Tempur Sealy International, Inc.

Good day and thank you for standing by. Welcome to the Tempor Sele Fourth Quarter 2023 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 will need to press star 1-1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Aubrey Moore, Investor Relations. Please go ahead.

Thank you, Operator. Good morning, everyone, and thank you for participating in today's call. Joining me today are Scott Thompson, Chairman, President, and CEO, and Basta Rao, Executive Vice President and Chief Financial Officer. This call includes forward-looking statements that are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve uncertainties, and actual results may differ materially due to a variety of factors that could adversely affect the company's business. These factors are discussed in the company's SEC filings, including its annual reports on Form 10-K and quarterly reports on Form 10-Q, under the headings Special Note Regarding Forward-Looking Statements and Risk Factors. Any forward-looking statement speaks only as of the date on which it is made. The company undertakes no obligation to update any forward-looking statements. This morning's commentary will include non-GAAP financial information. Reconciliation 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 .tempersile.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 2023 Fourth Quarter and Full Year Earnings Call. I'll begin with some highlights from the quarter and full year, and then turn the call over to Bosker to review our financial performance in more detail and discuss our 2024 guidance. After that, I'll provide an update of our proposed acquisition of Mattress Firm before opening up the call for Q&A. In the fourth quarter of 2023, net sales were approximately $1.2 billion and adjusted EPS was $0.53. Our results were in line with our expectation for the quarter, with sales and adjusted EPS approximately consistent with prior years. Turning to a few highlights for 2023. First, I'd like to highlight our resilience of our business model, our robust cash flow and industry-leading balance sheet. Our solid financial position has given us flexibility to capitalize on the industry's opportunities. We're delivering strong operating cash flow, investing in the business, and outperforming the broader betting market in North America and internationally. In the last three years, we've generated over $1.0 billion in cash flow after investing $1.3 billion in advertising and over $600 million in CapEx. We believe that strategic investments in our brands, capabilities, and capacity enabled us and our retailers to succeed in a dynamic environment. Versus the prior year, adjusted EBITDA to net debt leverage declined from 3.1 to 2.87. We expect to continue to reduce our leverage in the coming quarters as we prepare for the closing of the proposed mattress firm transaction. The US betting industry, which is our largest market, was challenged in 2023. Based on preliminary figures, we believe the category units were down double digits versus the prior year. As the US produced mattress units were below the 20-year trough for the industry. However, we have recently seen stabilization of the category demand. The international markets we operate in have generally demonstrated similar trends on a consolidated basis. Over the prior two decades, the betting industry has consistently grown through both ASP and unit expansion over time. We anticipate that the category will return to his historical trends of consistent growth. With our strong financial position, resilient operating model, and the recent investments we've made in the business, Tempur-Sealy is uniquely positioned to reap the benefits of an improving market. The second item I'd like to highlight is our successful rollout of our new iconic premium products and continued expansion of our extensive manufacturing capabilities. These actions in 2023 solidified our position as a leading vertically integrated global betting company. Internationally, we successfully launched an all new lineup of Tempur mattresses, pillows, and bed bases in over 90 markets, introducing new innovation and expanding our total addressable market globally. The consumer-centric innovation and expanded price points in the new collections are driving positive traction in broad range of customers, including our legacy ultra premium consumers at mattress prices at $3,000 and above, as well as consumer shopping for mattresses starting at $2,000. The reaction to the new products has been positive. On the cost side, we have streamlined the construction of the new product to maximize manufacturing efficiency, enhance our ability to efficiently customize products to meet customers' needs in diverse markets and channels. In the US, the new Tempur Breeze and Sterns and Foster product portfolio completed their rollout in 2023 and realized notable -over-year growth. The Tempur Breeze portfolio achieved double-digit sales growth and a 5% increase in mattress and foundation ASP, while Sterns and Foster portfolio also delivered strong sales growth over the same period. These premium brands significantly outperformed the market and drove higher ASP for the entire category at a time when retailers are dealing with reduced floor traffic. In 2024, we expect to complete the full refresh of our US Tempur portfolio by introducing our next generation of ADAPT products. The new ADAPT products are focused on meeting one of the highest consumer needs in mattresses, reduced aches and pains. This line includes our most advanced Tempur material, uniquely designed to deliver 20% more pressure relief than the standard Tempur material. The ADAPT products paired with our own proven line of innovative smart, adjustable bases will build on the success of prior generations and Tempur Sealy's robust R&D track record. We have over 60,000 new ADAPT mattresses ready as we prepare for the rollout to begin in the first quarter and expect to reach substantial completion before Memorial Day holiday. In 2023, we also opened our newest and largest -the-art plant in Crawfordsville, Indiana. This new facility located in the Midwest complements our existing manufacturing footprint and enhances our ability to serve Northeast customers. Our expanded US manufacturing footprint will allow us to capture the projected long-term demand for our products and to support our rapidly growing OEM business. The new facility has the capabilities to manufacture a wide variety of bedding products and components for branded and non-branded operations. Our third highlight is the diversification of our business model and go-to market approach. One of our long-term initiatives is to increase the visibility with the consumer, wherever and however they choose to shop. We follow the customer's lead and aim to provide quality products at every price point, both on and offline. In support of our broader portfolio diversification strategy, we are pursuing growth initiatives through innovation and development of industry-leading products, growing our wholesale business through existing and new retail relationships, and increasing our investments in Stearns and Foster Brands. We'll also look to expand further into the OEM market and grow our -to-consumer business through the expansion of our e-commerce channels and company-owned stores. All these initiatives are in line with our pursuit of long-term sustainable growth. For example, our -to-consumer channel has increased from $150 million in 2015 to over $1.2 billion in 2023, a compound annual growth rate of 30%. This was in part thanks to the expansion into hundreds of new company-owned stores around the world and the successful launch of our Stearns and Foster and Sealy e-commerce websites. Additionally, we began offering OEM and private label products in 2020. Today, we generate hundreds of millions of dollars in profitable private label and OEM sales, with further opportunities for growth in 2024 and beyond. Lastly, our growth in wholesale has been broad-based across existing and new distribution. In fact, in April, we'll be expanding our products into additional big-box stores with one of the largest U.S. betting retailers. Fourth, I'd like to highlight significant expansion in our -over-year consolidated gross margin. We delivered -over-year improvement of 260 basis points in our consolidated gross margin to .2% in the fourth quarter of 2023. This is a result of efforts from the team to drive profitability by leveraging our fixed cost structure over multiple growth initiatives. As mentioned, our new product innovation investments in manufacturing processes and plant and diversification of our -to-market strategy have all contributed to improved gross margin. As we continue to drive greater efficiency, we increase our ability to invest in advertising, product development, and our people. We also benefit from a larger pool of free cash flow to drive EPS growth and reduce

