Tempur Sealy International, Inc.

Good morning, ladies and gentlemen. Thank you for standing by. And welcome to the Tempe City's fourth quarter 2022 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker host for today, Lauren Averitt, Investor Relations Manager. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for participating in today's call. My name is Lauren Averitt, the Investor Relations Manager. Before getting started, we want to extend our congratulations and best wishes to Aubrey, who is currently on maternity leave. 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 filing 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 release. And now, with that introduction, it is my pleasure to turn the call over to Scott.

Thank you, Lauren. Good morning, everyone, and thank you for joining us on our 2022 fourth quarter and full earnings call. I'll begin with some highlights from our fourth quarter, and then I will turn to discuss how we've delivered on our long-term initiatives. Then Bhaskar will review our fourth quarter financial performance in more detail and discuss our 2023 guidance. Finally, I'll close with a few comments on how we view the current market environment. Then we'll open the call up for Q&A. In the fourth quarter of 2022, net sales were approximately $1.2 billion, and adjusted EPS was 54 cents. This represents a 36% growth in sales and a 59% growth in adjusted EPS as compared to the fourth quarter of 2019, a pre-COVID period. Compared to the same period last year, this represents a 13% decline in sales and a 39% decline in adjusted EPS as we navigated a weak overall market and experienced robust inflation. However, we continue to outperform the broader industry by a good bit and enhanced our competitive position. Consistent with our previous quarter, we observed a slight increase in resilience of our premium customers with sales of value-focused customers a bit more subdued. I'd like to begin by highlighting some of the key wins for the quarter. First, as we discussed last quarter, we successfully kicked off the North America launch of our new collection of Stearns and Foster products. which is designed to further distinguish our high-end traditional Interspring brand from the numerous mid-market Interspring brands in the marketplace. Our third-party retail partners have demonstrated their enthusiasm for both the new Stearns and Foster product portfolio and our commitment to supporting the lineup through compelling national brand marketing. This excitement for the new product is reflected in robust year-over-year order trends. In order to ensure the new product meets our stringent quality requirements, we have extended the launch window in response to a slight component delay. We expect to complete the rollout by Memorial Day holiday selling period. Overall, we remain on track to expand Stern's retail slots by more than 20%. Turning to our second highlight, our U.S. e-commerce channel performance performed well in the quarter, delivering approximately double-digit growth. Our new Stearns and Foster and Seeley e-commerce sites have exceeded our expectation, with greater mix into the more premium SKU assortments resulting in unexpectedly high ASP across both brands. Our temporary e-commerce business also delivered solid growth in the quarter, which is especially notable considering the difficult prior year compare. With the recent launch of our new Seeley website, We now have operations and direct consumer websites in the US at each of our leading brands. Our expanded e-commerce presence is a powerful tool that enables us to be closer to the customer, drive share of voice, and build on our omni-channel strategy. For the last five years, we've developed a direct relationship with millions of customers, gaining valuable consumer insights and furthering our direct marketing capability. This helps build our long-term customer relationships and drives marketing efficiencies. Moving to ESG, we further our commitment to protect and improve our communities and the environment. We recently published our 2023 Corporate Social Value Report, which is available on our IR website. We are proud of the progress we've made in our ESG goals. In the fourth quarter, we achieved our goal of 100% landfill diversion from our U.S. and European manufacturing operations. We also made progress towards our goal of carbon neutrality for our global operations, reporting a decrease in emissions per unit. Before turning the call over to Bhaskar, I want to take a moment to step back and review the progress we've made on our long-term initiatives during 2022. Though the year was fluid from a macroeconomic standpoint, we remained focused on positioning the business for long-term success. starting with our first key initiative, which is to develop the highest quality products in all the markets we serve. When it comes to product development, our number one objective is to anticipate and react to consumers' evolving sleep preferences. In early 2022, we made continuing progress against this objective through various product launches. As part of the refresh of our U.S. Sealy Posturepedic