Tempur Sealy International, Inc. (NYSE:TPX) Q1 2024 Earnings Call Transcript

Tempur Sealy International, Inc. (NYSE:TPX) Q1 2024 Earnings Call Transcript May 7, 2024

Tempur Sealy International, Inc. beats earnings expectations. Reported EPS is $0.5, expectations were $0.48. TPX isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, everyone, and welcome to today’s Tempur Sealy International Incorporated 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. [Operator Instructions] Please note, this call is being recorded. [Operator Instructions] It is now my pleasure to turn the conference over to Aubrey Moore, Investor Relations. Please go ahead.

Aubrey Moore: Thank you, operator. Good morning, everybody, 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 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 report 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 statements. This morning’s commentary will also include non-GAAP financial information. Reconciliations of this non-GAAP financial information can be found on the accompanying press release, which is posted on the company’s investor website at investor.tempursealy.com and filed with the SEC. Our comments will supplement the detailed information provided in the press release. And now with that introduction, it is my pleasure to turn the call over to Scott.

Scott Thompson: Thank you, Aubrey. Good morning, everyone, and thank you for joining us on our first 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 provide an update on our proposed acquisition of Mattress Firm, which we expect to close by the end of the year. Lastly, I’ll open up the call for Q&A. In the first quarter, net sales were approximately $1.2 billion, and adjusted EPS was $0.50. Our adjusted EBITDA was $198 million, consistent with the same period last year. These results are evidence of our strong competitive position in the market. Turning to a few highlights. First, we continue to develop and launch high-quality bedding products in all the markets we serve.

We are actively refreshing our US Tempur portfolio with our latest Adapt products. These products are designed to address the fundamental consumer need, alleviating aches and pains. They feature our most innovative Tempur material and are engineered to provide an impressive 20% improvement in pressure relief compared to standard material. When our mattresses are combined with our proven range of smart adjustable basis, the result is a comprehensive advanced sleep system. The rollout of over 60,000 Adapt mattresses to retailers is on schedule and we expect to be substantially rolled out by Memorial Day. Early reports from our third-party retailers and our direct-to-consumer operations are strong. We also, to select national retailers, recently rolled out Active Breeze, our most customizable heating and cooling sleep system, priced at approximately $10,000 for queen and base set.

This system caters to the discerning ultra-luxury consumer seeking cutting-edge sleep solutions, offering both active climate management and the benefits of Sleep Tracker AI. Our third party retailers and our company-owned Tempur stores are reporting that the presence of this product on the showroom floors generates a halo effect propelling interest towards the top-tier offering of our Tempur lineup. Although, still early in the rollout when bundled with additional products, the ACTIVEbreeze is driving some tickets upward of $20,000, while we anticipate modest sales volume for this ultra-premium product, it’s significant live in the elevating the brand perception and foreshadowing the future of bedding innovation. Please note that even with challenges like reduced brick-and-mortar retail traffic our innovative products are driving momentum in the category.

Excluding the impact of floor models, our US average mattress sales prices across all brand products increased mid-single-digits and our attach rate increased double-digits year-over-year, demonstrating the consumers’ willingness to spend on innovative quality products designed to provide better night sleep. New products are also building momentum in our International business. Our new product collection features consumer-centric innovation and an expanded price range that meets the needs of a broader spectrum of customers. In the first quarter, we executed the launch of our all-new Tempur mattresses bed bases and pillows in the UK and are now fully rolled out worldwide. We also optimized the new Tempur mattress beds construction to facilitate a higher level of customization while streamlining the manufacturing process, allowing us to effectively meet the unique demands of consumers across various markets and channels.

Second highlight, we invested in compelling marketing to support our brands and products. We continue to be balanced with our media strategy focusing both on broad-based and targeted digital outlets to meet consumers throughout their purchase journey. In North America, we developed new creative design to drive consumers’ interest in the category and our recently launched Tempur products. In the first quarter, we introduced a new ad focused on the Tempur-Pedic Ergo ProSmart base and its exclusive SoundScape mode feature, which delivers an immersive relaxation experience designed to help people who have trouble following sleep. These ads are already resonating with consumers in driving attach rate and ASP expansion for our retail partners. In the second quarter, we continue to support these lineups with our new targeted TV spots and digital assets focused on illustrating how the Adapt collection provides a solution to one of the leading barriers to quality sleep, aches and pains.