our

net leverage.

While we expect the

retail environment to remain dynamic, we have a track record of delivering results during challenging cycles. In fact, we generated $4.9 billion in sales and $2.2 billion in gross profit for the full year 2023, both of which were just shy of our highest-ever annual sales and gross profit figures. In 2024, we plan to stay focused on our long-term initiatives, stay agile to capture opportunities, and deliver higher sales and profits. Our last highlight is on our commitment to protect and improve our communities and the environment, as we detailed in our recently published 2024 Corporate Social Values Report. The report is available on our IR website. We are proud of our achievements over the last year, including our zero waste to landfill status at our Canadian and Mexican manufacturing facilities, and maintaining our zero waste to landfill status at our U.S. and European manufacturing operations. This year, we contributed over $800,000 in charitable contributions through our Kemper Seeley Foundation and donated more than 12,100 mattresses worth approximately $16.9 million, bringing our cumulative 10-year donation total to over $100 million. With that, I'll turn the call over to Vosker. Thank you, Scott.

In the fourth quarter of 2023, consolidated sales were approximately $1.2 billion, and adjusted earnings per share was $0.53. We have $33 million of pro forma adjustments in the quarter, all of which are consistent with the terms of our senior credit facility. These adjustments are primarily related to the cost incurred in connection with our planned acquisition of mattress firms. Turning to North America results. Net sales decreased 4% in the fourth quarter. On a reported basis, the wholesale channel decreased 6%, and the direct channel increased 11%. North America adjusted gross profit margin improved to 40.7%, primarily driven by favorable commodities and operational efficiencies, partially offset by unfavorable product mix. Product mix is primarily being driven by the continued growth of our OEM initiative. North American adjusted operating margin improved to 15.9%, driven by improved gross margins, partially offset by investments in growth initiatives. Now turning to international. Net sales increased 8% on a reported basis, and 4% on a constant currency basis in the fourth quarter. As compared to the prior year, our international gross margin improved to 55.7%, driven by commodities, partially offset by unfavorable mix. Our international operating margin decreased to 19.2%, driven by higher operating expense from investments in growth initiatives, partially offset by improvements in gross margins. One of our growth initiatives is expanding our retail store footprint, and we now operate over 750 stores globally. Now to balance sheet and cash flow items. At the end of the fourth quarter, consolidated debt, less cash, was $2.5 billion, and our leverage ratio under our credit facility was 2.87 times, within our historical target range of 2-3 times. In the fourth quarter, we generated operating cash flow of $91 million. We're pleased to report that we have successfully entered into a $625 million delay draw term loan, and increased the availability of our existing revolver by $40 million. This is in connection with our financing plan for the anticipated acquisition of MattressFirm in late 2024. Upon closing the acquisition, we plan to fund the cash portion of the transaction with a combination of cash on hand and through existing and incremental borrowings. Our financing plan for this acquisition is consistent with our historic history of balancing financial flexibility, leverage, and the cost of capital. We have already executed on elements of this strategy by successfully refinancing our credit facilities in 2023, and now with the new delay draw term loan. We anticipate raising incremental borrowings closer to the closing of the transaction, and expect net leverage to be between 3 and 3.25 times, assuming a closing in the second half of 2024. We expect to return to our target leverage ratio range of 2-3 in the first 12 months after closing. Now turning to our 2024 guidance. We expect adjusted EPS to be in the range of $2.60 to $2.90. Our guidance is based on sales increasing low to mid single digits versus 2023. This also considers our expectation that the U.S. betting industry unit volumes are stable versus the prior year, which implies slight headwinds in the first half and recovery in the second half of 2024. Our sales outperforming the industry due to new distribution wins in the U.S. and the continued success from the new product launches overseas. And advertising spend of about $500 million as we continue to support our leading brands and new products. All of this resulting in adjusted EBITDA of approximately $1 billion at the midpoint of the range. I want to note two phasing items for 2024. First, we believe the -over-year negative unit trends seen in the U.S. betting industry over the past year are mitigating. We believe industry units will likely be down high single digits through the end of 2023. And while we expect the first quarter will be down some, we believe units for the industry will return to -over-year growth later this year. Second, we recently opened our new Crawfordsville facility to provide us with incremental capacity to support our long-term growth. In April, we will start servicing our new distribution that Scott spoke to previously, which will mark the beginning of our growth into this capacity. The phasing between this capacity and our new volume will result in our historical seasonality being a bit off. As we grow into Crawfordsville, the timing of the shipping of new distribution, and our near-term category outlook, we expect this to pressure profits in the first quarter, likely resulting in EPS being between 45 and 50 cents. We expect a return to delivering -over-year EPS growth starting in the second quarter of 2024. As we noted, we expect our full-year adjusted EPS to grow 15% at the midpoint of our guidance. Our guidance also considers the following allocations of capital in 2024. CapEx of approximately $150 million, down significantly from prior years as our major capital projects are complete. This is a more normalized level of spend, driven by maintenance spend of $110 million and growth spend of approximately $40 million. And a quarterly dividend of 13 cents, representing an increase of 18% relative to 2023. Lastly, I would like to flag a few modeling items. For the full year of 2024, we expect DNA of approximately $200 to $210 million, interest expense of approximately $135 million to $140 million, on a tax rate of 25%, with a diluted share count of 179 million shares. With that, I'll turn the call back over to Scott.