portfolio, We launched a new line of premium and hybrid Sealy mattresses featuring improved comfort, superior support, innovative cooling technology. This lineup has truly resonated with our Sealy targeted consumer base. We leveraged our Sealy brand to tap into new market segments as well. We launched our new Sealy natural collection in the second half of the year. Constructed more eco-friendly, sustainable source material, this collection appeals to environmentally conscious consumers and continues to broaden our customer base. We also launched our Sealy FlexGrid mattress line, which features pressure-relieving gel grid that represents the evolution of the technology in the market today. With a unique, scalable manufacturing approach, we're able to offer these products at a mid-market retail price. In addition to supporting our 2022 launches, we fed the innovation pipeline for 2023 and beyond. Later this quarter in the U.S., we'll launch an upgraded line of Temper Breeze products and smart adjustable bases. Then later in the year, we expect to expand the distribution of our Temper Active Breeze cooling system into select wholesale doors. We expect these launches to further strengthen Temper's appeal to the premium wellness-minded consumer and drive improved attach rates and strong ASP. Turning to our international group. Beginning this quarter, we'll undertake the largest international product rollout in the company's history, reaching more than 90 markets worldwide. This new lineup of mattresses, pillows, and bed bases has been strategically designed to drive addressable market expansion of Tempur products. The launch is phased over multiple quarters to allow for the customization by region. Finally, I would point out that our investment in Silicon Valley's sleep tech startup, Bright, our partnership with Sleep Data Company, Full Power Technology, and our industry-leading R&D team will ensure Tempur-Sealy remains at the forefront of sleep innovation. As evidence of our commitment to product quality and innovation, our leading brands received a number of recognitions throughout the year. Notably, Tempur-P rate number one in customer satisfaction among mattress brands in the J.D. Power 2022 report for the fourth year in a row for retail mattress category. And for the second year in a row, ranked number one in the online mattress category. A true testament to the customer's trust of our brand and products. Turning to our second initiative, which is to promote our brands with compelling marketing worldwide, we supported our brands and products with a record marketing investment of approximately $450 million this year. In addition to generating strong near-term returns and driving outperformance relative to the broader betting market, these investments also serve to seed the market for our 2023 product launches. Sealy, and Tempur continue to be the number one and number two best-selling mattress brands in America and among the most highly recommended, recognized, and desirable brands in the industry, with 95% of shoppers aware of at least one of the TSI brands. In 2022, we leaned into the untapped potential of our Stearns and Foster brand by doubling our presence on national television. In addition to contributing to growth and awareness and consideration for Stearns, these marketing investments grew our retail support, which combined with the new product lineup is reflected in a significant increase in placements. Our investments in product, brand, and channel successfully drove Stearns and Foster's website traffic and sales growth in 2022, making clear progress to our goals to make Stearns and Foster our third billion-dollar brand. Last year, we also seeded the market for our upcoming international launch with strategic marketing investments in store sales programs and e-commerce initiatives worldwide. Our third initiative is to optimize our powerful Omni distribution platform. We evolved our global Omni channel present in step with consumer preferences to be wherever they wanted to shop. The largest pillar in our omnichannel distribution strategy is our more than 26,000 third-party retail doors. This broad footprint ensures that consumers can easily find and experience our products in person. While we're well represented in third-party retailers in the U.S. today, there are opportunities both to increase our balance of share with existing retail partners, and to sell to certain retailers who do not currently retail Temproseally products. Turning to our OEM operations, while we entered this space only a few years ago in 2020, we made significant progress in growing our operations, both within our Sherwood private label innerspring business and our foam pouring business. In 2022, we delivered significant growth in our OEM operations. as we continued to charge towards our target of $600 million in OEM sales. Note that OEM sales growth will decrease the cost per unit for all of our branded products as we spread our fixed costs and drive more advantageous supply agreements on the enhanced volume. In addition to growing our wholesale and OEM business, we are now running in excess of $1 billion in annual sales in our global direct-to-consumer business, with a robust five-year compound annual growth rate of over 40%. Regarding our direct retail store operations, we opened 50 retail stores in 2022 and currently operate over 700 brick-and-mortar storefronts around the world. Our retail network is comprised of both wholly owned and joint venture locations, led by over 200 Tempur retail and multi-branded sleep outfitter stores in the U.S., and our more than 200 Dreams locations in the U.K. In total, including the e-commerce sales they facilitate, our company-owned stores generate an average sale of $2 million per location, with the U.S.