Tempur Sealy International, Inc.

Please stand by, your program is about to begin. Good day, everyone, and welcome to the Tempor Silly Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask questions by pressing the star and one on your telephone keypad. You may withdraw your question by pressing star two. Please note this call is being recorded and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Aubrey Moore with Investor Relations. Please go ahead.

Good morning, everyone, and thank you for participating in today's call. Joining me today are Scott Thompson, Chairman, President, and CEO, Foster 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 Segurities 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. Any forward-looking statement speaks only as of the date on which it is made. The company undertakes no obligation to update any forward-looking statement. This morning's commentary will also include non-GAAP financial information. Reconciliations of this non-GAAP financial information can be found in the accompanying press release, which is posted on the company's investor website at investor.tempersealy.com and filed with the SEC. Our comments will supplement the detailed information provided in the press release. And with that introduction, it is my pleasure to turn the call over to Scott.

Thank you, Aubrey. Good morning, everyone, and thank you for joining us on our second quarter 2024 earnings call. I'll begin with some highlights from the quarter and then turn the call over to Bhaskar to review our financial performance in more detail. After that, I'll open up the call for Q&A. In the second quarter, net sales were approximately 1.2 billion, and adjusted EBITDA was 231 million, an improvement of 6% versus the second quarter of 2023. Our adjusted EPS grew a solid 9% to 63 cents, while also improving our leverage ratio. We're pleased to see our global market outperformance mitigate the impact of softer than anticipated industry volumes. Despite an estimated mid-single-digit industry decline in the quarter, more than our anticipated low single-digit decline for the period, our sales were only slightly below internal expectations. Our strong gross margin performance and solid cost controls resulted in healthy earnings growth in the second quarter. turning to a few of the second quarter highlights. First, our U.S. business outperformed the market, driven by the enduring strength of our brands and products, and supported by some recently introduced consumer-centric innovation and compelling marketing initiatives. Tempur-Pedic emerged as our top-performing brand again this quarter, supported by our all-new ADAPT products. As a reminder, our updated collection is designed to alleviate aches and pains by leveraging our innovative Kemper material, which delivers a 20% improvement in pressure relief compared to standard materials. The recently introduced Active Breeze product, our advanced heating and cooling sleep system, priced at approximately $13,800 for a cane, has resonated strongly with discerning ultra-luxury customers. In addition to active climate management, this product integrates sleep tracker AI and is driving premium tickets upward of $20,000 when bundled with complementary items. While sales volumes expected to be moderate, we believe this ultra-premium offering plays an important role in enhancing brand perception and signaling the future for betting innovation. Our North American direct-to-consumer business experienced an ASP uplift, and 2% sales growth in the quarter, driven by our new Tempur-Pedic products, clearly outperforming the industry as a whole. Our U.S. Tempur retail stores and e-commerce platform reported a mid-single-digit expansion of ASP over the prior year, and both our Tempur-Pedic and Stearns & Foster e-commerce websites experienced strong traffic. Our value price products also performed well in the quarter, supported by our recent distribution wins with two large U.S. betting retailers. These wins drove solid performance within our OEM and Sealy brands, mitigating the impact of soft industry-wide demand for entry-level and value-oriented price points. Overall, our broad-based momentum from our new products and distribution wins drove mid-single-digit growth in North America mattress units. Excluding the growth in our OEM business, North America mattress units were down low single digits, and mattress ASP was consistent with prior years, indicating consumers maintaining their willingness to invest in bedding innovation. To support all our brands, products, and third-party retailers, we continue to execute a balanced media strategy. with focus on both fraud-based and targeted digital outlets to engage consumers throughout their purchasing journey. Our recent creative campaign has strewn consumer interest across our product categories, supported the successful launch of our new Tempur offering, and fostered the continued momentum of Stearns and Foster collection. In the second quarter, we introduced new targeted TV spots and digital assets to support the new Tempur-Adapt collection. which resonated with our target customer base and is driving strong interest in our newly rolled out lineup. We're also continuing to support the Stearns and Foster product with campaigns that reinforce the brand's 175-year legacy of superior comfort, quality, and craftsmanship. This investment in Stearns and Foster advertising continues to drive among the fastest growing level of Google search interest in the category. In fact, we've realized nearly 30% increase in Stearns and Foster's search interest since January, outpacing search interest in the overall category by a factor of seven times. Second highlight, we are pleased with our performance with our international business, which continues to generate strong results against a challenging operating background. In the second quarter, the Tempur international team delivered solid growth year over year, and the Dreams business in the UK also performed well in what has been a challenging market. A recently concluded international rollout of all new Tempur mattresses, bed bases, and pillows is a key driver to these international results. The new lineup