Thank you, Bosker. Nice job. Before opening up the call for questions, let me provide a brief update on our pending acquisition of mattress funds. In the fourth quarter, we certified substantial completion with the FTC second request. We continue to work with the FTC to advance the transaction approval process and anticipate these conversations will continue through the first quarter. As previously disclosed, we continue to expect the transaction to close in mid to late 2024. In connection with and contingent upon the acquisition, we are proactively pursuing a divestiture plan and engaging with mattress firm suppliers. In parallel, Tempur-Sealy and mattress firm continue to make joint progress

on

integration

planning. Lastly,

a brief comment on mattress firm's financial performance. Mattress firm recently made their quarterly results available on their website, which were consistent with our expectations. We encourage you to review mattress firm's website for more information on their financial performance for the most recent quarter. In summary, our progress towards the transaction close is on track, and we look forward to joining with the mattress firm team. And with that, I'll open up the call for questions. Operator?

Certainly. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. As a friendly reminder, please limit yourself to one question. Please rejoin the queue to ask a follow-up. One moment while we compile our Q&A roster. And our first question will be coming from Susan McLaurie of Goldman Sachs. Your line is open.

Thank you. Good morning, everyone.

Good morning, Susan.

Good morning, Scott. Maybe to start with, why don't we talk a little bit about demand? You mentioned that it seems like we have bottomed out in the fourth quarter and that this year we could see a sequential improvement as we move through. How are you thinking about that, I guess, relative to the macro backdrop, the potential for rates to come down, and what else do you think is stimulating the consumer a bit, perhaps, to start to see some improvement on the unit side?

Well, obviously, we have easier comps, which is probably the first thing that's got to be pointed out. Second thing, obviously, we are at an all-time low when we're talking about the U.S. in volume. So we are really at rock bottom from a historical standpoint. And as you mentioned, there are some green shoots. Obviously, we're in an environment where interest rates are trending down. We're also, if you look at the betting industry, we just got back from the Vegas betting show, there's good innovation in the industry. We've got some new product coming out, and others have some new product coming out that's very interesting. We've also seen some of our larger retailers, I'm going to say refocus on advertising, and we've got several of them increasing their advertising budgets going into 2024. So, yeah, in general, it feels like I've used the term bouncing around the bottom. We're kind of bouncing around the bottom. If you go back and look at the fourth quarter, and kind of look at it, parse it by month, October was not good in the U.S., and then it got better throughout the quarter. And then you get to the January period, and obviously, it's very difficult in this world to forecast. But if we look at our own order book in January, it's positive. If I look at our online sales in January, it's at double digits. So it looks like some green shoots. But you have to dampen that when you look at some of the details. The order book's positive, but it's concentrated in some larger customers. It's not as broad-based as we'd like to see. If you go talk to the retailers and listen to them, the floor traffic is down double digits, and they're January, when you talk to the retailers in general, are talking about being down 10%. And you think about January, it's only 30% of the quarter. So what I'm kind of saying, it's all mixed, and we continue to get some mixed signals, but clearly bouncing around the bottom seems to be the best description currently.

Okay, that's helpful color. Thank you. Good luck.

In one moment for our next question. And our next question will be coming from Peter Keith of Piper Sandler. Your line's open.

Oh, hey, thanks. Good morning, everyone. Maybe it's a bit of a financial question for BOSFIR, but I was hoping you could quantify the EPS or EBITDA impact from these facility startup costs in Q1, and then also provide a little bit of color on how you guys are thinking about input costs year on year and launch costs year on year.

