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VOLUME XXI
September 14, 2023
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November 8, 2021
Covestro announces new investment plan during CIIE debut
Zhu Shenshen 13:58 UTC+8, 2021-11-08 China International Import Expo
3 Photos | View Slide Show ›
The Germany-based company Covestro announced a plan to invest in a new manufacturing facility in Shanghai and secured the first deal for renewable attributed MDI (methylene diphenyl diisocyanate) in the Asia-Pacific region, the company said during its debut appearance at the China International Import Expo (CIIE).
MDI can be used in apparel, automotive interior materials, and thermal insulation for refrigeration appliances and buildings.
Covestro plans to build a new plant for polyurethane elastomer systems in Shanghai with an investment of “tens of millions of euros” amid rising global demand, especially in the Asia-Pacific region. The special chemical materials are used in industries from solar power to offshore wind energy and material handling.
The plant is expected to begin operation in 2023 at the Covestro Integrated Site Shanghai, with a total investment of 3.5 billion euros (US$4.04 billion).
“We believe our elastomers and other high-tech materials solutions can contribute to the nation’s sustainable development and carbon neutral ambitions,” Holly Lei, president of Covestro China, said at its CIIE booth.
Lei was also joined by Markus Steilemann, CEO of Covestro, who gave an online speech for CIIE.
During CIIE, Covestro also secured its first commercial order in the Asia Pacific region for a professional polyurethane raw material MDI with Huafon Group.
Covestro also signed partnership agreements at CIIE with universities and researchers including the Shanghai Institute of Organic Chemistry (SIOC) and Tongji University.
http://www.shine.cn/biz/company/2111087825/
November 8, 2021
Covestro announces new investment plan during CIIE debut
Zhu Shenshen 13:58 UTC+8, 2021-11-08 China International Import Expo
3 Photos | View Slide Show ›
The Germany-based company Covestro announced a plan to invest in a new manufacturing facility in Shanghai and secured the first deal for renewable attributed MDI (methylene diphenyl diisocyanate) in the Asia-Pacific region, the company said during its debut appearance at the China International Import Expo (CIIE).
MDI can be used in apparel, automotive interior materials, and thermal insulation for refrigeration appliances and buildings.
Covestro plans to build a new plant for polyurethane elastomer systems in Shanghai with an investment of “tens of millions of euros” amid rising global demand, especially in the Asia-Pacific region. The special chemical materials are used in industries from solar power to offshore wind energy and material handling.
The plant is expected to begin operation in 2023 at the Covestro Integrated Site Shanghai, with a total investment of 3.5 billion euros (US$4.04 billion).
“We believe our elastomers and other high-tech materials solutions can contribute to the nation’s sustainable development and carbon neutral ambitions,” Holly Lei, president of Covestro China, said at its CIIE booth.
Lei was also joined by Markus Steilemann, CEO of Covestro, who gave an online speech for CIIE.
During CIIE, Covestro also secured its first commercial order in the Asia Pacific region for a professional polyurethane raw material MDI with Huafon Group.
Covestro also signed partnership agreements at CIIE with universities and researchers including the Shanghai Institute of Organic Chemistry (SIOC) and Tongji University.
http://www.shine.cn/biz/company/2111087825/
November 7, 2021
Tempur Sealy International, inc (TPX) Q3 2021 Earnings Call Transcript
TPX earnings call for the period ending September 30, 2021.
Scott L. Thompson — Chairman Of The Board, President And Chief Executive Officer
Thank you, Aubrey. Good morning, everyone, and thank you for joining us on our 2021 third quarter earnings call. I’ll begin with a few highlights of our record third quarter financial performance. Bhaskar then will review our financial performance in more detail. Finally, I will conclude with some comments on our building blocks for future growth. We’re pleased to report robust third quarter results. The team continues to deliver strong results all around the world. In the third quarter of 2021, sales grew 20% year-over-year, with strong performances across North America and the International segments and with growth across all brands, channels and price points. Our strong sales performance was driven by our company initiatives, strong demand for Tempur-Pedic products in the U.S. and a solid bedding industry backdrop worldwide. Adjusted earnings per share for the third quarter was $0.88, an increase of 19% versus the same period last year. I should also note that we’ve grown sales and adjusted EPS double digits for nine out of the last 10 quarters. I’d now like to highlight a couple of items from the quarter. First, we are pleased to officially welcome the Dreams organization, our recent acquisition in the U.K., to the Tempur Sealy family.
