Tempur Sealy International, Inc.

Good day, and thank you for standing by. Welcome to the Temporarily Second Quarter 2022 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'll need to press star 11 on your telephone. Please be advised that today's conference is being recorded.

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 Security Litigations Reform Act of 1995. These forward-looking statements include uncertainties, and actual results may differ materially due to a variety of factors that could adversely affect the company's business. These factors are discussed in the company's SEC filing, including its annual 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 obligation to update any forward-looking statement. This morning's commentary also includes non-GAAP financial information. Reconciliations of this non-GAAP financial information can be found in the accompanying press release, which has been posted on the company's investor website at investor.temperzilli.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 second quarter earnings call. I'll begin with some commentary on the second quarter, then spend some time discussing how we are continuing to drive our long-term growth initiatives in the current very fluid operating environment. Then Bhaskar will review our second quarter financial performance in more detail and discuss our updated 2022 guidance, which has been revised to reflect the changes in the market. Finally, I'll share a few closing remarks regarding how our business model would operate in a recessionary environment, and then we'll open it up for Q&A. In the second quarter of 2022, net sales were 1.2 billion in adjusted EPS with 58 cents, both slightly below our expectations, primarily due to the U.S. market and a 30 million sales backlog on U.S. Sealy as we brought our new ERP system online. We made significant progress in this backlog and expect to return to normalized lead times by the end of the third quarter. The second quarter was also impacted by three additional factors. First, flare-ups of COVID variances internationally, particularly in our Southeast Asia markets. Second, commodity inflation impacting our costs ahead of the timing of our price increases, which went into effect at the end of June and will benefit future quarters. And third, operational investments to secure our supply chain to retain labor in order to maintain product quality and customer service. Our international operation performed in line with our expectations, even as we faced challenges. In North America, the overall operating environment deteriorated during the quarter as the forward outlook for the economy and our sector diminished for all the reasons that have been well reported. We believe that the overall U.S. mattress industry, our largest market, had its toughest volume decline in 15 years, with units down 20 to 25% this quarter compared to last year. This environment again gave us a chance to demonstrate the resilience of our business model as we generated profit, invested in our business, returned capital to our shareholders, and outperformed the market. The team continues to focus on execution. First, we continue to work on expanding our leading position in the domestic U.S. betting industry. The last few years, our growth initiatives and industry-leading products have driven a meaningful outperformance relative to the market. We continue to drive market outperformance with our focused delivery of best-in-class product quality and customer service. We completed our multi-year journey of transitioning more than 50 of our global subsidiaries and using five different ERP systems to using one common system. This investment in consolidating our operations is expected to drive long-term efficiencies across our global operations, enhance cybersecurity, facilitate customer communications regarding order status, and improve our direct consumer capabilities. We now are truly one company if this completes the merger of Sealy and Tempur. I personally want to thank all of the employees who worked on this critical project. Great job. Third, Stearns and Foster performed very well relative to the market in the second quarter and is currently our fastest growing brand in the domestic market. Additionally, we launched the Stearns and Foster e-commerce website this quarter, although still very small. It's performing ahead of our expectations and ahead of where we were at this time when we launched our successful online cocoon by Sealy. Consumer research has identified that there is an unmet market need for high-end traditional industry and budding products, and our strength and foster e-commerce channel is designed to provide additional opportunities to serve this demand. Our approach is similar to our direct temper strategy in that we drive meaningful brand awareness to the benefit of Stearns and Foster sales across all distribution channels, growing ASP, driving advertising dollars, and profits for all of our partners. We'll launch our all-new collection of Stearns and Foster mattresses in the fourth quarter. The new Stearns and Foster line is designed to further distinguish our high-end traditional innerspring brand with superior technology, clear product step-up stories, and new contemporary look. Fourth, in addition to Stern's and Foster's launch, the other new product launches in our pipeline continue to be on track and on plan, furthering our objective to bring industry-leading innovation to market. In the second quarter, we completed the rollout of our new premium Sealy products, which offer improved comfort and support technology. We also launched our new Sealy Natural Collection, which was thoughtfully designed with our commitment