-based Tempur retail stores averaging a robust $4 million for sales per location. Finally, I should note, then in aggregate, our U.S. web has grown at a compounded annual growth rate of over 25% since 2017. Our fourth and final key initiative is to drive increased EPS through operational execution and prudent capital deployment. In 2022, we generated full-year adjusted EPS of $2.66. This represents a five-year compound annual growth rate of 26%. We executed on a balanced capital allocation strategy to return value to shareholders. We allocated approximately $1 billion in capital. First, we reinvested over $300 million in operations. This includes a one-time investment to stand up our new foam pouring plant in Crawfordsville, Indiana. which is expected to commence operation in 2023, enhancing our ability to service our customers by ensuring product availability to meet increased demand in the premium sector, creating shorter lead times, and reduced per-unit logistics costs in the Northeast market. Second, we invested $10 million in Bright, a technology-based mattress company with differentiated product offerings targeted at a different premium customer than we currently serve today. Third, we invested over $665 million in share repurchase to buy back approximately 10% of our shares outstanding at an average price of $33 a share. And finally, we paid $70 million in cash dividends. I should note, we announced today a 10% increase in our quarterly dividend, bringing it to 11 cents per share. I'd be remiss if I didn't mention our ERP transition, which will play a critical part in our ability to deliver on all of our long-term objectives. In 2022, we completed the multi-year journey of transitioning more than 50 of our global subsidiaries from using five different ERP systems into 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-to-consumer capabilities. With that, I'll turn the call over to Bhaskar. Thank you, Scott. In the fourth quarter of 2022, consolidated sales were approximately $1.2 billion and adjusted earnings per share was 54 cents. We had $10 million of pro forma adjustments this quarter, all of which are consistent with the terms of our senior credit facility. Turning to North American results. Net sales decreased 12% in the fourth quarter. On a reported basis, the wholesale channel decreased 13%, and the direct channel decreased 5%. Early indications are that we outperformed the market. When looking at our sales growth, please note our fourth quarter of 2021 was significantly benefited by a Tempur-Pedic backlog reduction of $100 million. North American adjusted gross profit margin declined to 37.9%, primarily driven by operational headwinds and mix related to the prior year Tempur-Pedic backlog reduction, partially offset by pricing action. The backlog reduction in the prior year accounted for approximately half of the margin decline. North America adjusted operating margin decline to 15.1%, driven by the decline in gross margin and operating expense deleverage. Now turning to international. Net sales decreased 14% on a reported basis. On a constant currency basis, international sales decreased only 2%, as we experienced a $36 million headwind in the quarter from unfavorable foreign exchange rates. Foreign currency remains volatile, though we have seen favorable trends since the fourth quarter. Our current expectation for 2023 contemplates a modest FX headwind to both sales and adjusted EBITDA. As compared to the prior year, our international gross margin improved to 55.2%. driven by pricing actions to offset commodity inflation, partially offset by mix. Our international adjusted operating margin improved to 20.7%, driven by the improvement in gross margin and operating expense leverage, partially offset by the impact of COVID on our joint venture operations in Asia. Turning to commodities, which we think about as inclusive of raw material inputs logistic costs, and labor, all of which have been highly inflationary across the global betting industry for more than two years. In the fourth quarter, global commodity prices largely trended in line with our expectations. Some commodities have gravitated off their peaks, though others remain pressured. We anticipate that prices could continue to ease throughout the year, although we expect commodity prices in 2023 will continue to trend significantly ahead of 2020 levels. Now to global operations. We are taking actions to fully support our customers while managing