The addition of Dreams furthers our vertical integration and omnichannel growth strategies. We are successfully integrating the business, and it is performing well. It’s ahead of its initial expectations, both from a top line and bottom line perspective. We expect over time to leverage our combined track record of operational excellence to realize unbudgeted synergies, which will further drive profitability. Second, consistent with our legacy of launching innovative products, we’re excited to highlight some of our new products in North America and around the world. Starting with North America. We plan to launch a Sealy mattress with a best-in-class pressure-relieving gel grid layer at a consumer-appealing mid-market price point designed to target the niche market of consumers looking for a nontraditional feel at a non-premium price point. We’re also planning to launch a Sealy branded eco-friendly mattress collection made with responsible sourced material. Furthermore, in early 2022, in addition to the emerging niche markets we plan to address, we are launching a new line of premium Sealy products targeted to a wide variety of customers, which includes a new lineup of industry-leading hybrids.
This new Sealy lineup is intended to extend the brand’s leadership in the industry by offering superior support and new proprietary material. Looking ahead to late 2022, the team is also working on the next line of Stearns & Foster products. These products are designed to further distinguish our high-end traditional Innerspring brand from the competition, and appeal to consumers that prefer a traditional Innerspring mattress. While Stearns & Foster is on track to have record sales this year, supported by a record amount of advertising dollars, we see ample opportunity to further expand consumers’ awareness of this segment through the introduction of new products and continuing advertising. Turning to International. As we’ve previously announced, we are launching a new line of Tempur products in our European and Asia-Pacific markets next year. These new products will feature the innovative Tempur-Pedic technologies that experienced great success in the U.S. and will be sold at a wider price range compared to legacy Tempur International offerings. Next, I’d like to highlight our recent capital allocation activities. During the last 12 months, we’ve allocated over $1 billion in capital acquiring Dreams, repurchasing shares, paying dividends and investing in our ongoing operations. At the same time, our robust earnings drove a reduction in our leverage ratio.
In the third quarter, we opportunistically repurchased $190 million of our shares, bringing our total share repurchase over the last 12 months to approximately $700 million at an average price of $36 per share. Regarding recent investments in the business, over the last 12 months, we’ve opened three new manufacturing facilities. Additionally, we recently broke ground on our third domestic foam-pouring plant in Crawfordsville, Indiana, which is planned to be operational in 2023. And we’re also expanding our manufacturing footprint within existing facilities and overall warehousing space in several locations. We’re investing to dramatically reduce our exposure to future supply chain disruptions by expanding our capacity to hold key chemical inputs and expand safety stock of certain products. The operational investments we are making today are part of a broader strategy to expand our North American manufacturing capacity, which will allow us to service the long-term demand outlook that we see for our industry’s leading brands and products. As you know, Sealy and Tempur brands are currently ranked as number one and number two best-selling mattresses in the United States. The next highlight is our worldwide wholesale business, which grew a robust 11% this quarter as compared to the same period last year.
We’re pleased with these performances, especially given the strong prior year sales comp and the fact that we were unable to ship all of the market demand in the quarter. As expected, our customers continue to be on allocation, and we exited the quarter with a record backlog. Post quarter end, the normal market seasonality has allowed us to make significant progress on working down our Sealy backlog. Thus, we recently took customers off of allocation. Unfortunately, due to the tremendous demand for Tempur-Pedic products in North America and domestic supply chain issues, the backlog for Tempur-Pedic expanded in the third quarter. We expect to work down this backlog in the fourth quarter and enter 2022 better positioned to fully meet consumers’ demand. Across both brands, our total backlog has increased from the end of the second quarter by about $100 million as of September 30, 2021. Turning to the final item I’d like to highlight. Our direct-to-consumer business had another record quarter, growing 79% over the third quarter of 2020 and growing 17% excluding the Dreams acquisition. With this quarter’s strong performance, our third quarter direct-to-consumer sales has grown a compound annual growth rate of 45% over the last five years.
On an annual run rate basis, our direct channel is now on track to generate over $1 billion of sales. Our companywide retail stores had a standout performance this quarter. The Dreams stores and our legacy company-owned stores both drove double-digit same-store sales growth year-over-year. Our e-commerce operation also performed very well this quarter. We continue to see robust sales growth driven by double-digit improvement in conversion and average order value. Our commitment to investing in the online presence of Tempur-Pedic brands is paying off. While we are pleased with our results, I should once again remind you that both our wholesale and direct sales in North America have been constrained in the quarter. The supply chain constraints once again forced us to turn away business this quarter. We estimate that it was about $100 million. Considering this and the unrealized sales from our increased backlog, our sales could have been higher by over $200 million this period. Turning to our growth outlook and drivers. I’m pleased to reaffirm our expectations that 2021 sales will grow approximately 60% over 2019, a period not impacted by COVID. Our sales and earnings growth over the two-year period has significantly outpaced the overall industry. So I’d like to take a moment to remind you what we said last quarter about the components of this growth.
