Tempur Sealy International, Inc.

Good day, and thank you for standing by. Welcome to the Temporarily Third Quarter 2022 Earnings. 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 11 on your telephone. You will then hear a message that your hand is raised. We do ask to please limit your questions to one. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Aubrey Moore, Vice President of 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 statements. This morning's commentary will also include non-GAAP financial information. Reconciliations of this non-GAAP financial information can be found in the accompanying press release, which has been posted on the company's 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 third quarter earnings call. I'll begin with some highlights for the third quarter, followed by an overview of the current operating environment in our North American and international markets. Then Bosco review our third quarter financial performance and update our 2022 guidance. Lastly, I'll share a few closing remarks regarding our competitive advantages and then open the call up for Q&A. In the third quarter of 2022, net sales were approximately 1.3 billion and adjusted EPS was 78 cents a share. This represents a 56% growth in sales and 140% growth in adjusted EPS as compared to the third quarter of 2019, a pre-COVID period. Compared to the same period last year, this represents a 6% decline in sales and an 11% decline in adjusted EPS as we continue to perform well in a less robust market. Our results were challenged by headwinds from unfavorable foreign currency and an overall less robust operating environment. I'd like to begin with highlighting some key wins in the third quarter. First, I'd like to discuss our exciting progress on our Stearns and Foster brand. We are pleased to share that we expect to expand our Stearns and Foster spots by third-party retailers in the U.S. by over 20%, demonstrating retailer support for our expansion strategy. To be clear, we believe these slot gains will be from competitors, not other Tempur-Sealy brands. Many of these incremental slots will be filled with our new Stearns and Foster Luxe Hybrid and our new Stearns and Foster Reserve mattress. Importantly, these are two of the highest-end mattresses in our new Stearns portfolio, with the Queen mattress in these lines ranging in price from $3,299 to $6,499. These price points are critical to unlocking the premium innerspring consumer that we and our retailers are targeting. This will support our growth plans for Stearns and Foster in 2023 and beyond. This is a great start towards our goal of making Stearns and Foster our next billion-dollar brand. In parallel to the product launch, we've also focused on driving Stearns and Foster's brand awareness, consideration, and purchase intent. In 2022, we doubled our investment in national Stearns and Foster advertising and continue to grow our advocacy at retail. To augment our wholesale distribution strategy and to be consistent with our being where customers want to shop, we also recently launched our Stearns and Foster e-commerce platform, which is performing well and has contributed to the growth in awareness and consideration for Stearns and Foster brands. Products are on track to be available through select retailers in the fourth quarter, and we expect a new lineup to be fully rolled out by the start of the 2023 President's Day holiday selling period. Investing in premium price points positions us well in the current macro environment, as we see resilience in premium demand in the face of economic uncertainty. Additionally, looking at historical industry performance, premium betting sales grow growth has outpaced other price points since 2015. Sales of mattresses above $2,000 have been growing seven times faster than the overall category. At the same time, there's been no consistent premium innerspring brand advertising at a national scale. The new Stearns and Foster lineup targets this underserved segment. Our second highlight is our recently launched Sealy e-commerce platform. The website's mattresses assortment includes Sealy FlexGrid, Sealy Natural, Cocoon by Sealy, and our most popular Sealy Posturepedic and Posturepedic Plus models. With the new Sealy website active, we are now operating direct-to-consumer website in the U.S. for each of our leading brands. Our North America direct channel grew at 8% in the quarter, driven by high single-digit growth in our e-commerce channel and same store sales growth in our company-owned stores. Our direct-to-consumer operations continue to reach customers who prefer to purchase directly from a manufacturer. We are now running in excess of half a billion dollars in annual sales in North America direct-to-consumer, with a robust five-year compound annual growth rate of 33%. Third, in addition to executing against our Stearns and Foster product launch, we also continue to exercise against our other product launches. Our domestic Tempur-Pedic and Sealy launches and our international Kemper launch are all on plan. As an example, we rolled out our Sealy natural collection in the third quarter, which is designed with sustainability and environmental preservation in mind. This product is open for nationwide distribution. We have seen this product resonate with West Coast retailers and consumers. We also recently launched our Sealy FlexGrid mattress line direct to consumer in the U.S. It is designed to target a niche market of consumers looking for a unique feel. The Sealy FlexGrid features best-in-class pressure-relieving gel grid that represents an evolution of the technologies in market today. Its unique manufacturing approach makes it more scalable and economic. This enables us to offer these products