Absolutely. So let me take those one at a time. If you think about the first quarter specifically, a couple of things happening there. We called out the phasing of revenue. We called out our expectations on a category. Also is that we have some great news is we're really excited about what's happening from a temporary adapt. And also good news is that the adapt is going out earlier than where debris did in prior year. So that's a couple of pennies between the first and second quarter. Specifically, as it relates to the question you asked about Crawfordsville, as a whole, about $30 million of DNA increase on a year over year basis. So when you parse that out for the quarter, think of that at about a couple of three cents. As it relates to input costs from a full year perspective, we still remain constructive. We've seen some tailwinds in 2023. It's very consistent with where we left it coming out of the third quarter as it relates to our input cost expectations. At that point, we called out, let's call it 20, 30.5th of benefit for 2024. So that's basically where we remain today. All that said is that we are mindful of what's happening in the Red Sea, but our expectations are still positive as it relates to the commodity input costs. And then closing it out with launch expenses on a full year basis is we would expect launch costs to be flat. However, as I called out, there is some phasing that happens between 1Q and 2Q, given the timing of the ADAPT is a bit earlier than where it was with Breeze in prior year.

I'll pile on that just a little bit, Vosker, and highlight Crawfordsville. Obviously, that's a huge investment for us, and while others in the industry are closing plants, and reducing capacity, we're adding capacity. And what you're seeing in the first quarter is basically turning on the plant full, and so you get the fixed cost of the plant coming through the income statement before you get the profits coming from the product, which will come in the second quarter. The good news is we've got orders. We need the plant, and it's busy. We've just got a timing on the building of the product and when revenues show up. The cost of the products will show up in inventory, but the whole fixed cost of the plant has got to go through the income statement. We're really excited about the future of that operation.

Okay. Thank you very much,

guys. And one moment for our next question. And our next question will be coming from Bobby Griffin of Raymond James. Your line is open.

Hey, good morning, everybody. Thanks for taking my question. So, Scott or Vosker, I was just hoping, when we look at the 2024 sales guidance flat industry units kind of as the starting point and then maybe build a little bit to your guide of, call it maybe 3% to 4% at the midpoint, can you unpack the drivers to get there? Is it mostly market share gains, mix, price? Is there anything to help put some context around what's assumed in the building blocks and the size of those building blocks to walk us from the industry to Tempur-Sealy's performance?

Sure. I'll let Vosker do the details, but, you know, foundationally, we have two big distribution wins that have been executed and those sales will show up in April. But you want to, you know, build a board? Absolutely.

So just starting with the category, as we indicated, is that our expectation is that it will be flat for the full year. However, as you call that as well, there will be a build. So let's call that big round numbers down low singles in the first half and up in the back half. So when you think about the phasing of sales and what the new distribution that Scott spoke to is that it is a build as you go from one to two and then you see the growth in three from a couple of different areas. The new products getting out there in DAP, the continual momentum that we're seeing in international and the improvement from a category standpoint. Specifically, disaggregating that a little bit, we're super excited about what we're seeing internationally. We would expect the growth in our international new product launch. We saw the green suits in the third quarter and it continues to grow in the fourth quarter and we're very excited about what that could do for us in 2024 and beyond. So the expectation is that we would see growth in international and all of the quarters. And then now bouncing back to the US, so what that would imply is that taking share internationally. When we get into the US, is the way that we think about this, it is really the market share gains would be tied to the market share growth and we're really excited about that. We're excited about the new distributions, the wins that we have in hand. Obviously, that's our expectation is that's what we've assumed in the guide. But our expectation is always is to continue to outperform the market.

Very good. I appreciate the details. Best of luck here executing this year.

In one moment for our next question. And our next question will be coming from Jason Hawes of Bank of America.

Hey, good morning and thanks for taking my questions. I'm curious if you could provide a little bit more color on the distribution gains that you cited. Was that really in reference to one big box retailer? Are you seeing some more broad distribution gain? Thanks.

We've got two large distribution gains in-house that the revenues will come starting in, call it April. So there's two big ones. And then like always, there's two small ones that are a little more on the smaller side. But there are two that are a little more needle moving. I guess would be a fair way to say it.

