Tempur Sealy International, Inc.

Good day, everyone, and welcome to the Tempur-Sealy third quarter 2024 earnings call. At this time, all participants are in a listen-only mode. Later, you'll have the opportunity to ask questions during the question and answer session. You may register to ask a question over the phone at any time by pressing the star and 1 on your telephone keypad. Please note, today's call will be recorded, and we will be standing by if you should need any assistance. It is now my pleasure to turn today's conference over to Aubrey Moore with 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 Bossa 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. Any forward-looking statement speaks only as of when the date 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.temperfeely.com and filed with the SEC. Our comments will supplement the detailed information provided in the press release. And now, with that introduction, I will turn the call over to Scott.

Thank you, Aubrey. Good morning and thank you for joining us on our third quarter 2024 earnings call. I'll begin with some highlights from the quarter and then turn the call over to Bobster to review the financial performance in more detail. After that, I'll provide some comments on our proposed acquisition of Mattress Firm and then open up the call for Q&A. In the third quarter, net sales grew 2% to $1.3 billion. and adjusted EBITDA grew a solid 6% to 275 million compared to the same period last year. Our GAAP EPS grew 14% to 73 cents per share, and our adjusted EPS grew 7% to 82 cents per share compared to the same period last year. The overall betting industry remains significantly below historical volumes However, we are pleased with Tempur-Sealy's results in the third quarter with an outstanding international performance and a solid domestic results. Adjusted EBITDA to net debt leverage ratio declined to 2.4 times, which is below our midpoint of our targeted range of two to three times. As we recorded previously, we are preparing our financial position for the planned closing of the mattress firm transaction. Cash generation in the quarter was very strong, despite the soft market. And we delivered $240 million in free cash flow. Our strongest quarter of free cash flow is the third quarter of 2021. Here are the third quarter highlights. Our first highlight is our adjusted EBITDA margin of 21.1% in the third quarter, which is the strongest margin in 10 quarters driven by our consolidated growth coupled with our operating efficiency initiatives and diverse business platform. We continue to invest in brand through advertising and best-in-class service levels while also remaining agile and responsive to industry conditions. We expect to see significant upside once the market normalizes, which we estimate to be in 2025 and to be led by the new Feeley-Posterpedic product launch, which I'll discuss in a minute. Turning to our second highlight, our U.S. business continues to perform well compared to the broader market, driven by the continued success of our newly launched products and recent distribution events. We recently completed the full refresh of our Tempur-Pedic brand, starting with the new generation of Breeze products and smart bases launched in 2023, followed by the 2024 rollout of our updated ADAPT collection and Active Breeze Halo product. These newest generation products feature a broad range of innovative solutions, such as industry-leading cooling technology, advanced pressure relief, and AI-driven sleep insights that help consumers overcome common barriers to quality sleep. Our ongoing commitment to and investment in consumer-centric innovation It's clearly delivering returns, as we see a growing trend in consumers attaching a smart base to their mattress purchases, which is driving an increase in average transaction value for both our retail partners and our direct-to-consumer business. Additionally, our Sleep Tracker AI app continues to enhance our product value by offering users real-time personalized coaching to help them achieve better sleep. We're particularly pleased to report the app downloads reached a record level in both August and September, demonstrating strong consumer engagement and interest in our innovative solutions. These results prove that our products are resonating with premium health and wellness focused customers. Burns and Foster was our strongest performing brand in the quarter and delivered solid growth through both wholesale and direct to consumer channels. driven by last year's new product launch, our rapidly expanding e-commerce platform, and our ongoing investments in advertising. Our value products also performed relatively well in a challenging demand environment, aided by recent distribution wins in two large U.S. betting retailers. Turning to our third highlight, we're excited to share that we'll be launching our all-new collection of U.S. Sealy Posturepedic Products for the first half of 2025. This is a significant reimagining of the Posturepedic product branding and marketing as we work to ignite growth in the U.S. vetting market, where Sealy is the largest brand. This new product line is targeted at the mid to entry-level market, where industry volumes have been weak the last few years. This updated Sealy Posturepedic collection of mattresses is the result of a multi-year R&D cycle and will feature new proprietary coil technologies. These patent-pending precision fit coils were designed in-house by our engineers to provide superior support, which has been the common thread of Posturepedic collection since its inception in 1950. We've also simplified merchandising. provide a clear value proposition and more compelling step-up story. The update will feature a new look, thoughtfully designed to offer a fresh style while staying connected to Sealy brand legacy. The launch will be supported with a national advertising campaign beginning Memorial Day 2025. The advertising is designed to reinforce the Sealy post-traumatic difference This top of the funnel multimedia campaign will be a national advertising effort to drive excitement for the company's largest brand. Our messaging will be amplified by an all new Sealy Posturepedic in-store experience, and we plan to elevate Sealy's brick and mortar presence with updated in-store material and training. We're continuing to make high return investments in brand and product to drive our and our third-party retailers success shifting to international for our fourth highlight both our legacy international business and our dreams operations performed very well in the third quarter driving healthy double-digit growth in international sales and 200 basis point of expansion international operating margins representing significant momentum relative to the overall subdued international market. Our newly launched international temper collection of mattresses, bed bases, and pillows continue to drive growth and market outperformance across key markets like the UK, Germany, China, and Australia. Notably, since the collection launched last year, we expanded our wholesale distribution by more than 10% and see continued opportunities to broaden distribution over the long term. We're supporting our new international products with strategic investments in advertising. Our continued investments throughout this funnel ensures that we drive both brand awareness and conversion, feeding the market for sustainable long-term growth. Our final highlight for the quarter, our U.S. Tempur-Pedic brand was recently awarded number one in customer satisfaction in both the in-store retail mattress and the online mattress segments of J.D. Power's 2024 mattress satisfaction report. We're honored to achieve this distinction for the last five out of six years for the retail category and for the fourth consecutive year in the online category. With these recognitions, Tempur-Pedic has been named the most awarded brand in the history of the J.D. Power U.S. Mattress Satisfaction Study. This recognition is a testament to our consumer-centric innovation and our unwavering commitment to product quality and service. And with that, I'll turn the call over to Bhaskar. Thank you, Scott. In the third quarter of 2024, consolidated sales were $1.3 billion and adjusted earnings per share was 82 cents. There are approximately $22 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 cost incurred in connection with our planned acquisition mattress firm and manufacturing footprint optimization initiatives. The manufacturing optimization involves the closing of two small facilities as we transferred their volume into our full-service manufacturing plant. This shift will allow us to lower our future costs per manufactured unit while continuing to make product to our industry-leading quality standards. Turning to North American results. Net sales through both our wholesale and direct channel declined approximately 1% in the third quarter. North American adjusted gross margin declined 10 basis points to 43.1% driven by the mixed impact of the new distribution win for our OEM business, partially offset by commodity costs and operational efficiencies. North American adjusted operating margin declined 20 basis points to 20.1%, driven by the decline in gross margin and operating expense deleverage. Now turning to international results. International net sales grew a robust 12%, on a reported basis and 11% on a constant currency basis. As compared to the same period last year, our international gross margin improved 70 basis points to 57.3% driven by operational efficiencies. Our international adjusted operating margin improved 200 basis points to 18.2% driven by operating expense leverage and the improvement in gross margin partially offset by the Asia joint venture performance. We're pleased to share that our Asian joint venture recently opened our first manufacturing plant in India. Although not expected to be material to our operations in the near term, it is further evidence of the long-term vision and willingness to invest in the future.