Sgl Group Ord

Hello, everyone. Thank you for joining us, and welcome to SomniGroup First Quarter 2026 Earnings Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Lauren Avrit, Director of Investor Relations. Lauren, please go ahead.

Thank you, operator. Good morning, and thank you for participating in today's call. Joining me today are Scott Thompson, Chairman, President, and CEO, and Bhaskar Rao, Executive Vice President and Chief Financial Officer. This call includes forward-looking statements that are subject to the state's proper 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. 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 has been posted on the company's website at www.somnigroup.com and filed with the SEC. Our comments will supplement the detailed information provided in the release. And with that, it's my pleasure to turn the call over to Scott.

Good morning. Thank you for joining us on our first quarter 2026 earnings call. I'll begin with some highlights in the quarter and then take the call over to Bhaskar to review our financial performance in more detail and discuss our reaffirmed 2026 earnings guidance. After that, we'll open up the call for Q&A. In the first quarter of 2026, net sales increased a healthy 12% to 1.8 billion. Adjusted EBITDA increased 20% to 297 million, and adjusted EPS increased a robust 20%, 59 cents per share. We're pleased with these results, particularly against the backdrop of heightened geopolitical tensions and winter weather disruptions in the U.S., all of which weighed on the industry demand. We believe global betting demand declined mid-single digits in the first quarter, which was below our expectation that demand would be flat but slightly positive during the quarter. We believe our performance reflected the strength of our business model and its ability to perform across varying market conditions. This has allowed us to continue to extend our leadership position in the industry. Turning to our first highlight, we expanded EBITDA margin by over 100 basis points and grew adjusted ETS by 20%. We accomplished this on 12% sales growth, demonstrating operating leverage embedded in our business model. We also delivered record first quarter operating cash flow, which we deployed towards debt reduction. We ended the first quarter at 3.1 times leverage, and are on track to return to our targeted range of two to three times adjusted EBITDA in the next few months. Our second highlight, our North American Tempur-Sealy business outperformed the broader market. Tempur-Sealy North America delivered mid-single-digit wholesale sales growth year over year on a like-for-like basis, driven by investments in high-quality advertising, continued momentum in Sealy-Posterpedic Line and increased balance of share at MasterSpot. Looking to the back half of the year, we expect the launch of our new Stearns and Voster lineup to optimize price architecture within the broader portfolio, support higher average selling price for our retail partners, strengthen our position at higher price points. We expanded our offering with additional skews at the top of the price range. Targeting the customer who has demonstrated continued resilience through the cycle, it represents a significant growth opportunity. We'll support the launch with new national campaign advertising focused on differentiated luxury product and on broader health and wellness benefits to improve sleep. Our third highlight, Our international business continued to capitalize on long-term growth opportunities, delivered double-digit growth on a reported basis, and then single-digit growth on a constant currency basis. Semper International performed the broader industry in the quarter, extending a multi-year track record of solid growth across our key markets. This performance reflects continued discipline investment in distribution and marketing, a resilient supply chain, strong local execution, and the strength of our temper brand. We're pleased with our results in a challenging environment, and our international business remains well positioned for continued growth over the long term. Our UK-based betting retailer, Dreams, once again outperformed the market this quarter, reinforcing its position as a category leader. strong brand awareness and share of voice combined with effective execution, growth, solid customer engagement, and healthy order volume. Our ongoing operational discipline and a continued focus on product quality and customer experience supports further growth in this very competitive UK market. Our fourth highlight, Mattress Firm outperformed the broader US market supported by its scale, depth of category expertise, and a well-curated merchandising assortment. Merchandising action taken over the past year has better positioned mattress firm business to meet customer needs across price points while maintaining a strong focus on quality and innovation. During the quarter, we further deepened relationships with suppliers aligned with our quality standards and marketing commitments. Our proprietary sleep expert model continues to differentiate the in-store experience supported by one of the industry's largest and most highly trained sales force, which has been augmented by ongoing technology investments. We remain on track with our previously announced $150 million store refresh program targeting completion in 2027. To date, we've spent approximately $40 million on the store refresh program, all funded operating cash flow. Additionally, the rollout of temper brand walls is progressing well with national depletion expected by year end. With that, I'll turn the call over to Bhaskar. Thank you, Scott. In the first quarter of 2026, consolidated sales were a solid $1.8 billion. and adjusted earnings per share