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?

Thank you. Ladies and gentlemen, as a reminder, To ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 again. In the consideration of time, we ask that you please limit yourself to one question only. Please stand by while we compile the Q&A roster. And our first question coming from the line of Susan McClary from Goldman Sachs, your line is open.

Thank you. Good morning, everyone.

Good morning.

My first question or my question is around, you know, thinking about the state of the consumer. You gave a lot of good details on how you're thinking about the various product lines and the brands and how they're performing. As you look out, how are you thinking about the pushes and the pulls on the different income segments and the ways that the consumer may respond this year to the macro?

Sure. Thank you for your question. I'm going to focus on the U.S. because that's obviously our biggest segment, and to go around the world would take the entire call. So focusing on the U.S. consumer, a couple of observations. One, we're seeing the high-end consumer continuing to hang in there. Low-end consumer has been where a lot of the deterioration has been. I think when we look at it, You know, call the units down 20%, 25% this year. That is well down from where we historically have been and is very close to actually trough unit production in North America. We're probably 5% or 6% off the trough, and that would be 2009-ish. That's right. I think. I mean, Oscar. So clearly you've taken a downturn. But store traffic continues to be a little bit soft. I think it's what the retailers would tell you, but the people that show up buy. We're seeing, I guess, a little bit fewer people financing it. That's right. I think it's what I would say from the consumer standpoint. So you heard our outlook. We're basically looking for 2023 to be stable, which, again, is almost at trough unit production in the U.S., And assume that by 2024, the unit growth will come back to the industry.

Thank you. One moment for our next question. And our next question coming from the line up, Seth Bashum with Wet Bush, your line is open.

Thanks a lot and good morning. Please give us a little bit more color on the bridge tier. margin guide for 2023 you talked about a few components but of those launch costs advertising etc can you tell us what you think that the biggest drivers of pressure are and then as it relates to commodities again how much do you expect benefit there absolutely so when i think about EBITDA margins and as i go into 2023 we are anticipating some improvement on a year-over-year basis

To put together those building blocks the way I think about it in no particular order is I would think of operations. We've made some investments in 2022. Our expectation is that as that supply chain continues to stabilize, that will turn into a tailwind for us in 2023 as the year plays out. In addition to that is we have pricing actions. The last action we put in place is in June of 2022. We will get the wraparound benefit of that in 2023. As you mentioned, we do have floor models. Very excited about what we have going on. We have the breeze coming out in the second quarter. We're wrapping up Stearns in the first quarter. We have Cube that's happening, sorry, the international launch that's happening all throughout 2023. However, the cost associated with that will be the floor model discount. Let's call that principally in the second quarter as breeze gets out there. And then finally, all throughout the year, we will be investing in advertising, as we mentioned on the call, over $500 million. You add all those puts in, and then fundamentally is that have initiatives that are going to grow the top line so of our mid-single digit growth is that half will be come from those initiatives and with the balance coming from four models as well as a bit of the pricing actions thank you and our next question coming from the line of curtis nagle with bank of america elena sulpin uh good morning thanks very much uh kind of my last question in terms of uh just

breaking out the sales guidance, which I think was a little better than expected, so that's good. Maybe just digging a little bit more into the U.S., you know, Scott, over the past, I don't know, three, four months, you know, we've been talking about stabilization, right, in the U.S., which, you know, sort of started in 4Q. Through, you know, where we are right now, you know, has that continued? You know, could we talk a little bit in terms of just how the U.S. is trending at the moment and, you know, how you're feeling about that?

Well, I mean, as of 8 a.m., I can tell you how we're doing. Look, it's very stable. I mean, it feels like from a trend standpoint, we're getting off what we'll call the COVID trend of people shopping more during the week than they used to and less on the weekend. It's moved back to more traditional shopping with more shopping on the weekend than during the week. One of the other trends that we saw during COVID Uh, was the, the, the holiday periods were not quite as robust, uh, and the business was steadier through, through the calendar. And now we're going back to what I think is more of the historical pattern where the trough is, is a real trough and the peaks are real peaks. Uh, the holiday periods become critical for the industry, but all of that would be what I would call normal, uh, getting back to stable. And look, I think our volumes, we haven't seen anything since year end that would make us think the industry is anything but at least stable. And I'll add that I haven't seen anything that makes me think that we won't continue to take a reasonable amount of share in 2023. Thank you.

And our next question coming from the lineup. Bobby Griffin from Raymond James.

Good morning, guys. Thank you for taking my questions. Scott, in your prepared remarks, you talked a little bit about an opportunity to sell some products maybe in some retailers that don't have as much share. I think you guys do have a test going on with Sam's with maybe some potential to launch that in-store. So can you maybe update us on how that initial rollout is going and some of the timing around that? And is anything assumed in the guidance for picking up some new slot placements there?