That's helpful. Thank you.

In one moment for our next question. Our next question will be coming from Seth Basham of Wedbush. Your line is open.

Thanks a lot and good morning. My question is on the margin outlook for 2024. Hopefully for some more color between expectations for gross margins and SG&A. It seems like you expect material gross margin improvement probably from commodities, but what about from improving operational efficiency? And on the SG&A side, it seems like advertising growth is likely to be about in line with sales growth, but you're expecting deleverage and other costs. Thank you.

Scott, let me take that up. So from a gross profit perspective, good call out, Seth. We would see nice year on year improvement from gross margin. So a couple of big drivers I would call out. I spoke to commodities briefly in the prior question. We would expect that to be a tailwind. We're very excited about the continuing momentum that we see in our US operations. Just to put a reference on that, we invested in customers and spilled some EBITDA historically. We started seeing the benefits of that starting to turn around in the back half of 2023. The expectation is that that would continue to build momentum as we get into 2024. So that would be a tailwind for us as well. Previously, I think I mentioned something around $50 million to $60 million. It would be our expectation that that would continue. On a year on year basis, yes, there's some phasing between quarters as it relates to launch, but big picture floor models should be a slight tailwind for us versus the prior year, and then Crawfordsville would be a headwind. So when I think about that, Crawfordsville, again, a headwind on rate. However, if Crawfordsville was not there, it would be difficult for us to manage this new distribution wind that we would have without incurring overtime and with our various other facilities. So that's really the gross profit story. As I think about from an operating expense perspective, a couple of things is we continue to manage this business for long-term growth, so we're going to invest in those things that will give us that growth and outlook perspective. When you think about OPEX on an overall basis, is that we would expect just a bit of deleverage. On the advertising perspective, just parsing that out, is I would think of the North American business being flat on rate on a year over year basis, and internationally, we're going to invest to really support that growing into that new addressable market. So what that blends to when you put all that together, is we expect incremental investments on rate from advertising. Also, we continue to be very excited about the potential of our -to-consumer business, not only in the bricks and mortar, which is a global story. In fact, the doors on a -over-year basis from first quarter to first quarter have grown 40 stores. So we're going to continue to invest in that initiative, as well as the e-com. As you know, we have a robust e-commerce business in the US, and now all of our brands are represented, CERN, Sealy, as well as Tempur. And then we spoke to international, but just parsing that a bit, is China remains a big opportunity for us, so we're going to spend some money there. So really what's, again, flat to slightly up as it relates to rate from an OPEX perspective, but really what's driving it is the investments we're making in future growth.

One moment for our next question. Our next question will be coming from Brad Thomas of KeyBank Capital Markets. Your line is open, Brad.

Hi, good morning. I was hoping we could talk a little bit more about the international segment and perhaps a bit more about the outlook for new product rollouts and some of the timing of some of the margin opportunities you have as we look forward. Thanks.

Sure. I'll talk a little bit about the international rollout. It's gone really well, and I think it's just probably the beginning from the international standpoint. And you can see from, I think, Bosker's earlier comments about what we're doing from an advertising standpoint. We feel we've got the right product now at the right price points. We're spending a little more money in advertising because we think the returns are going to be good, but all that is a very bullish sign for international on what we'll call a multi-year strategy. It's taken us quite a while, quite a number of years, to get the product, get it right, get the manufacturing process right. But we think we're in the early innings from an international growth standpoint. Bosker, do you want to add anything? What I would say

from timing of a margin view is, as I think about gross margin, is we mentioned the typical seasonality. We're not going to see that necessarily this year, just given as we ramp into that new distribution and given Crawfordsville. From a gross margin expectation standpoint, again, overall up year on year, and then margins consistent with prior years, is that it would increase as we go throughout the year, really driven dry a couple of different items. One is that we do expect from a growth standpoint, sales growth more in the back half than we would in the first half, therefore giving us some leverage from a gross margin on the gross margin line. And as well as those as the operational improvements, is that will gain momentum and continue to build on itself.