We estimate about half of our two-year growth is attributable to our new retail partnerships. Another 35% of our growth is derived from our M&A activities and share gains from previously untapped addressable markets. We estimate only about 15% of our expected two-year growth comes from the broader industry. We attribute our performance to our commitment to driving our four key initiatives: first, to develop the highest-quality bedding products in all the markets that we serve; second, promote worldwide brands with compelling marketing; third, optimize our powerful omnichannel distribution platform; and fourth, drive increased EBITDA and prudently deploy capital. Our clear long-term initiatives, robust free cash flow and solid balance sheet have supported the explosive growth that we’ve generated over the last two years. We expect to drive future double-digit sales and EPS growth in 2022 and beyond.
With that, I’ll turn it over to Bhaskar.
Bhaskar Rao — Executive Vice President And Chief Financial Officer
Thank you, Scott. I would like to highlight a few items as compared to the prior year. Sales increased 20% to over $1.3 billion. Adjusted EBITDA increased seven percent to $298 million. And adjusted earnings per share increased 19% to $0.88. As expected, there were a few transitory items impacting this quarter’s margins compared to the records in the same period last year. These included: price increases to customers without margin benefit; operational inefficiencies to provide the best possible service to our customers while dealing with supply chain issues; and unfavorable brand mix, again, driven by supply chain issues. As expected, we have been neutralizing the dollar impact to commodities through our pricing actions. Our gross margin was impacted as sales increased with no change in gross profit dollars. This accounts for 350 basis points of the year-on-year change in consolidated gross margins for the quarter. This rate dilution was expected, and the underlying margins for the business remain strong. I also want to reiterate our belief that driving incremental bottom line profitability is the best way of returning value to shareholders.
Now turning to North America. Net sales increased 13% in the third quarter. On a reported basis, the wholesale channel increased 12% and the direct channel increased 20%. North American adjusted gross profit margin declined 490 basis points to 39.9%. This decline was driven by the previously mentioned items. We have implemented several pricing actions over the last 12 months to offset rising input costs. While we have been neutralizing the dollar impact, commodity prices have increased beyond our prior forecast. We expect additional pricing actions to offset these headwinds in 2022, although we will feel a bit of cost pressure in the fourth quarter. North America third quarter adjusted operating margin was 21.2%, a decline of 260 basis points as compared to the prior year. This is driven by the decline in gross margin I previously discussed, partially offset by operating expense leverage. Now turning to International. Net sales increased 73% on a reported basis, inclusive of the acquisition of Dreams. On a constant currency basis, International sales increased 72%. As compared to the prior year, our International gross margin declined to 54.6%. This decline was driven primarily by the acquisition of Dreams and pricing benefit without change in gross profit. Our International operating margin declined to 22.1%.
This decline, again, was driven by the acquisition of Dreams, the decline in gross margin and operating expense deleverage as costs in the current year have returned to a more normalized level. As a multi-branded retailer, Dreams sells a variety of products across a range of price points. Their margin profile is lower than our historical International margins, which is driving the major change in year-over-year margins internationally. Excluding Dreams, the underlying sales and margin performance internationally was in line with our expectations across both Europe and Asia Pacific. Now moving on to the balance sheet and cash flow items. We generated strong third quarter operating cash flows of $285 million. We are running very light on inventory, and we would expect that our inventory days would increase by the end of the year to support our expected sales growth in 2022. At the end of the third quarter, consolidated debt less cash was $1.9 billion, and our leverage ratio under our credit facility was 1.7 times. Our strong financial performance and balance sheet resulted in positive signals from the capital markets. First, we received multiple rating agency upgrades during the quarter, resulting in the strongest credit ratings in the company’s history.
Scott L. Thompson — Chairman Of The Board, President And Chief Executive Officer
Thank you, Bhaskar. Great job. I want to provide some additional details about our plans for future growth. We have complementary building blocks in place that we believe will drive growth in our business for next year and beyond. The first major building block is the launch of our new line of Tempur products in our European and Asia-Pacific markets. The new products will have a wider price range with the super premium ASP ceiling maintained and the ASP floor expanding into the premium category. This will allow us to reach a new segment of customers, substantially increasing our total addressable market internationally. We will launch and invest in these new products across our international markets in 2022. Second key building block is the continuation of our initiative to expand into the domestic OEM market. In 2020, we recognized whitespace opportunity for Tempur Sealy in the OEM market and successfully generated $150 million in sales in our first year. We believe that we can grow our sales by 400% to $600 million by 2025 due to continuing — continuation of utilizing our best-in-class manufacturing and logistics capabilities to manufacture non-branded product. This will allow us to earn our fair share of approximately 20% of the bedding market we believe is serviced by OEM. This also is expected to decrease our cost per unit for our branded product as we spread fixed costs and drive more advantageous supply agreements.