to sustainability and environmental sustainability. environmental preservation mind. In the fourth quarter, we expect to launch a Sealy mattress with a best-in-class pressure relieving gel grid layer at a consumer-appealing mid-market price point. This product is designed to target a relatively small category of consumers looking for a non-traditional mattress feel. In 2023, we expect to begin to roll out our lineup of all-new tempered mattresses, pillows, and bed bases across both Europe and Asia. This new product lineup features exciting customer-centric innovation, allows better channel and customer differentiation, and has a wider price point. Retailers' reaction to this new product and price points today has given us confidence that this updated product strategy will enable us to significantly increase our total international addressable market. In addition to Asia and Europe rollouts, in the first quarter of 2023, we plan to introduce our new line of Temper Breeze products in the U.S., along with a new line of adjustable bases with incremental consumer-focused features and benefits. We have made substantial investments in 2021 and 2022 to prepare for these launches, and we're looking forward to bringing these new consumer solutions to market. Turning to the final highlight, in the first half of 2022, an incremental 10 plants diverted 100% of manufacturing byproducts from landfills. We continue to be on track to achieve our goal of zero landfill waste at our wholly owned temper and sealing manufacturing operations worldwide. by the end of the year. Our focus remains on delivering shareholder value through the execution of our long-term strategies by investing in our brands, products, people, and capacity. We also continue to allocate capital to share repurchase as part of our commitment to returning capital to shareholders. We've repurchased over 8% of our shares outstanding year-to-date and plan to repurchase at least 10% in 2022. Our key initiatives, which have driven growth from a $500 million company at the time of our IPO to a $5 billion company today, are the underpinning of our confidence and our ability to continue to extend our leading position in the global betting market. These key initiatives include, first, develop the highest quality betting product in all the markets we serve. Second, promote worldwide brands with compelling marketing. Third, optimize our powerful omnichannel distribution platform. And fourth, drive increased EPS through operation, execution, and by prudently deploying capital. These initiatives have shaped the building blocks to our next stage of growth, which we're laying the groundwork today. In the US, we're investing in new products, compelling brand advertising, expanding channel diversification. In our international operations, we're investing in the 2023 launch of our all-new temper products in Europe and Asia to increase our international total addressable market. Our operations are also an investment focus this year as we execute on four key priorities, complete the transition to our new ERP system, to stand up a third U.S. foam pouring plant, Three, strengthen our supply chain worldwide. And four, increase safety stock of imported products, key components, and inputs with long lead times. With that, I'll turn the call over to Bhaskar. Thank you, Scott. I would like to highlight a few items. Consolidated sales increased 4% to $1.2 billion. Adjusted earnings per share was 58 cents. And we repurchased over 4 million shares in a quarter. At the end of the second quarter, we successfully implemented a new round of pricing action. This follows previous rounds of pricing, all of which were designed to fully offset the headwinds from rising input costs. Our pricing actions are diluted to gross margins as sales increase with no meaningful change in gross profit. Since 2019, this dynamic has accounted for 400 basis points of headwind to consolidate a gross margin. We believe that designing price increases to cover the dollar impact of inflation is both beneficial for near and long-term retailer advocacy and end consumer demand. We expect certain input costs may ease beginning in the back half of the year. If this relief were to come to pass, we anticipate the unfavorable margin dynamic that we have experienced over the past couple of years will reverse, providing a tailwind in 2023. As Scott mentioned, we are leveraging our industry-leading balance sheet and cash flow attributes to invest in the business, laying the groundwork for future growth. We have made investments to diversify our supplier base to fully support our customers while managing through a fragile global supply chain and a tight labor market. We invested an incremental $10 million in our operations in the second quarter to maintain our high standard of product quality and customer service. We anticipate these incremental investments to continue to a lesser degree in the second half of the year. For 2023, we are set up to drive efficiencies as the global supply chain infrastructure stabilizes and our new ERP system drives synergies. We have adjusted $17 million of charges during the quarter, all of which are permissible adjustments under the terms of our senior credit facility. $9 million of those adjustments were related to the transition of our new ERP system, which, as Scott noted, was completed in the second quarter. In addition, we had $4 million of organizational restructuring costs and of operational startup costs relating to expanding our capacity. We expect there may be a similar amount of adjustments related to these items later this year, primarily from further investments in our new foam pouring facility in Crawfordsville, Indiana. Now