through an evolving global supply chain and a tight labor market, which has resulted in $10 million of incremental expense in the fourth quarter. As the global supply chain continues to stabilize and as our new ERP system drives productivity, we expect improvements throughout 2023 and beyond. Now moving to the balance sheet and cash flow items. In the fourth quarter, we had operating cash flow of $95 million. In response to the global supply chain volatility, we took actions in 22 to reinforce our safety stock of raw materials and finished goods. We believe this focus on providing our customers with the best possible product quality and customer service was one of the key drivers of our outperformance relative to the broader industry last year. Our inventory days improved in the back half of 22 as we began to normalize our safety stock. We anticipate inventory levels will continue to normalize throughout 2023 as the supply chain further stabilizing, driving cash cycle improvements. Our new foam pouring plant in Crawfordsville, Indiana is on track to begin its phased opening in the second quarter. In order to optimize production in this new facility, we will phase bringing the plant online to ensure the highest level of quality while we grow into the incremental capacity. This plant's location complements the existing manufacturing footprint and enhances our ability to service our East Coast customers. We expect our CapEx to decrease significantly in 2023 and return to a more normalized level of spend thereafter. We think of annualized CapEx as approximately $150 million, driven by maintenance spend of approximately 110 and growth spend of approximately 40. At the end of the fourth quarter, consolidated debt less cash was $2.8 billion, and our leverage ratio under our credit facility was 3.1 times, slightly ahead of our target range of two to three times. We anticipate returning to our target leverage range in 23. Now turning to 2023 guidance. We expect adjusted EPS to be in the range of $2.60 to $2.80. This considers sales growth of single digits, primarily driven by the execution of our key initiatives and also benefited by the selling of discounted floor models and the wraparound impact of pricing, sales and marketing investments of $20 million to support product launches, and record advertising spend of over $500 million as we continue to support our leading brands and new products, resulting in EBITDA of approximately $980 million at the midpoint of the range. As I think about 2023 phasing, the first quarter will be our last pre-war comp. That combined with front-loaded product launch and advertising cost will result in a difficult year-over-year compare in the first quarter. We expect to outperform the market. The consolidated first quarter sales are consistent to prior year and adjusted EPS that represents 19% of 2023 EPS expectations. Our guidance also considers the following allocations of capital in 2023. CapEx of approximately $200 million, which includes 90 million of growth CapEx, primarily to fund the completion of our Crawfordsville facility. A quarterly dividend of 11 cents, representing an increase of 10% relative to 22. And the repurchase of at least 5% of our outstanding shares funded through free cash flow, which is generated in the back half of the year. Lastly, I would like to flag a few modeling items. For the full year 2023, we expect DNA of about $200 to $210 million, interest expense of about $135 to $140 million, on a tax rate of 24 to 25%, and a diluted share count of 178 million shares. With that, I'll turn the call back over to Scott. Thank you, Bhaskar. Nice job. Before opening the call up for Q&A, I'll take a moment and share some thoughts about our expectations for the macroeconomic backdrop in 2023. In the U.S., we've aligned our outlook with a consensus GDP forecast of economists at major banks. And we're assuming that we'll encounter a mild recessionary operating backdrop in 2023. We see growth opportunities in Asia this year, led by less volatile environment in China. In Europe, although we see consumers exhibiting resilience in the face of the ongoing war in the Ukraine, and elevated inflation, we expect a mild recession. Turning specifically to our U.S. betting industry expectations. Last year, the U.S. betting industry experienced its worst decline in history. We do not have complete information yet, but we would expect U.S. produced units were down an unprecedented 20 to 25 percent compared to 2021. Our 2023 guidance is grounded in a stable U.S. betting environment, with units consistent to the prior year, with the back half stronger than the first half. We are currently thinking the U.S. betting industry units will return to growth in 2024. Overall, our 2023 outlook targets growth on both the top and bottom lines. Its contemplates our continued outperformance across the betting industry worldwide, driven by our new products, strong brands, and omni-channel initiatives. Our strong competitive position continues to provide us with significant long-term growth opportunities. And with that, I'll open up the call for questions. Operator?