The third building block of future growth is our expectation that we’ll be able to service the entirety with a robust demand for our brands and products through the wholesale channel. Throughout 2021, because of supply chain issues, we’ve had to turn away new North American customers opportunities and have had our existing customers, including our e-commerce and retail operations, on allocation. Beginning in 2022, we anticipate being able to fully service demand and reengage with those new customers who approached us in the past about bringing on our brands and non-branded products. We also expect to return to a normalized brand mix dynamics as supply chain improves for both Tempur and Sealy operations. The fourth building block is continued expansion through our direct channel. As I’ve said before, we believe that we have one of the fastest growing, most profitable direct-to-consumer bedding businesses in the world. We expect both our e-commerce and company-owned stores to have robust growth opportunities going forward. Our e-commerce will continue to focus on converting customers interested in purchasing online directly from a brand, while our retail operations are driving both same-store sales growth and expansion of new store counts. We currently operate over 600 retail stores worldwide and see opportunities to further increase our store count organically, about double digits annually for the next several years.
The fifth building block that will drive our future growth is continued investment in innovation. Consumers are growing — consumers have a growing appreciation for the importance of sleep to overall health and wellness and, as a result, are increasingly searching for new solutions and technology to help improve their sleep. We have a strong legacy of delivering award-winning products that provide breakthrough sleep solutions to consumers, backed by over a century of knowledge and industry-leading R&D capabilities. Our planned 2022 product launch simplifies how we will relentlessly drive innovation to continue to bring consumer-centric solutions to market. Lastly, we expect to continue to execute on our capital allocation strategy. We run a balanced capital allocation plan, which contemplates supporting the business, returning value to shareholders via share repurchase and dividend and, on opportunistic basis, acquiring businesses that enhance our global competitiveness. We believe that our execution across these key building blocks will sustain double-digit sales and EPS growth in 2022 and position the company very well for sustainable long-term growth. In closing, I briefly want to touch on ESG. We’ve embedded environmental, social and government factors into our core strategy to help deliver long-term value.
For example, our new eco-friendly mattress collection I discussed a moment ago. We made a responsibly sourced material. We also expect our new U.S. foam-pouring facility to allow us to hire approximately 300 local employees. Our average annual salary for our U.S. manufacturing employees is above the national average, and it’s about $42,000 a year. This facility will also include state-of-the-art equipment, which is expected to improve energy efficiency on a per product basis.
Scott L. Thompson — Chairman Of The Board, President And Chief Executive Officer
Good morning and thank you for your question. I mean you’re asking about our confidence going into 2022. I mean look at it from our standpoint. We just reported, I think, this is the ninth out of the last 10 quarters we’ve had double-digit sales and EPS growth. So a lot of momentum to start with within the business. If you look particularly at the third quarter, I think we were at 20% growth in sales, but clearly highly constrained. We tried to outline the impact of that constraint. We had an increase in our backlog of about $100 million, primarily driven by Tempur. And then we’ve had customers on constraint, and that’s primarily been North America Sealy.
So I mean if you really put the $200 million, we feel we were constrained in the quarter, the underlying demand for our product was probably closer to 40%, and the organization wasn’t able to realize that demand. You can see from our comments that we’re working very hard to increase our capacity. So assuming no macroeconomic events, assuming the virus is trending the way it is, we go into 2022 feeling very good about demand. And it’s really about just our ability to produce, and that’s something that we’re relatively in control of, assuming the supply chains kind of normalize. But feel very good, particularly about Tempur worldwide.
I’d also say, if you look at our direct business, which is a business that we obviously have total control over, the compound annual growth rate and that’s what, 40-plus percent over the last five years, the stores, I think we called it out in the prepared remarks, are running 20% same-store sales. So our expertise in retailing continues to give us confidence. You also slipped in an extra question because you’re very skillful at that. So you kind of threw in a supply question. Look, the supply chain, I would say, in general, is getting better. I think we all still have to realize that the supply chain in the world is a little bit fragile, so it could get shaken up by something we don’t know about.