turning to North American results. Net sales decreased 5% in the second quarter. On a reported basis, both wholesale and direct channels decreased 5%. North American adjusted gross profit margin declined to 38.7%. This decline was driven by operational investments to service our customers and pricing benefit to sales with no gross profit. These factors were partially offset by favorable mix as Stearns and Foster performed well in the quarter. North American second quarter adjusted operating margin declined to 16.5%. This was driven by the decline in gross margin and advertising investments in Stearns and Foster ahead of the planned fourth quarter launch. Now turning to international. Net sales increased 59% on a reported basis, primarily driven by the acquisition of green. On a constant currency basis, international sales increased 68% as we experienced $10 million of headwind this quarter from unfavorable foreign exchange rates. Foreign exchange continues to fluctuate, and we believe that FX will be a larger headwind for us going forward. If current FX rates were to hold, we estimate a year-over-year headwind of at least $80 million to international sales and $15 million in profits in the second half of 22. This has been considered in our revised guidance. As compared to the prior year, our international gross margin declined to 53.1%. This decline was driven by the acquisition of Dream's mix pricing benefit to sales with no gross profit. 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 margin. This is driving the major change in year-over-year margins internationally. Our international operating margin declined to 14.5%. This was driven by the decline in gross margin, the impact of COVID-related shutdowns on our joint venture operation, and operating expense deleverage. Now moving on to the balance sheet and cash flow item. In the second quarter, we had a slight use of operating cash flow our inventory days extended throughout the quarter as we reinforce our safety stock of adjustable basis and raw materials to be able to better support our customers across our global operations. We believe our focus on providing our customers with the best service has been the key driver of our outperformance relative to the broader industry. At the end of the second quarter, consolidated debt left cash was $2.8 billion, and our leverage ratio under our credit facility was 2.7 times within our target rate of two to three times. Now turning to our revised 2022 guidance. We have updated our earnings guidance and now expect adjusted ETFs to be in the range of $2.60 to $2.80 in 2022. Our guidance contemplates full year consolidated sales to be consistent with the prior year. North American and international sales to be both down low single digits in the second half of 22 versus prior year. Gross margin to improve from the second quarter into the back half of the year as our latest pricing actions are now in effect. and our advertising rate in the back half of the year to be consistent with our second quarter advertising rate. Also included in our 2022 outlook is our plan to invest over $250 million in CapEx to support the long-term needs of our business. In addition to our maintenance CapEx of $100 million, we are making significant non-recurring investments in our U.S. manufacturing capacity which includes standing up a new foam pouring plant in our expanded chemical tank farm and warehousing. The team is on track for these major capital projects, and we anticipate in future years that CapEx will moderate as these investments roll off. Lastly, I would like to slide a few modeling items. For the full year 22, we expect DNA of about $185 million. interest expense of about $100 million, a tax rate of about 24.5%, and a diluted share count of 180 million shares, which includes our assumption to repurchase at least 10% of our shares outstanding. With that, I will turn the call over to Scott. Thank you, Oscar. Great job. Clearly, the risk of an economic slowdown has increased today relative to just a few quarters ago. But before opening the call up for Q&A, I want to take a moment to discuss the resilience of our business model. Our highly variable cost structure, working capital strength, and low leverage profile insulates the business during challenging periods from the pressure to make unhealthy short-term decisions that may hurt the strength of our brands, or impede the business from capitalizing on new opportunities. Our global and geographic diversity mitigates the impact from market-specific downturns. The business has faced global sales declines in 2017 and 2020. In both periods, the flexibility of the business model allowed us to focus our efforts to come out of each situation stronger than we were when we started. This is a good reminder of how our business is well-structured to weather challenging periods. As sales trends change, first, approximately 70% to 80% of our costs flex down to accommodate for declining unit demand. Second, our input costs normally decline as they're normally tied to global economic activity. Third, our working capital needs reduce, freeing up cash. Fourth, our capital expenditures flex down to maintenance CapEx. Note, the last few years, we've been leaning in to growth investments. Regardless of the market environment, we have a track record of executing and outperforming the industry. We're not in a defensive situation today, but we have cut back on expected hiring. We've elongated some of our capital project timelines. Additionally, our early 2023 planning reflects the change in the operating environment. with a greater focus on driving operating efficiencies. With that, operator, will you please open the call up for Q&A?