Our consumer research shows that these new assets are our highest scoring ads to-date and we’re excited to put this new content into the market. We also continue to invest in advertising to support our Stearns & Foster products with engaging messages that reinforces the superior comfort, quality and craftsmanship is the hallmark of the brand for over 175 years. As has been the case with our successful Tempur-Pedic advertising, our recent investments in Stearns & Foster have also been successful, helping the brand to achieve excessive year-over-year growth in consumer traffic to stearnsandfoster.com every year since we first introduced the television advertising in 2021. And in 2023, helping the brand to achieve the industry’s highest year-over-year growth in Google Search.

Internationally, we continue to increase our marketing investments to support the positive momentum of our recently launched new Tempur product range. Our creative assets highlight the many benefits of the latest generation of Tempur materials, covers all retail assortments and reaches all relevant media channels. We continue to see positive results with uplift in awareness, share of search, web sessions and retail traffic. Our market intelligence reaffirms that we are outperforming the market in a challenging retail environment. We recently announced the signing of David Beckham as our newest brand ambassador, for our key markets in the high-growth Asia Pacific region. The campaign consists of television assets, content for our online channels and point-of-sale material for our own stores and retail partners.

The campaign launched in March in Australia. We’ll also go log in our other Asia Pacific subsidiaries later this year, and we will host an event with David Beckham and key retail partners in China during the second quarter. Our advertising efforts worldwide are designed to break through to consumers at all points in their purchase journey, driving near term sales, while also continuing to build long-term support for our brands. Our research shows that our brands continue to be top of mind for consumers seeking high-quality sleep solutions. Third highlight, we continue to expand and optimize our diverse omni-channel distribution platform to meet the consumer wherever they want to shop. Our brands and private labels continue to gain traction in the Wholesale segment across existing and new distribution channels.

In the first quarter, we expanded our OEM relationship with a large specialty betting retailer. And in April, we expanded our products into additional big-box stores with one of the largest U.S. bedding retailers. Consumers are also engaging with our product through our company-owned stores and e-commerce presence. Our North American direct channel performance was solid in the quarter, delivering a robust 8% sales growth year-over-year driven by strength in our e-commerce business. Finally, we continue to drive year-over-year improvements in costs through sourcing and operational efficiencies. During the quarter, our operations team focused on enhancing supply contracts, improving labor productivity and optimizing logistics. These efforts, combined with the impact of normalizing commodity prices resulted in a 270 basis point benefit to the North America first quarter adjusted gross margin and 130 basis point benefit to International’s first quarter adjusted gross margin.

With that, I’ll turn the call over to Bhaskar to provide more detail.

Bhaskar Rao : Thank you, Scott. As mentioned, in the first quarter of 2024, consolidated sales were approximately $1.2 billion and adjusted earnings per share was $0.50. There are approximately $18 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 our planned acquisition of Mattress Firm. Turning to North American results. Net sales declined 2% in the first quarter. On a reported basis, the wholesale channel declined 3% and the direct channel grew 8%. North American adjusted gross margin improved 160 basis points to 39.5% driven by commodities and operational efficiencies partially offset by changeover costs to support new OEM distribution and product launch costs.

North American adjusted operating margin was consistent to the prior year at 15.3% driven by improvement in gross margin offset by investments in growth initiatives. Now turning to international. International net sales were consistent year-over-year on a reported basis and declined 2% on a constant currency basis. As compared to the prior year, our International gross margin improved 140 basis points to 55.4% driven by commodities and operational efficiencies. Our International adjusted operating margin improved 20 basis points to 15.5% driven by the improvement in gross margin partially offset by investments in growth initiatives. Now moving on to balance sheet and cash flow items. At the end of the first quarter consolidated debt less cash was $2.5 billion and our leverage ratio under our credit facility was 2.85 times within our historical target range of two times to three times.