at mid-market retail price points, starting at $15.79 before promotion. We're also exploring opportunities to include our FlexGrid technology in our lineup of OEM offerings, and possibly as a component to other bedding manufacturers. Turning to our 2023 product pipeline. In the first quarter of 2023, we plan to begin launching our new Temper Breeze products and a new line of smart adjustable bases in the U.S. Building on the success of our proven Temper Breeze, the new generation will feature breakthrough temper material innovations that deliver even greater cooling benefits and enhanced temper feel characteristics. Our refreshed adjustable baseline also features incremental technologies, including new Sleep Tracker 2.0 technology. The current Sleep Tracker technology offers best-in-class sleep tracking with accuracy, which has recently been validated by a comprehensive Stanford medical study. In addition to breakthrough automatic snoring detection and response offered today, the new generation of bases will also be equipped with a range of relaxation features that help prepare customers' mind and body for deep, rejuvenating sleep. Following the launch of the new Breeze and updated SmartBase, we expect to expand our active Breeze product, our most customizable cooling system. We've been testing this product in select temporary retail stores, and found at a price point nearing $10,000, this system meets the needs of the ultra-luxury consumer focused on better sleep. We've also observed a halo effect from having this product on the floor, driving momentum to the high end of our Tempur lineup. In the first half of 2023, we also expect to begin the largest international product rollout in the company's history to more than 90 markets around the world. We plan to face launch over multiple quarters, which allow the team to implement market-specific launch plans. The rollout is expected to conclude by the end of 2023. This new lineup of mattresses, pillows, bed bases has been strategically designed to drive the addressable market of temper products internationally. The range features consumer-centric innovations to continue to appeal to our legacy ultra-premium consumers at prices of $3,000 and above, while also launching products at broadened price points unlock the incremental 2,000 to 3,000 segment. The new lineup is designed to build each mattress on a common platform. This common base will drive more efficient manufacturing processes and enhance adaptability to individual markets. This allows us, over time, to broaden our price points to drive meaningful expansion of our international total addressable market without materially altering our profit margin profile. Turning to our final highlight, we announced this morning Tempur-Pedic ranked number one in customer satisfaction among mattress brands in the J.D. Power 2022 report. We are thrilled to have achieved this distinction for the fourth year in a row in the retail mattress category and the second year in a row for the online mattress category. We are honored by our customers' continued trust in our product. We are dedicated to continue to bring leading solutions to market. Turning to the current operating environment, our North America operations generally performed in line with our expectations in the quarter, driven by strong Labor Day holiday selling periods. This supports our belief that, after a change in behavior in recent years, the U.S. bedding consumer is returning to historical seasonality and concentrating their purchase behavior around key holiday shopping periods. We continue to see an impact on the U.S. consumers' behavior from macroeconomic pressures, particularly from strong inflation and a sense of near-term economic uncertainty. These factors are disproportionately impacting certain segments of the market. We continue to observe more resiliency of our premium customers, while the value-focused customer is more subdued. Our historical data indicates that consumer confidence and consumer sentiment correlate to betting domains. Our research also indicates that the number one reason consumers want to purchase a new mattress is to improve their sleep, while only 10% of purchase decisions are made in relation to a housing event. It's a bit early, and we don't have all the data yet, but preliminary indications are that we continue to outperform the industry in North America. Turning to our international operations third quarter performance, Overall, the team executed well against the turbulent backdrop and delivered results largely in line with our expectations. Our Asian operations continue to perform well, despite the headwinds from regional COVID lockdowns. Europe, as anticipated, was pressured in the quarter by the ripple effect of the war in the Ukraine, driving record low consumer confidence, energy concerns, and double digit inflation. Furthermore, Foreign exchange rates were a headwind to our international segment this quarter, as the majority of our international operations operate with the British pound or euro as their functional currency. Overall, we're pleased with both our quarterly results and the progress we've made on our long-term initiatives against an evolving macroeconomic background. We entered this complex macro period with retailers generally in good shape, a strong competitive position, and new innovative products to launch. We're watching the macro developments closely and adjusting to the market conditions while staying aggressive and on strategy. And with that, I'll turn the call over to Oscar. Thank you, Scott. In the third quarter of 2022, consolidated sales were approximately $1.3 billion. and adjusted earnings per share was 78 cents. We have adjusted $6 million of charges during the quarter, all of which