features consumer-centric innovation, a high level of customization, and a broader range of price points, ensuring we meet the diverse needs of the consumers across various markets and channels. Turning to the third highlight, in the second quarter, we achieved consolidated adjusted gross margin expansion of 200 basis points and adjusted EBITDA margin expansion of 170 basis points year over year. Operationally, we continue to drive gross margin efficiencies through enhanced supply contracts, improved labor productivity, and optimized logistics. These efforts coupled with normalized commodity prices contributed to a significant gross margin improvement in both North America and our international segments. We successfully translated that gross margin expansion into increased profitability while concurrently investing in certain long-term growth initiatives. Finally, I'd like to highlight the flexibility of our business model, which allows us to remain agile in a dynamic operating environment. Approximately 70% of our total costs flex with sales, helping to mitigate the impact of periods of softer demand. In the second quarter, our flexible operating model adapted to the muted operating conditions, while continuing to support our brands and delivering best-in-class service to our third-party retailers. Our strong cash flow and solid balance sheet continue to differentiate us from the competition. In the second quarter, we reported a robust $122 million in free cash flow, our strongest second quarter free cash flow since 2021. We also reported debt to EBITDA leverage of 2.7 times, well within our target range. and we expect our total leverage to trend down as we prepare for the mattress firm acquisition. And with that, I'll turn call over to Bostrom. Thank you, Scott. As mentioned, in the second quarter of 2024, consolidated sales were approximately $1.2 billion, and adjusted earnings per share was 63 cents. There are approximately $7 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 costs incurred in connection with the planned acquisition of the mattress firm. Turning to North American results, net sales declined 4% in the second quarter. On a reported basis, the wholesale channel declined 5%, and the direct channel grew 2%. North American gross margin improved a robust 200 basis points to 41.9%, driven by favorable commodities, operational efficiency, and lost costs. These improvements were partially offset by the mixed impact of the new distribution win for our OEM business unit. North American operating margin improved 100 basis points to 18.4%, driven by the improvement in gross margin partially offset by investments and growth initiatives, including advertising investments to support our newly launched products and investments to support our growing direct-to-consumer business. Now turning to international results. International sales grew 1% on a reported basis and 2% on a constant currency basis. As compared to the prior year, our international gross margin improved 170 basis points 56.6%, driven by operational efficiencies and favorable launch costs. Our international operating margin declined 90 basis points to 12.5%, driven by investments and growth initiatives to support our new advertising campaigns and Asia joint venture performance, partially offset by the improvement in gross margin. Now moving on to the balance sheet and cash flow items. At the end of the second quarter, consolidated debt less cash was $2.4 billion, and our leverage ratio under our credit facility was 2.7 times, within our historical target range of two to three times. We expect to continue to do leverage as we prepare for the mattress firm acquisition. Now turning to our 2024 guidance. We now expect adjusted EPS to be in the range of $2.45 to At the midpoint of the range, this represents a 6% growth year over year, a notable expansion of profitability in a prolonged challenge market. Our guidance is based on slight sales growth in the back half of the year, resulting in full year sales that are approximately consistent with the prior year. This also considers our expectation that 2024 U.S. bedding industry unit volumes will be down mid-single digits, which implies the industry headwinds will moderate sequentially but will continue through the back half of the year. Our sales performance outperforming the industry due to recent distribution wins in the U.S. and the continued success from the new product launches. with advertising spend approaching $475 million as we support our leading brands and new products, resulting in adjusted EBITDA of approximately $940 million at the midpoint of the range. Our guidance also considers the following allocation of capital in 2024. CapEx of approximately $140 million, down significantly from prior years as our major capital projects are complete. This level of spend is driven by maintenance CapEx of 110 and gross CapEx of approximately $30 million, and a quarterly dividend of 13 cents, an increase of 18% year over year. Lastly, I would like to flag a few modeling items. For the full year 2024, we expect DNA of approximately 200 to 210 million, interest expense of approximately $130 to $135 million on a tax rate of 25% with a diluted share count of 179 million shares. With that, I will turn the call back over to Scott. Thank you, Bhaskar. Nice job. Turning to a brief update related to the mattress room acquisition. I'm pleased to share that we have recently successfully executed a new post-closing supply agreement with one of Mattress Firm's medium-sized mattress suppliers. This is one of several post-closing supply agreements that we have executed in preparation for our planned acquisition of Mattress Firm and is consistent with our plan for Mattress Firm to continue as a multi-branded retailer. We'll not be providing any further comments on mattress firm acquisition beyond what we've shared on our July 8th update call, a replay of which you can find on the investor website. And because we're in litigation, we will not be taking any questions on the acquisition this morning. Thank you for your understanding as we move through this process. And with that, operator, please open the call up for questions.