We generated record first quarter operating cash flow of $130 million, an improvement of $30 million year-over-year. We have already started to execute elements of our strategy to finance the Mattress Firm transaction, which is consistent with our history of balancing financial flexibility, leverage and cost of capital. We successfully expanded and extended our credit facilities in late 2023 and executed a delayed draw term loan in the first quarter of 2024. We anticipate raising incremental borrowings closer to the closing of the transaction and expect net leverage after closing to be between 3 times and 3.5 times, assuming a closing in the second half of 2024. We expect to return to our target leverage ratio range of two times to three times in the first 12 months after the closing.

Now turning to 2024 guidance. Consistent with previous expectations, we expect adjusted EPS to be in the range of $2.60 to $2.90. At the midpoint of the range, this represents a robust 15% growth rate year-over-year in a challenged market. Our guidance is based on sales increasing low to mid single digits versus 2023. This also considers our expectation that the US bedding industry unit volumes are flat to slightly down versus the prior year, which implies headwinds in the first half and some recovery in the second half of 2024. Our sales outperforming the industry due to recently won distribution in the US and the continued success from new product launches. Advertising spend of approximately $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. Our guidance also considers the following allocations of capital in 2024, CapEx approximately $150 million down significantly from the prior years as our major capital projects are complete. This is a more normalized level of spend driven by maintenance CapEx of $110 million and growth CapEx of approximately $40 million; and a quarterly dividend of $0.13, an increase of 18% over prior year. Lastly, I would like to flag a few modeling items. For the full year 2024, we expect D&A of approximately $200 million to $210 million. Interest expense of approximately $135 million to $140 million. On a tax rate of 25% and with a diluted share count of 179 million shares.

With that I’ll turn the call back over to Scott.

Scott Thompson: Thank you, Bhaskar. Before opening the call for questions, let me provide a brief update on our pending acquisition of Mattress Firm. As previously announced in the fourth quarter of 2023, we certified substantial completion with the Federal Trade Commission’s second request. We continue to work with the FTC to advance the transaction’s approval process and anticipate the FTC to complete its review in the second quarter. As previously disclosed, we continue to expect the transaction to close in mid to late 2024. In connection with and contingent upon this acquisition, we are proactively pursuing a divestiture plan. We are also engaged with numerous Mattress Firm suppliers on post-merger supply agreements. I’m pleased to share that six of the seven suppliers, we’ve offered post-closing supply agreements, have successfully negotiated and executed a win-win agreement with us.

Lastly, a brief comment on Mattress Firm’s financial performance. Mattress Firm recently made their quarterly results available on their website. We encourage you to review Mattress Firm’s website for more information on their financial performance for the most recent quarter, which we believe was consistent to slightly ahead of the U.S. industry trends. In summary, we’re making good progress on closing the proposed transaction and we look forward to joining with the Mattress Firm team. And with that, I’ll open up the call for questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] And we will take our first question from Susan Maklari with Goldman Sachs.

Susan Maklari: Thank you. Good morning everyone.

Scott Thompson: Good morning Susan.

Susan Maklari: Good morning. Scott I wanted to talk a little bit about how you’re thinking of the year coming together. I think coming into 2024 the expectation was that earnings in the first half would be driven more by margin recovery, while the top line was still perhaps a bit soft and then seeing some recovery in the volumes in the second half. I know you mentioned in your prepared remarks you continue to expect that. I guess can you talk a bit about what gives you the confidence that we will see that second half improvement in the volume? And any thoughts on the puts and takes to how the earnings may come together as we move through the balance of the year now that we’re one quarter in?

Scott Thompson: Sure. Thank you for that very short and simple question. Look when we look at it, the first thing that you asked about the confidence in the back half, quite frankly the comps get easier. That’s probably one of the biggest things is with the comps in the back half are much easier than in the front half. Also, when we look at our products that have been launched, they’re resonating in the marketplace and they should have momentum, both from an international and a domestic standpoint. We also obviously had good margin performance this quarter. I expect that we’re going to have a positive gross margin performance throughout the year. I guess the last thing I would kind of throw into your question is, if you look at the historical data and where the bedding industry is, I think everyone who had looked at that data and I’ll talk primarily about the US at this point that’s where the data is the easiest to look at is you’d have to say the bedding industry is in a depression and has been in one for a number of quarters.