Great. Thank you very much.

One moment for our next question. Our next question will be coming from Michael Lasser of UBS. Your line is open, Michael.

Good morning. Thank you so much for taking my question. How do you think about the incremental margin on either sales upside or potential downside as the year unfolds and into next year, assuming that the betting recovery continues to gain steam? Thank you so much.

Okay, I'm going to speak for a second, then we'll let Bhaskar answer. You know, it's interesting. It's a really interesting question. You know, on the upside, it's obviously good. I think the part I want to call out is on the downside, if for some reason we've missed our call on the industry, we've got a lot of flexibility in the system to take costs out, because we've got the company positioned, I'm going to call it aggressively, for growth. And when you position a company aggressively for growth, you're spending some money, as we've talked about earlier in this call. And if for some reason there was a downside case someone was working with, we have the ability to take out a good bit of cost if we reposition the company for that kind of environment that we don't see. Do you want to talk about that a little bit, Bhaskar? Absolutely. What I would

say on a blended basis, the way I've historically thought about this business, the incremental contribution profit, call it, somewhere between 30 to 35%. As I sit here today, it feels closer to 35, maybe a bit above that, versus where we have been historically. And that, in context, is all things being equal. As we pointed out, we have expectations about the category. And as the consumer starts coming back, and they will, betting is not going obsolete, mattresses are not going obsolete, there will be a mix of when those units come back. Again, positive from an EBITDA standpoint, positive from a contribution profit standpoint. However, that mix would be something to think about as this industry begins to recover.

Thank you so much.

One moment for our next question. Our next question will be coming from Keith Hughes of Truist. Keith, your line is open.

Thank you. Question on the new facility in Indiana. Once you get up to full capacity, how much of your phone pouring will that represent? And will you actually hit full capacity in the second quarter?

Really complicated question. Let me put some words around it. No, we will not hit full capacity in the second quarter. And it depends on when you talk about capacity, whether you are running one shift, two shifts, all that kind of stuff. The way you should probably think about it is, look, first quarter, a little bit of a drag to get it going. By the time you are into the second and third quarter, Crawford's bill is contributing. But you should think about optimized. Optimized, it is probably a couple of years out, as far as being totally optimized, depending on what the betting market is. And it gives us great flexibility. But with Crawford's bill and the other plans we have, and the ability to go to second shifts, you should think about temper has capacity for the foreseeable future, both in pouring OEM foam and regular foam.

Okay, one more question about this. Go ahead. Do you think you are going to, in terms of like spring production, do you think you will do some more backward integration on spring production in the future as well, particularly given the volume you are starting to move in the industry?

You know, I do not know. That is something we have always looked at. We have got a great partnership with Leggett for sure. They do a fabulous job for us. We have got some other manufacturers who are doing a good job for us. And we make a good bit of our springs already. We make our own springs in the Asian market. The JV, Mexico. We make our own springs. We make a few here in the U.S. So we will continue to use kind of what I will call a blended strategy of -in-class spring manufacturers and build some of our own and continue to look at the economics and the pluses. But right now I think we are very happy with the current relationships we have and the mix that is both, we will call it in-source and outsource from a spring standpoint. Okay. Thank you.

And one moment for our next question. Our next question will come from Laura Campi of Loop. Your line is open.

Good morning. Thanks for taking my question. Could we get any more context on how TPX formulated the divestiture plan related to the mattress firm acquisition and then just anything you are comfortable saying about next steps?

Yeah, you are probably not going to get much there. The FTC lawyers will call me after the call and whip me like a dog. What I would tell you is there is a formal process that goes on in that area and it is ongoing and flexible. But other than that, I really can't give you any color. Other than to tell you there has been good interest in the package and the activity.

Thanks, Scott. I did not mean to cause you peril. Maybe we could talk a little bit about expected AUR in mattresses this year and that will be a little less controversial.

There you go.