was 59 cents, up 20% over the prior year. There are approximately $26 million of pro forma adjustments in a quarter, all of which are consistent with the terms of our senior credit facility. As a reminder, year-over-year comparisons are impacted by the acquisition of Mattress Firm in early February 2025 and the related divestiture of Sleep Outfitters and certain mattress firm retail locations in the second quarter of 2025. I will be highlighting like-for-like comparisons defined as reported numbers adjusted for the acquisition and divestiture impacts normalized for these items in our commentary. Now turning to mattress firm results. Net sales through mattress firm were approximately $886 million in the first quarter. Same store sales were flat outperforming a market we believe was down mid-single digits in the quarter. Mattress firm adjusted gross margins decreased 360 basis points to 31.5%, including a 40 basis point headwind from the stub period. The remaining decline was primarily driven by promotional expense and product mix combined with some fixed cost deleverage. The impact of product mix on gross margin was primarily driven by increased balance of share of Tempur-Sealy products, as Tempur-Sealy's supply contract is structured to provide a portion of mattress firms' economics in the form of cooperative advertising credits, which reduces mattress firms' operating expenses. When looked at on a conforming basis, there is no material impact on EBITDA margin from the product mix change. Mattress firm adjusted operating margins declined approximately 230 basis points to 4.9%, including a 150 basis point headwind from the stop period. The remaining decline was primarily driven by the decline in gross margin, partially offset by the favorable cooperative advertising dollars I mentioned a moment ago. Turning to Tempur-Sealy, North America. North America sales grew 5% on a like-for-like basis, with like-for-like net sales through the wholesale channel increasing approximately 8% in the first quarter. Our sales with third-party retailers declined 4% after normalizing for four models. Like-for-like sales through the direct channel declined 12% in the first quarter, driven by reduced customer traffic at retail stores and e-commerce sites as we reduced our e-commerce advertising in the quarter. However, we have seen a marked improvement in recent trends. North America adjusted gross margins increased a robust 1300 basis points to 58.3%, including a 600 basis point benefit from the stub period. The remaining increase was primarily given by realized synergies and operational efficiencies with lower product launch costs as well. North America adjusted operating margin improved 710 basis points to 24.3% in the quarter, including a 230 basis point benefit from the stub period. The remaining increase was primarily driven by the improved gross margin, partially offset by investments in cooperative advertising, as noted a moment ago. Now turning to temporary international results. International net sales grew a robust 16% on a reported basis and 7% on a constant currency basis. Our international gross margins increased 140 basis points to 50.4%, primarily driven by favorable mix and operational efficiencies. Our international operating margin increased 160 basis points to 18.4%, driven by the improvement in gross margin and fixed cost leverage. I'd like to spend a moment discussing commodity inflation and our related pricing action. It's historical industry practice to adjust pricing as input costs rise. Like others in the industry, we have recently announced modest pricing action designed to offset inflationary pressures tied to oil-derived inputs, including key chemicals, as well as gasoline, diesel, Importantly, the structure of our supplier contracts provide us with early visibility into inflationary cost pressures before they flow through our P&L. This visibility allows us to thoughtfully implement pricing actions to offset inflation while minimizing any material interim exposure. This is a structural competitive advantage. We expect commodity inflation will not impact Tempur-Sealy's full year 26 earnings. but will modestly modify our normal seasonality at the timing of cost increases hit slightly before our pricing actions are fully implemented. This is by design to give our retailers time to adjust their merchandising and advertising plans. As a result, the second quarter will have an approximate $10 million headwind to Tempur-Silly profits. We expect that this will fully offset in the third and fourth quarter with our announced pricing action taking effect following the July 4th promotional period. On a full year basis, we expect the pricing action to be dollar neutral to temporary earnings, effectively offsetting the inflationary impact. We anticipate this will result in a $50 million pricing lift to the back half of 2026 global temporary sales on a life-for-life basis with an expected annualized lift of approximately $100 million. Now turning to sales and cost synergy targets. In the first quarter, we achieved $15 million net benefit in adjusted EBITDA from sales synergies and another $15 million benefit from cost synergies. In order to support the summer selling season and leveling out of manufacturing for seasonal fluctuation, Mattress Firm built their inventory of Tempur-Silly products in a quarter. The planned inventory build is reflected in intercompany sales for the first quarter. However, we never realize any sales benefits to Somni Group's EBITDA until Tempur-Silly products sold to Mattress Firm is sold through to the end consumer. Now moving on to Somni Group's balance sheet and cash flow items. At the end of the first quarter, consolidated debt less cash was $4.5 billion, and our leverage ratio under our