Thank you. To ask a question on your telephone, you will need to press star 11. We ask that you please limit your questions to one question and one follow-up. One moment for our first question. Our first question comes from the line of Bobby Griffin with Raymond James. Your line is now open.

Good morning, buddy. Thanks for taking my questions. Hey, Bobby. And team, I guess first for me, could you maybe help us understand just a little bit more detail of, A, how the quarter progressed, you know, through the months, and was there any slight improvement here towards the end of June or going into July, was 4th of July? And then second, I'll just go ahead and ask a follow-up now, or we can get it out there, but to the follow-up side is, Within the guidance for the back half, how does that – what does that assume from a unit perspective? Is it roughly the same as what we've seen year-to-date, modest improvement? Is anything to help us kind of put into context the back half versus what we've seen on play so far this year?

Sure. Let me take the last question first. So when you think about just the cadence throughout the year, as we mentioned, is that the units from an industry standpoint, whether it be the first quarter or the second quarter, were challenged. We perform well and significantly better from an industry standpoint. As we think about the back half, we would expect, I would say, slight to modest improvement in our own units as we go into the back half. So when you think about what does that mean is not only do we get a bit of improvement from volume, we would expect some pricing benefit as well. As pricing that we took for the latest round of commodities, we get the full impact of that or the benefit of that in the back half. As we think about the cadence through the quarter, what I would say is, and as we pointed out in the first quarter, is that the normal seasonality of the business is back. And not only is that seasonal across the quarters, but it's also seasonal around, let's call it the holiday selling periods. So again, consistent with prior years, call it 2019, is that in the non-promo periods, we see some, let's call it base or softness. And then in the promo periods or in the holiday periods, we see nice growth. So hopefully that helps.

Thank you. Again, to ask a question, that's star one. And please keep your questions to one. Our next question will come from the line of Seth Bassam with Wedbush. Your line is now open.

Thanks a lot and good morning. Scott, you referenced how you can flex costs down significantly when the economy and demand turns lower. but your guidance for the back half of the year implies significant pressure on operating margins. Can you talk about when you will decide to reduce your fixed costs and capex more aggressively to current demand levels if they persist?

Sure. Great question. First, let me kind of frame it as to what we've done so far. When we looked at this year going into the year, we were expecting a fairly solid year. Then we've got certainly some macro issues, whether it be the conflict over in Europe, whether it be inflation, a little bit of COVID still around. China got closed. We got hit with FX. So we ended up with a little bit different operating environment than we expected going into the year. And I think on a prior earnings call, I said, you know, we were set from an offensive position. Obviously, when we got into the second quarter, it became clear that it wasn't going to be as robust a year as we thought. But at the same time, we're in the primary selling period, the second quarter and the third quarter. And it certainly didn't seem like any time when you're in the busy season to be doing too much, we'll call it, cost controls. So we've trimmed around the edges a little bit. We're going to play through the third quarter, get more information about the market. And I suspect at the end of the third quarter, we'll have to make a decision as to how we want to position the company, you know, for we'll call it late 2022 and really 2023. I would expect that we'll, you know, be more conservative in our budgeting next year. So I'd say we're going to play through the busy season, then look at it. I do have to say, though, although we probably we have spent some extra money to make sure that we are ready in case the market was robust. And remember, we are pretty much a just in time delivery kind of supplier to our customers. So it's critical that we have the capabilities to meet their demands. If you look at how we're performing relative in the market, those strategies have really worked. And I think when we get the results for the second quarter for the whole industry, I think we'll have continued to take market share and maybe accelerated our market share capture during the second quarter. So it's working, but it has been a little bit expensive, and we'll work through it. But to answer your question very directly, you should expect at the end of the third quarter that we'll look at that very closely to see that we have the right balance there. Perhaps just to double tap into that, if you think about our margin performance, one thing to be mindful of, is we would expect the back half EBITDA margins to improve from the second quarter. In the second quarter, there was a bit of a uniqueness happening, whether it be the geopolitical crisis that hit us or whether it be the commodities where we were not able to get in price until, let's call it June or the part of July. So if you think about that in relation to the back half, that should help bridge on why we think margins are going to improve. However, if you think about it versus prior years, just be mindful. We pointed out that the price without incremental gross margin is about 400 basis points when you think about it versus 2019. So yes, it is, when you think about the math and the rate, that is unfavorable. However, when you think about the strength and the brands and the products, what that shows is our ability to move on price, or sorry, move costs by taking pricing actions.

