of like 8 or something, which when it's normal, PE is like 12 to 14. A little bit insulting, but those things happen. And so when you do an acquisition, you do have to consider your alternative use of capital. And, you know, stock buyback at an 8 PE is a pretty tough comp when you're looking at acquisitions.

Our next question will come from the line of Jonathan Matuszewski from Jefferies. Your line is open.

Great, thanks for taking my question. Is there a way to think about the impact of the delayed Tempur International product launch on the guide moving from 15 to 20% down to 10%? Thanks.

Sure. From my perspective, the Tempur International launch was going to cost us quite a bit of money. It was going to be a little bit of a drag on this year's EBITDA. So it got moved. which would normally be, so that comes back to you in the guide as a benefit. At the same time, we have a little Ukrainian war going on, and that's a big negative, and that takes a lot of the benefit or almost all the benefit away from what would normally have been a positive for this year's dividend and earnings guide, and we kick the launch off until next year. where we'll have some of those costs, but we'll also have the increased sales in 23. That's exactly right. Pretty much close, almost dollar for dollar-ish. That's exactly right.

Our next question will come from the line of Bobby Griffin from Raymond James. Your line is open.

Hey, guys. Thanks for letting me get one more in here. I just wanted to, Scott and Buster, talk about the second half of You guys called out for earnings to be up year over year. I think some of that would be share count, you know, probably be worth 20 cents or so versus last year, maybe a month of dreams. But, you know, that would kind of put you still on an apples to apples basis of $2 this half versus $2 last half last year. What's some of the other drivers that kind of give confidence in that? I mean, the inflationary environment is worse this year. The underlying macro environment probably is arguably worse for retail. I guess what are you guys assuming when you kind of unpack 2H versus 2H?

Well, one is you've got to use your comps, I mean, to start with, right? I mean, that's part of it. You know, part of the numbers you had this first half of the year, I mean, look, March, April, that time period last year, those are really, extraordinary comps that you're trying to comp off of. Look, we're going to have some additional retail stores in. You're going to have the pricing increase in. We had negative commodity expense we were picking up last year because we hadn't got prices in last year we were trying to compare with. And we've got a new product coming out, the Sealy product that's coming out, and we continue to take share in the marketplace. Right.

So, Bobby, the way that I think about that is that in the second quarter, there's a confluence of events, whether it be what's happening in China with basically Shanghai being shut down. And I think we called out specifically that's going to be about a $10 million drag from an EBITDA standpoint. And that's not exclusively China, but that's broader Asia. So as we think about, as we go into the back half, I don't think that we're not contemplating that that Shanghai situation or China situation is going to happen. So that should be a help for us as we get into the back half. In addition to that, we also, again, the strength of our brands and products, et cetera, we have put in another price. However, in the first half, or specifically in the second quarter, we got about $15 million of exposure associated with commodities. So when you think about that in the back half of the year, and you think about the lapping of price in the back half, that should be a tailwind for us as well. And then though we're not anticipating a significant improvement, as Scott mentioned, that consumer getting a bit of stabilization, that should be a help for us as well.

Yeah, and I would highlight one of the sentences that Oscar said. is we are assuming that China is going to be open for business, you know, come the third quarter.

Yes.

So we've got, we'll call it one quarter of China in lockdown. You know, that's certainly helpful in the back half also.

Thank you. And I'm not showing any further questions in the queue. I'll turn the call back over to Scott Thompson for any closing remarks.

Thank you, Operator. To our 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 its board of directors. This ends the call today, operator. Thank you.

Mike. Conference call. Thank you for participating. You may now disconnect. Everyone have a great day.