Yes, we are in SAMS online, and you can see us online, and we're working very closely with SAMS and other customers to fill their needs. I don't really have an update for you, and we generally don't talk a lot about specific individual customers, but I would say our relationship with SAMS is good and expanding. Do we have anything specific in our guidance? No, I would say that we We have lots of opportunities and sales team have goals, but we certainly don't start putting that kind of stuff in a forecast until we would have a firm deal.

Thank you. And our next question coming from the line of Atul Majwari from UBS. Your line is open.

Good morning. Thanks a lot for taking my question, and thanks for all the great call. Scott and Bhaskar, question on the sales guidance, so up 5% or rather up mid-single digits. If there were a scenario wherein sales were to fall short, say if sales were flattish or low single digits, do you have enough push in in the P&L to maybe pare back on expenses and still achieve the EPS guidance of 260 to 280?

Well, there's really embedded quite a bit in that question. When you know our variable cost structure, which, what do you have, Bhaskar, in the variable cost structure? 70-30. 70-30. So we have the ability to, we'll call it, right-size the organization relatively quickly if there's a downturn. I think the real issue, though, is would you pull all those levers? You certainly would pull levers if you thought you were headed towards several quarters of recessionary activity. You may or may not pull the levers, though, if you think you've got a very short-term downtrend in business, because whipping the organization around is complicated, and you might take it as an opportunity not to pull those levers. So can't guarantee you what we would do. What I think might be interesting to note, as an example, in 2022, if you look at our advertising expenses, our advertising expenses in North America on a dollar basis is up. And obviously, as a percentage, because our sales are down, is up. And you might wonder, well, why didn't we pull that lever? We could have pulled the lever and pulled back on advertising in the latter part of 2022 and had a higher EPS number and maybe made somebody happy on the street. I don't know. But we run the business for the long term and we've taken the opportunity to continue to support our brands. So it's a great business model. So we have the flexibility to deal with those situations. But right now we're in a pretty strong competitive position. And my guess is We're talking about short-term little bit of blip in the overall macro market. I suspect we'll continue to be aggressive, take share, and support our brands.

Thank you. And our next question coming from the lineup, Peter Keith with Piper Sandler, Yelena Sopin.

Good morning. This is Matt Egger on for Peter. Thanks for taking my question. Sorry if I missed it, but can you just walk us through the puts and takes of your input costs this year? I know you said they're expected to be down, but just can you go through maybe on kind of individual basis how you're expecting them versus 2019 and what's embedded in the guidance? Thanks.

Yeah, absolutely. So, when I think about commodities, as I mentioned on the call, I think about everything from ocean cargo to raw material to labor. So broadly speaking, we've seen unprecedented increases in commodities over the last few years. So the way I think about 2023 and what we saw in fourth quarter 2022 a bit is that they have come off their peaks, and the peaks being earlier in the year. But what I would say is that we are expecting, let's call it a modest tailwind, into 2023. However, by no means are they at the pre-pandemic levels.

you one moment please for our next question and our next question coming from the line of jonathan matubiscape from jeffrey salinas open great thanks so much for taking my question um i had a question on the competitive landscape your largest competitor recently filed for bankruptcy a couple of weeks ago just curious if you could give us a sense of of how conversations with your retail partners have looked since this news broke and how are conversations progressing regarding, you know, potential slot gains for the TSI brand? Thanks so much.

Yeah, thanks for the question. Look, I don't think that particular news was shocking to the industry. I think it was well telegraphed and expected. So I don't think it fundamentally changed the discussions with our retailers. What the retailers care about is quality products, support with advertising, and those kind of items. I think our chief competitor has strong brands and is a hard, tough competitor. But we continue to work aggressively with our retailers. I don't think the actual filing changed very much in most retailers' minds as long as they provide quality products and service in the marketplace.

Thank you. And ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star 1-1. One moment for our next question. And our next question coming from the lineup, Brad Thomas with KeyBank. Your line is open.

Hi, thanks. Scott, I was hoping to ask about the international product changes that are underway. Obviously, the potential to be really, really substantial for the company. I was hoping you could share a little bit more detail on perhaps how much this expands the addressable market for temper and how you think about what the financial impact could be once this is rolled out. Thanks.

Yeah, I'll start and I'll let Bhaskar probably clean me up. As you said, look, this is a significant launch internationally, bigger than a normal temper launch as we're repositioning the brand and we're changing some of the manufacturing procedures. as to how we make tempers so that we can hit some lower price points and service our customers better. Early on, we're in the middle of it. Early indications are good. And I'd say, what's the addressable market expansion, you think? Is it 20%, 30%? 20%, 30%, absolutely, from an addressable market standpoint. Of course, we have to perform. You can't just put that and say, okay, that's going to increase temper sales by that much. But we're working very hard on that area. But I do think it unlocks a growth potential for the international operations. You know, from a sales standpoint, we should start seeing that in the second quarter of this year. Because of the launch cost and stuff, you'll see the benefits of EBITDA probably starting in 2024 and the full benefit of it. But I think long term, in the next two or three years, it will be very important from our growth standpoint.