Thank you. One moment for our next question. Our next question comes from Keith Hughes with Truist. Your line is now open.

Thank you. My question's on pricing. If you could give us some details on the second quarter, how much pricing you got in a quarter, and then how much, particularly with another round coming over the end of the second quarter, how much you expect in the guidance for the second half?

Absolutely. Good question. So, when I think about that, let me answer the full year question. When we think about all-in pricing versus prior year plus the pricing actions that we've added is the way I would think about that is call it low to mid single digits. What I think about specifically in the second quarter is that last pricing action that we announced, we did not get that in effect until late in the quarter. What we did comment on is that that exposure that we had, meaning between commodities and price, was about $15 million that we'd recoup in the back half. So when you put all that together, what that would imply is that we would get a bit more pricing benefit in the back half than we would in the first half or in the second quarter.

Operator, we're ready for another question.

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

Hi. Thanks. Good morning, everyone. So maybe just to follow on that a little bit, as we look to the back half, Bhaskar, you noted input costs might start to come down a little bit. I was hoping you could provide some specifics on what areas you're seeing potential reduction. And then is the plan to hold price where you would get a gross profit dollar benefit or would you flex the pricing accordingly as some input costs come down?

From an industry standpoint, what I would say is that typically when commodity prices go up, pricing is taken. And when commodities come in, it's that those pricing sticks. That's the general philosophy from an industry standpoint, and that would be our strategy as well. When you think about our commodities portfolio, broadly speaking, is that within the raw material, the commodity profile or portfolio is that there are ups and takes. So whether it be a little TDI, whether it be a little, sorry, chemicals, whether it be the ancillary of purchase foam, barrel has come off, sorry, oil has come off the high of $125 a barrel. Lumber has come in a bit. So we're seeing some, you know, steel is hanging in, but perhaps there's some opportunity there as well. So, all of that has been considered in from an outlook standpoint, but it feels like just given this data play here from a bias standpoint, there is our bias is that there's more benefit. Then then the downside as versus where we were call it last year. Now, again, as we think about 2023, is that to the extent that that does come to pass is that would be incremental gross profit dollars that was flow through as well as. that rate item that we spoke to, the margin deterioration from price without growth profit, that would turn to be a tailwind as well.

Thank you. Our next question comes from the line of Carla Costello with J.P. Morgan. Your line is now open.

Hi. Given your comments about raising or building more inventory, more safety stock, can you just talk about how we should think about working capital for the next couple quarters? Do you see that being a typical benefit like it is in past years in third quarter? Or if you can give us any kind of full year sense of how much build you need in inventory and if there are any other offsets in working capital?

We've probably fully built the working capital needs that we have from a strategy standpoint to strengthen the supply chain and ensure safety stock for our customers. If anything, probably you're going to have more favorable working capital trends in the third quarter, I suspect, than you do historically, because we built in the second quarter. But there's no more incremental working capital needs. to implement this strategy, Mr. Bosco? No, 100%. I would agree. So the typical seasonality of the business is that we start spending working capital or benefiting in the back half of the year. That should come to pass. And as Scott mentioned, is that we did ramp specifically on temper and then raw material as well from a safety stock standpoint and around adjustable. And around adjustable because of the lead time and obviously the issues relative to shipping. So I suspect the working capital trends from a historical standpoint will be better in the back half than they have been. That's right. But certainly not negative based on what we know today. That's right.

Thank you. Our next question comes from the line of David Malinowski with Bank of America. Your line is open.

Hey, thanks. David on for Kurt Nagel here. Just wanted another couple of quick sentences, if that's all right, on the price increase that was taken in June. Was it across all brands? And then as well, have you kind of observed any demand destruction or trade down from pricing actions that have already been taken?

If I look through the Kemper brand to start with just in total and look at the higher end products versus the lower end products within Kemper, the higher end products have done better than the lower end products within Kemper. If you look at it from a brand standpoint, I think we called it out in the notes, Stearns and Foster actually grew during the quarter. Then Tempur would be the next performing brand, and Sealy would be the lowest performing brand. So I would say on the historical standpoint, we're not seeing any demand destruction from previous pricing actions, nor am I hearing any of that from the retailers. On the pricing that went in in June, I think that was across all brands, if I remember correctly. Across all brands. And as always, we're a little thoughtful about how we spread it. Generally, a higher-end consumer can handle it versus a, let's call it a value product. So we were thoughtful when we spread it. So from a pricing standpoint, I don't think we've seen any issues there. I think the issue that you're feeling a little bit in the second quarter is really a traffic issue. and consumers just being a little more conservative in their shopping.