are permissible adjustments under the terms of our senior credit facility and relate primarily to the transition to our new ERP system. We expect there may be a similar amount of adjustments related to these items in the fourth quarter, primarily from further investments in our new foam pouring facility. Turning to North American results. Net sales decreased 6% in the third quarter. On a reported basis, the wholesale channel decreased 7% and the direct channel increased 8%. North American adjusted gross profit margin improved to 40.2%, primarily driven by pricing actions to offset commodity inflation and favorable brand mix. This was partially offset by operational investments to service our customers. North America's third quarter adjusted operating margin declined to 19.8%, driven by increased advertising investments and operating expense deleverage, partially offset by the improvement in gross margin. Now turning to international. Net sales decreased 5% on a reported basis, On a constant currency basis, international sales increased 7% as we experienced a $30 million headwind in the quarter from unfavorable foreign exchange rates. As compared to the prior year, our international gross margin declined to 53.4%, driven by the acquisition of Dreams driving unfavorable mix and foreign exchange rate headwinds. Our international adjusted operating margin declined to 14.7%, driven by operating expense deleverage, the decline in gross margin, and the impact of COVID-related shutdowns on our joint venture operations in Asia. Turning to commodities, which have been highly inflationary across the global betting industry for more than two years. In North America, prices have generally trended in line with our expectations in the quarter, and we believe that the cost of certain inputs could be gravitating off their 22 peaks. while others have remained pressured. Easing of prices for our key inputs would allow our margins to normalize somewhat though we anticipate input prices will continue to trend significantly ahead of 2020 levels next year. In our international segment, the war in Ukraine has created incremental headwinds on availability and pricing of raw materials in Europe. In consideration of this trend, our international team has reinforced the supply chain and built safety stock to insulate the business from these risks. We have considered these dynamics and expect to offset the inflation on a dollar basis through strategic pricing of the new line. Turning to our operational investments. We are investing in operations to diversify our supply base, and 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 third quarter, and we anticipate these incremental investments to continue through 2022. We are set up to drive efficiencies as the global supply chain infrastructure continues to stabilize and our new ERP system drives productivity in 23. now moving to the balance sheet and cash flow items. In the third quarter, we had operating cash flow of $217 million. This year, we have taken actions to reinforce our safety stock of adjustables and raw materials to better support our customers across our global operations. We believe our focus on providing our customers with the best possible service has been a key driver of our outperformance relative to the broader industry. As we continue to reinforce our supply chain, we have improved our inventory by six days from the second quarter. We expect days to continue to improve in 2023 as the supply chain further normalizes. Our new foam pouring plant in Crawfordsville, Indiana is on track to start testing production in early 2023. The plant's location complements the existing manufacturing footprint and it is expected to enhance our ability to service our customers through providing shorter lead times while reducing per unit logistic expenses. In order to optimize production in this new facility, we will start each manufacturing line in phases to ensure the highest level of quality while we grow into the incremental capacity. We expect CapEx to moderate significantly in 23 and to return to a normalized level of spend thereafter. We think of normalized annual CapEx at approximately $150 million, driven by maintenance CapEx of $110 million and growth spend of approximately $40 million. At the end of the third quarter, consolidated debt left cash was $2.7 billion and our leverage ratio under our credit facility was 2.8 times within our target range of two to three times. Now turning to 2022 guidance. We have updated our earnings guidance range and now expect adjusted EPS to be in the range of $2.50 to $2.60 in 2022, which contemplates our current outlook for full-year sales to be flat to prior year. This outlook assumes full-year foreign exchange headwinds of $115 million on sales and $25 million to profits For the fourth quarter, this considers North American sales down high single digits and international sales down high teens as we anticipate the European consumer will continue to be pressured and foreign exchange rate headwinds of $65 million to sales and $15 million to profits. We expect launch expenses of $25 million to support the Stearns and Foster products, which includes $15 million of floor models and $10 million of sales and marketing expenses to support the launch. And we expect to maintain our level of advertising investments from the third quarter on a dollar basis as we continue to support our leading brands. Lastly, I would like to flag a few modeling items. For the four-year 22, we expect CapEx to be between $275 and $300 million, DNA about $180 million, interest expense of about $100 million on a tax rate of 23.5% and a diluted share count of 180 million shares, which includes our assumption to repurchase at least 10% of our shares outstanding.