Thank you. And our next question coming from the line of Laura Champion with Loop Capital. Your line is open.

Thanks for taking our question this morning. It's on the input to the guide for mid-single-digit growth this year. Does the industry need to recover in the back half and actually be positive in the back half in your view for you to hit that estimate?

Yeah, probably so. I mean, look, you were talking about crystal ball stuff, so, you know, give me a little bit of hedge words on this. But, look, I suspect, let's see, as we said in the fourth quarter, units were down 20%, 25%. We think. We don't have all the final data yet, but that's probably certainly in the zip code. So I think going into the first quarter, I suspect that units will be down in the first quarter. That is a very tough compare for the industry. It is the last pre-war quarter. So the first quarter, we'll call it projected to be down, and I feel pretty confident that the units would be down in the first quarter. By definition, you've got to have some units go the other way, and so you'd end 2023 with growth and call it the third and fourth quarter.

Thank you. One moment for our next question. And our next question coming from a lineup, Carla Casella with JPMorgan.

Hi, thank you. I just wanted to ask, you know, given kind of the turbulence in the market that you guys seem to be navigating very well, is it opening up more M&A opportunities or are there thoughts for you to continue to grow your OEM and expand the business that you need M&A as well as organic growth?

Yeah, it's interesting. You know, as we've always said, it's something in the world is in the betting industry and there's an opportunity we want to look at it. And we do. And we look at quite a few opportunities every year. You know, historically, you know, we've done one or two transactions a year. I think we've done like nine since I've been here. the whole strategy is really based on purely opportunistic um you know purchases and where we can find a win-win and so having said all that what that means is look we look at stuff sometimes we price stuff uh sometimes the price uh works and something happens sometimes the price is we're we're miles apart and nothing happens uh And then sometimes the price is pretty close, and we stay close to that particular company for a number of years. Using the example of Dreams, which is probably the classic one, is I think we effectively negotiated with them for five years until we both felt like we had a win-win transaction, which I think actually was a win-win transaction for both companies now that we've had them for a year. Some transactions happen very quickly, and the one that comes to mind is Sherwood. I think from start to finish, that might have been more like 30 days. We were aligned very quickly with that team to what the future looked like. So that was a very quick transaction. So with the market, it was a difficult year when you look back at it, whether you talk about the unexpected war in Europe, the inflation, the rapid unit decline, FX, COVID over in Asia. So yeah, certainly a colorful year. So are there more opportunities? There probably are. There are more opportunities. Whether or not we ever get aligned on anything, I don't know. But we continue to talk to people and really look for transactions that are good for both parties, good for our customers, good for the industry. And we'll continue to talk to people.

Thank you. And we have one last question in queue coming from the lineup. Atul Maswari from UBS. Your line is open. Hi.

Thanks for slotting me in again. I just had a quick question, Bhaskar, on the first quarter. Guidance seems like you're guiding to a 20% to 25% EPS decline. Could you provide some incremental color on the building blocks that gets you there in terms of revenues, gross margin, and costs?

Before he does that, we felt like we needed to give you a little more color on the first quarter. We normally wouldn't give that much kind of color on a quarter, but we really want to make sure everybody realized that's the last tough comp for the betting industry and not be surprised if it lasts pre-war. Atul, that's a good question. Let me answer it this way. Year over year, when you look at Q1 to Q1, there is a lot of things that are happening, whether it be FX, whether it be the war, the macro, the inflation, et cetera. So let me do it this way. Let me go from Q4 to Q1. I think it's a much more straightforward way to think about it. So what we've implied for Q1 off of Q4 is that we would expect some slight revenue growth, seasonality. From a seasonal standpoint, that would make sense. Then obviously from that incremental revenue, we'd expect some flow through associated with that. And then what we have is that we have two items that are unique to the quarter when you think about it versus Q4. And that is the launch of our international products, as well as the wrap up of our Stearns and Foster. So the way I think about that is, and brand advertising to support those launches. So again, relative to Q4 to Q1, what I would expect is a bit of revenue. And then investments associated with those products, let's call that brand advertising, as well as the investments for the launch and OPEX.

Thank you. I will now turn the call back over to Mr. Scott Thompson for any closing remarks.

Thank you, operator. To over 12,000 employees around the world, thank you for what you do every day to make a 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 board of directors. That ends our call today, operator. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.