Thank you. Our next question comes from B. Thomas with T-Bank. Your line is open.

Hey, yes, it's Brad. Thanks for taking my question. I want to ask a little bit more about trends in North America and the expectations in the second half with respect to mix and the performance of the temper brands. I was wondering if you could just give us a little bit more color. You know, you called out mix as still being a positive for margins in 2-2. What are you assuming in terms of how mix plays out, how temper holds up? And I guess in the first half of the year, it feels like, you know, tough comparisons that hurt the middle and lower end of the market. How are you looking at the higher end luxury and premium end of the market? Thank you.

Well, I think we're expecting the higher end to perform better. than the overall market, and I think temper has continued to take share in the U.S. market. Having said that, we're not expecting a very robust period in the back half. No, Oscar, is that pretty fair? I think that's right. You know, when you think about it holistically, North America, let's call it low single-digit decline, generally what happens during these periods of time is that high end hangs in better than when it otherwise would versus the low end. Also, we're very excited about what Stearns has already done in the second quarter and prior, and we're continuing to support that brand, and we've got a launch coming up here in the fourth quarter. So holistically, the way I think about that is the high end should hang in better than from a low end standpoint. And then I think when we look at our temper stores, the temper store, our flagship stores where we retail in North America, they had a reasonably good second quarter. you know, compared to the market. And I think once we get the final data for the second quarter, I think there probably will look like they performed very well.

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

Great. Thanks so much. You know, my question was on assumptions for second half. Historically, the wholesale betting units and sales have had a pretty good correlation with GDP and consumer confidence over time. So just curious what your implied second half sales guidance assumes as it relates to some of those macro dynamics. Are you assuming a sequential deterioration in GDP and consumer confidence and other dynamics? Just more color there would be helpful. Thanks.

Yeah, I'll start with that, and then I'll let Bhaskar clean it up a little bit. Clearly, we're not expecting a very robust back half of the year, with units probably declining in the industry. Call it single digits, for lack of a better way of saying it. And whether you call it a recession or whether it's not a recession, I think our outlook is that, at best, you're talking about a flattish recession. kind of world for the next two, three quarters. No, absolutely. If you look at the macro indicator versus where we were in the first quarter and where we are today, things have turned a little bit. And just reiterating what Scott said is no material improvement from here and no material decrement from here is how we're thinking about the back half.

Thank you. One moment for our next question. comes from Bob Durbel with Guggenheim Partners. Your line is now open.

Hi, Em. Good morning. A couple questions just on inventories. I guess your own inventories, but more importantly, inventories that retail. Just trying to understand what you're seeing with your retail partners and their patience and or willingness to be promotional around the industry given the weakness. Just to give some insights around that. That would be helpful. Thanks.

Sure. I mean, by its very nature, the bedding industry doesn't have much inventory in the system at the retailers because of the short order delivery time. So they don't carry a lot of inventory. Now, the furniture guys do. And if you're talking about the furniture side of the business, that's a completely different business. And their inventories are long. But if you're talking about mattresses and bedding, generally, it's just not much inventory in the system. Because, obviously, retailers are a fixed-cost structure kind of business model. Sales volume is actually more important to them than to us. And I think we're seeing retailers being more promotional. Or you might say getting back to the normal promotional cadence and aggressiveness that the industry was used to before the pandemic. But I think that they're stepping up in advertising and they've been stepping up in promotions. And I think they'll continue to be a little more aggressive than they were certainly during the COVID years, we'll call it. but really moving back to normal promotional cadence.

Thank you. One moment for our next question. Our next question comes from Atul Maswari. The next question comes from Atul Maswari with UBS. Your line is open.