credit facility was 3.1 times, demonstrating our strong cash generation and disciplined capital allocation approach. Turning to cash flow performance. In a muted market, we delivered record first quarter operating cash flow of $247 million and record first quarter free cash flow of $186 million. We have reduced our net debt by nearly $500 million over the trailing 12 months of fully supporting growth initiatives and returning over $250 million to shareholders in dividends and buybacks. We expect to return to our target leverage ratio of two to three times over the next few months. Now turning to 2026 guidance. As a reminder, our guidance considers the elimination of intercompany sales between Mattress Firm and Tempur-Sealy, which we expect to represent approximately 23% of global Tempur-Sealy 2026 sales. Intercompany eliminations in accordance with GAAP will reduce Tempur-Sealy sales but be margin accretive and neutral to dollars of operating profit. Please note that we acquired Mattress Firm in February 2025. As a result, our first quarter and full year 26 reported results will reflect the impact of a little over one additional month of Mattress Firm financial results. We expect adjusted earnings per share to be between $3 and $3.40 for the full year. This guidance range contemplates a sales midpoint of approximately $7.8 billion after intercompany eliminations. Our annual guidance also reflects our expectation that the global betting industry will be flat to slightly down year over year. The announced pricing actions across our global markets, Tempur-Sealy North America like-for-like sales growing mid-single digits, international business growing mid-single digits, and like-for-like mattress firm sales growing low single digits. We also expect reported gross margin slightly above 45% and nearly 100 basis points of net margin expansion from operational efficiencies, including synergies, and operating leverage, partially offset by the impact of temporary pricing actions, which are intended to neutralize commodity inflation dollars which will be margin dilutive. Our 2026 outlook also contemplates our assumption for temporary silly brands and private label to be in the low 60% of mattress firm total sales. This represents about an incremental $40 million of EBITDA benefit for 2026 compared to 25. and approximately $700 million of advertising investments, all of which we expect to result in adjusted EBITDA of approximately $1.45 billion at the midpoint. Regarding capital expenditures, we expect 2026 CapEx approximately $225 million, which includes $75 million of investments in mattress firm store refreshes and brand wall installation. We expect our CapEx to normalize to $200 million in the future years, and for at least 50% of our free cash flow in 26 to go toward quarterly dividends and share repurchases. Now, I would like to flag a few modeling items. For the full year 2026, we expect DNA of approximately $315 million, interest expense of approximately $230 million, a tax rate of 25% with a diluted share count of 213 million shares. Note that our guidance does not include any impact for the closing of the proposed combination with Leggett and Platt, as the timing is dependent upon regulatory review and approval by Leggett and Platt shareholders. We expect the transaction would be accretive to adjusted earnings per share within the first year of operations before any synergies. Finally, a bit of color on guidance. The midpoint of our guidance assumes that consumer confidence, which has been pressured by geopolitical conflict, will normalize as we progress through the year. If these pressures were to continue through the year end, we would be tracking closer to the low end of our guidance. With that, I'll turn the call back over to Scott. Thank you, Bhaskar. Well done. Before opening the call up for Q&A, I want to quickly address our recent announced agreement to combine Leggett and Platt. As we announced last month, we signed a definitive agreement to combine with Leggett an on-stock transaction valued at approximately $2.5 billion, including the assumption of debt. We expect this transaction closed by year-end, subject to satisfactory customary closing conditions. Following the close of the transaction, Leggett is expected to operate as a separate business unit with Insomnia Group, similar to Temper Sealy, Mattress Firm, and Dreams, and to maintain its offices, including its primary location in Carthage, Missouri. We're proud to have Leggett & Platt join us and believe the combination is beneficial to all stakeholders of both companies. We expect the combination to leverage the individual strengths of SomniGroup and Legit and Plaid to realize five strategic benefits. First, this combination continues our vertical integration strategy and enables us to closer collaborate between component engineering, manufacturing, design, and customer trends, supporting accelerated innovation cycle and more cost-effective consumer-centric product construction. Second, this combination provides access to incremental addressable markets beyond betting, expanding SomniGroup's long-term growth opportunities and cash flow generation. Third, the combination is expected to lower SomniGroup's net financial leverage and increase its flexibility. Fourth, the combination is expected to be accreted to adjusted earnings per share before synergies and in the first year post-closing and significantly increase SGI's peak earnings in a normalized betting market. And fifth, the combination presents cost synergy opportunities. In total, we expect synergies to result and at least $50 million of EBITDA on a fully implemented annual run rate basis. With that, operator, we're done with our prepared remarks. Please open the call up for questions.