And so, it’s got to normalize at some point whether it’s this quarter or whether it’s a quarter out or two. There’s no reason to believe it wouldn’t normalize. There haven’t been any products or any changes or any structural changes and the need for mattresses. And we may be building up pent-up demand. I don’t know. It’s hard to always tell. But certainly, we’ve been bouncing around the bottom for a long time and it just seems very reasonable that we should begin to normalize into what I’d call relatively minor growth from an industry standpoint. And then quite frankly, even if the industry doesn’t deliver that growth as you know we’ve been a fairly robust market share gainer over a number of quarters. And we don’t see any reason why that won’t continue going into the back half of the year.

Bhaskar Rao: And Susan, as it relates to puts and takes from an earnings standpoint outside of the volume items as Scott mentioned again, some new distribution that we have in the US, products resonating and whatnot, we do have some margin drivers as well. If you think about gross margin we had some nice performance in the first quarter. As Scott mentioned, we’d expect margin expansion as we go throughout the year double tapping in a couple of those items. The operational efficiencies that we’ve been speaking about for some time now, we saw the green shoots in the back half of last year and we continue to see that in the first quarter. That should give us a benefit more in the first half, but in the back half as well. And the commodities have been a bit of a tailwind for us that we’d expect throughout the year as well.

Operator: Thank you. And we will take our next question from Bobby Griffin with Raymond James.

Bobby Griffin: Good morning everybody. Thanks for taking my questions. I guess, I want to follow up there on gross margins really nice performance during the quarter on a consolidated basis as well on a segment basis. Can you maybe talk a little bit how some of the puts and takes played out? Did the launch costs as well as the new manufacturing facility startup costs play out as expected? Or did any of that cost gets shifted maybe into 2Q?

Bhaskar Rao: Bobby, it played out as expected. So we did indicate that from a new capacity standpoint specifically Crawfordsville is that would be in ramp mode and that that did happen very largely consistent with what we had imagined. As we get into the second quarter and beyond is, we will start seeing some revenue from the new distribution specifically in OEM that would offset that. Also four models, we did indicate from a phasing standpoint year-over-year, we’d have a little bit more in the first quarter than we did in the prior year and that played out as expected. In the second quarter, we’ll have the continuation of Tempur, but largely in line from an expectation standpoint. So again, when you think about what the expectations for margin as we get throughout the year, those tailwinds will continue whether it be the things that we have under our control which is the operations group again hitting on all cylinders as it relates to driving productivity.

And just as a reminder, once we get what we recoup what we – from the 2019 levels then we’ll go back to what we’ve historically had which is driving productivity out of those addressable COGS from a go-forward standpoint.

Scott Thompson: And Bhaskar, I mean to highlight, if I’m not mistaken I mean Crawfordsville was a little bit of a headwind.

Bhaskar Rao: That’s correct.

Scott Thompson: Gross margin in the first quarter. And even with that very strategic headwind, we still were able to step over it and deliver a solid gross margin performance.

Operator: Thank you. And we will take our next question from Rafe Jadrosich with Bank of America.

Rafe Jadrosich: Hi, good morning. Thanks for taking my question. I wanted to ask on the share gains that you’ve been driving how do you think you performed versus the industry in the first quarter? And then along with that just the shelf space gains that you’ve made, can you just talk about the timing there? And if there’s additional white space in some of those retailers?

Scott Thompson: Sure. And let me start out by saying the information is not perfect when you’re working in this industry and market share and kind of guessing everybody performed. So this is kind of what I’ll call our best thinking is – and we’re talking about the US market primarily, when we talk about this. So if you look at like information you get about springs and if you look at other data, you would perceive that the industry was down what do you think Bhaskar, double-digits from a sales standpoint call it 10% for rounding?

Bhaskar Rao: Yes Scott.