Thank you. Good morning, and thanks a lot for taking my questions. Bhaskar, first, a quick clarification. If I heard you right, I think you mentioned that you were expecting your own units to improve slightly in the back half relative to year to date. That is right. Why do you expect any improvement given the potential for macro turn for the worst later this year? So that's my first question. And then my second question is, Scott, you mentioned industry units down maybe in the 20 to 25% range in this quarter. Do you believe the industry is at a point wherein it's shaken off some of, you know, the excess demand that it saw during the pandemic? Or, in other words, like have units returned back to 2019 levels for the industry, or will it need a few more quarters of decline before we get to that point? Thank you.

I'll start. I'll answer your second first, just to confuse Bhaskar. That's your third fork. Yeah. When you talk about the second quarter and the unit client, call it 20% to 25% for the industry in the U.S., I mean, the key there, first of all, is it's a terribly hard compare from last year because last year units were up 20% plus. It is by far the hardest comp in the year on a quarterly basis. And although we don't think there was any pull forward in sales during the COVID period, if you look at it from a quarterly standpoint there's no question in the second quarter last year uh we probably pulled forward from sales and then if you look at it then the third and fourth quarter from last year was rather uh stable i would say so it would look like to me when the stimulus checks hit last year second quarter boomed we probably pulled forward within the year uh some sales but again if you look at the full year 2021 units were not far off what I'll call historical trend. What was the second part? And that really addresses the question about units, first half versus back half. If you think about what was happening from an industry standpoint last year, whether it be stimulus or not, and as Scott mentioned, second quarter was an extremely hard comp, When we think about the back half, that's how we're thinking about it, which is like the modest improvement versus the first half. I think the other thing I would point out is if you take kind of step back and just look at the competitive analysis and look at all the players in the industry and how they're performing and what their competitive position is, it looks like to me we're in a stronger competitive position at the end of the second quarter than we were this time last year. whether it be some companies, it's a little more difficult to raise capital. Certainly the online business has become a little more challenging, some of the changes that Google and Apple have made. And then our products have done very well in the marketplace. So I think our competitive position is considerably, quite frankly, considerably stronger than it was this time last year. And you blend that together with a relatively robust, not robust back half, we think we can knock out some positive units.

Thank you. And our next question comes from William Reuter with Bank of America. Your line is now open.

Hi. My question is on capital allocation. So you're slowing down your share repurchases in the second half of the year. You guys are above the midpoint of your leverage target. Given an environment that's more uncertain, and as you think about next year, I guess, do you think about trying to allocate more capital to keeping your leverage towards the bottom end of the range, or do you feel comfortable within the range regardless?

Great question, and the challenge in answering the question is it can change based on the current facts and circumstances that we learn every week or every month. Um, you know, I, I think what we've said is look, we plan to buy at least 10%. Um, and we'll continue to look at the, what the economy looks like and kind of manage our balance sheet. I think, what are we about two, seven right now, you know, whether we're two, seven to four or something like that. But I, I, I imagine, uh, assuming that we don't see any change in our perspective of the future. that we'll run somewhere around, we'll call 2.5, give or take a couple of hundred, you know, a couple of 20 bits forward or backwards. If something looks a little more challenging, we would do kind of what you're insinuating is we would begin to move closer more towards two times leverage. And if things got a little bit, looked a little bit brighter, we might move a little closer to three. But I think we'll hover around the midpoint of our leverage would be our current expectations.

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

Thanks for taking my question. It's more of a clarification. So if industry units were down 20% to 25% in Q2, what were TPX's units?

Ours were not down that much.

Okay.

I think we took considerable share, but I don't have all the data. I'm not trying to be smart, but I don't have all the data yet from all the sources to nail it down, and I don't want to give our number out specifically for competitive reasons, but we were down significantly less than that.

Thank you. One moment for our next question. I have a question from Carla Casella with J.P. Morgan. Your line is open.

Great. Just a follow-on on my last question with the working capital gains in the back half. Do you expect to be able to be fully out of the revolver this year or to chip away at some of that revolver draw from this quarter?

No, we would expect to, from just a utilization standpoint and efficient utilization of our debt structure, is we would expect to still be in the revolver. At the end of the year? At the end of the year. Yeah, absolutely. And what that would imply is leverage is We expect, as Scott mentioned, is that it should come down from here slightly.

Thank you. One moment for our next question. Our next question comes from Peter Keith with Piper Sandler.

Your line is open. Peter, are you muted?