AUR. That would be Oscar. Yep. And just to make sure that we are on the same page, Laura, that is ASP, Ever Sales Price? Correct. Correct. So the way that we are thinking about it currently is, again, very excited about what is happening with ADAPT. Breeze continues to have legs, so just to make sure we are grounded. ADAPT largely will be complete in the first quarter and then it is out there. That is great. It is ahead of where we were from a Breeze standpoint, so the momentum will build. And what is very nice about that is our expectation is that ADAPT and Breeze will live harmoniously together if you exclude the impact of four models. So what that would mean is we are not expecting that ASP will be materially one way or the other. Let's call it flattish. On an overall basis, when you think about the U.S., our expectation is that there is not going to be a significant difference sitting here today as it relates to how we think about units and dollars. So the implication there is that ASP is going to be flattish, broadly speaking, across the world. Again, what I would call out as I referenced this before is that eventually the consumer is going to come back. We feel like there is momentum that is happening from a consumer getting back a little bit as we think about the back half of the year and beyond. So as that consumer does come back, they will come back at all price points. However, it is that incremental EBITDA, but it is something to be mindful of as those units come back and where they come back to.

Great. Thank you very much.

Thank

you.

In one moment for

our next question. Our next question will be coming from William Reuter of Bank of America. Your line is open.

Hi. This kind of follows on that last question, but you mentioned you expect ASP to be flat. Are you seeing a trade down currently? Are you currently seeing ASP flat or are you seeing greater strength at lower price points? I know you had a turns and foster rollout last year, so that may be contributing to some greater success there. But any comments on MIX?

Yeah, on MIX, we're generally seeing the higher price units do better than the lower priced units. That's a trend that has been around for a year or so. The gap is narrowed some, but we continue to see that MIX. We haven't seen any deterioration in the strength of the higher end. I think in general, what I think Voskres talked about, correct me if I'm not wrong, on a -for-like basis, we aren't expecting to see ASP increases as there's quite a bit of pricing put in the market over the last few years due to commodity increases. It feels like the commodity thing is behind us and price on a -for-like basis is stabilized.

That's fair. Thanks so much.

One moment for our next question. Our next question will come from Jonathan Matuszewski of Jeffreys. Your line is open.

Great. Good morning and thanks for taking my question. Scott and Voskres, hoping you could expand upon your recent conversations with retail partners. Sounds like you're hearing from them a little bit of a change in mindset regarding advertising spend with them signaling to you some -over-year increases in their budgets for 2024. Any added color that could provide context for us in terms of what's changing their mindset to get a little bit more aggressive in their own ad spend? Thanks so much. Sure.

Look, when you look at the retail business model, it's got quite a bit of fixed cost. The retailers have absorbed quite a bit of sales decrease. And so I think the obvious thing to do if you're a retailer and you're trying to get your sales going is you look at your content, make sure you're advertising quality content, and see whether or not you can spend a little bit more and get a high return on investment because floor traffic has been down. Clearly, we're waving the flag about the need for the industry, not just any individual retailer or manufacturer to advertise, but it takes a village. And we've been fairly aggressive about asking others to pony up. And we're, of course, doing our share by historical standards. We're leaning in heavy. And I think the people that have invested in advertising are getting good returns. And to the extent that that continues, hopefully we'll get some other manufacturers and some more retailers leaning in. And like I said, we've got I think two off the top of my head that are leaned in. And I think that's going to be part of the turnaround story in 2024 is the market people getting back to understanding the category. And the category is driven, sure, on consumer confidence, but you also have to have a good bit of advertising in the marketplace for the industry to succeed.

It's really helpful. Thank you.

Okay. And I'm showing no further questions at this time. I would now like to turn the call back to Scott Thompson for closing remarks.

Thank you. To our 12,000 employees all around the world, thank you for all you do every day to make the company successful. To our retail partners, thank you for your outstanding representation of our brands. To our shareholders and lenders, thank you for your confidence in Tempur-Sealy's leadership team and its board of directors. This ends the call today, operator. Thank you.

Certainly. This concludes today's conference call. Thank you for participating. You may now disconnect.