I am muted. Sorry about that. Thanks again. A big picture question for you on housing. I've always thought that housing turnover drives maybe about 20% of unit volumes. We're obviously going into a pretty challenged market for home buying and second home purchases. Do you have any updated views on how that impacts your business, either as a percent of units or high end versus low end?

Yeah, look, there's no question housing starts impact the business. I actually don't think it's in the top two or three drivers, but obviously housing slowing down is what I'll call a minor headwind. For me, the most key statistic that I guess I always watch is really consumer sentiment and consumer confidence. And I think those track better to the performance of our sales. But yeah, housing affordability is certainly higher and we're watching it. I'd spend more time on consumer sentiment and confidence.

Thank you. And our next question comes from Bobby Griffith with Raymond James. Your line is open.

Hey, guys. Thanks for landing back in the queue for the follow-up. Doctor, just quickly, I think you mentioned second half ad expense relatively in line with 2Q, but I don't think we have 2Q as the base. So can you tell us from sales what the second quarter ad spending was? Yes, let's call it 9.2%.

Okay, I appreciate that. And then... Bobby, apologies. Bobby, apologies. Bad math, 9.8.

Need a calculator.

Our next question comes from the line of Altu Maswari with UBS. Your line is open.

Thank you so much for taking my follow-up. Scott, it looks like some of your competitors and some other brands are ramping up their promotions as they're probably seeing some sales pressure. So at what level of sales decline would TPX decide to raise its own promotions, be it price discounts or otherwise, as you look to stimulate customer interest?

I think our promotional cadence will be relatively consistent with last year. with maybe a little tweak because we were constrained with Sealy at times, so we pulled back a little bit on Sealy because we couldn't deliver on Sealy because of some issues there. But I think we're very comfortable with the strength of our brand that we won't have to change what I'll call our historical promotional cadence. On the manufacturing side, for manufacturers that are trying to drive volume with price, and we've seen that, I guess, the last few quarters. I think it's probably two or three quarters we've bumped into that a couple of times. That has not been successful, is my perspective, when we've studied that. They've lowered price, but they really haven't made much of a move. So I don't think that's the way to probably drive success as a manufacturer. I think probably spending money in advertising, quality of products, quality of sales force, probably better drivers if you're trying to drive sales as a manufacturer. I think the pricing thing doesn't really work that well.

Thank you.

And our next question comes from the line of Brad Thomas with KeyBank. Your line is open.

Hi, Brad Thomas again. Thanks for letting me back in. Scott, I was wondering if you could just talk a little bit more about the, you know, potential acquisition landscape. You all have done a great job over the years of finding, you know, opportunities to invest in. And, you know, how is that changing and how might your appetite be changing at all given what's happening from a macro perspective? Thanks.

Thank you for the question. I mean, first of all, just as a quick update, the recent acquisitions are performing very well, whether it be Sherwood or whether it be Dreams, the two first come to mind. And so I would say in total, our acquisition strategy over the last few years has done better than pro forma, and we're certainly proud of it. It's made us stronger. Obviously, multiples have come down in the industry. and certainly come down on our stock, and that makes it a challenge to do anything, because we're not going to do anything that we don't think is accretive or drops value. There are lots of candidates. I will tell you that over the last four or five months, the number of candidates certainly worldwide has certainly perked up, and we continue to talk to people to see whether or not it makes sense for us and for them But again, it's a little bit challenging. We have made a relatively small investment in a company called Bright that has some very interesting technology. And the way we think about technology is we want best-in-class technology, and we generate some of that technology internally through our teams, whether it be in springs, foam, and other areas. We have some great internal people that help us from a technology standpoint. But we also don't mind getting technology. We'll call it outsourced technology. And we've got a great relationship with Full Power. And you've seen the impact of that on our adjustable bases. And today, I think Bright announced that we put some money in Bright. They've got some interesting technology. It's not commercial yet, but they've got 90 rebalancers. in a bed that Svelte adjusts that are very quiet, and we're very bullish on their technology, so we've made a small investment there. But we'll continue to look at acquisitions, but the pricing environment because of the multiple compression is difficult, and coming up with normalized earnings is difficult because of COVID and other things. So we'll be cautious, but we've got some great opportunities people we continue to talk to worldwide.

Thank you. And I would now like to turn the conference back to Mr. 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 our call today. Thank you.

This concludes today's conference call. You may now disconnect. Everyone have a wonderful day.