But as we sit here today, the supply chain issues are improving. As I think we called out last quarter, we are hoping we get normal seasonality, particularly in Sealy North America, where we’ve been constrained. We have gotten some normal seasonality in the fourth quarter on Sealy, and we’ve rapidly caught up in the backlog as it relates to Sealy. And the good news about that is it takes our customers off constraint in North America starting probably in the last week or so. But that’s the first time they’ve been unconstrained — what, Bhaskar, about a year?
Bhaskar Rao — Executive Vice President And Chief Financial Officer
Correct.
Scott L. Thompson — Chairman Of The Board, President And Chief Executive Officer
So thrilled to get the salespeople back out in North America to drive new customers and feel really good about our times to delivery on Sealy that we’ve struggled with over the last year. Thank you for your question.
Bobby Friedner — Piper Sandler — Analyst
Good morning. It’s Bobby Friedner on for Peter Keith. Just wanted to ask around high-end versus low-end sales trends and if there’s anything to call out there as to a bifurcation between the two with the high-end leading feedback we hear from retailers that premium has been very strong. So wondering if you’re starting to see any divergence in trends between the two?
Scott L. Thompson — Chairman Of The Board, President And Chief Executive Officer
Yes. I don’t have any analytical data to prove it. But my gut feeling is exactly what you said. I think high-end and premium is doing the best. I think at the lower end it’s probably cooled off some from what might have been a little bit of stimulus checks earlier in the year, but still good, but premium is clearly leading the way. And some of that may be from consumers more focused on health and being willing to spend on health and wellness as it relates to their experience with the pandemic, yes. I think that’s absolutely true. And quite frankly, that’s a good trend for the manufacturers. Because obviously, we make more not just dollars, but margin, on the higher-end product in Tempur and Sealy and Stearns & Foster are certainly well positioned within the industry at the premium end.
Keith Hughes — Truist — Analyst
Thank you. I had questions about the new Sealy product launch, the gel, the gel product. Can you just talk about how many SKUs will be part of that when you think you’re going to get that out in the market and any other details you’re willing to share?
Scott L. Thompson — Chairman Of The Board, President And Chief Executive Officer
Sure. I’d tell you kind of the crushable wafer is kind of my slang word for it. We’ve got the product developed. It will be a Sealy product, call it middle market. Exact number of SKUs hasn’t been determined. We expect it to be in the market in 2022. It’s in testing to make sure it’s best in class as we sit here today. I don’t think it’s a big product. I don’t think it would be material to the organization. It’s another one of those examples of where we find niche opportunities. And as the largest bedding manufacturer in the world, there’s probably not a bed we can’t make if we believe that there’s a market there that’s worth attacking. And so we’re going to attack that market.
November 7, 2021
Tempur Sealy International, inc (TPX) Q3 2021 Earnings Call Transcript
TPX earnings call for the period ending September 30, 2021.
Scott L. Thompson — Chairman Of The Board, President And Chief Executive Officer
Thank you, Aubrey. Good morning, everyone, and thank you for joining us on our 2021 third quarter earnings call. I’ll begin with a few highlights of our record third quarter financial performance. Bhaskar then will review our financial performance in more detail. Finally, I will conclude with some comments on our building blocks for future growth. We’re pleased to report robust third quarter results. The team continues to deliver strong results all around the world. In the third quarter of 2021, sales grew 20% year-over-year, with strong performances across North America and the International segments and with growth across all brands, channels and price points. Our strong sales performance was driven by our company initiatives, strong demand for Tempur-Pedic products in the U.S. and a solid bedding industry backdrop worldwide. Adjusted earnings per share for the third quarter was $0.88, an increase of 19% versus the same period last year. I should also note that we’ve grown sales and adjusted EPS double digits for nine out of the last 10 quarters. I’d now like to highlight a couple of items from the quarter. First, we are pleased to officially welcome the Dreams organization, our recent acquisition in the U.K., to the Tempur Sealy family.
The addition of Dreams furthers our vertical integration and omnichannel growth strategies. We are successfully integrating the business, and it is performing well. It’s ahead of its initial expectations, both from a top line and bottom line perspective. We expect over time to leverage our combined track record of operational excellence to realize unbudgeted synergies, which will further drive profitability. Second, consistent with our legacy of launching innovative products, we’re excited to highlight some of our new products in North America and around the world. Starting with North America. We plan to launch a Sealy mattress with a best-in-class pressure-relieving gel grid layer at a consumer-appealing mid-market price point designed to target the niche market of consumers looking for a nontraditional feel at a non-premium price point. We’re also planning to launch a Sealy branded eco-friendly mattress collection made with responsible sourced material. Furthermore, in early 2022, in addition to the emerging niche markets we plan to address, we are launching a new line of premium Sealy products targeted to a wide variety of customers, which includes a new lineup of industry-leading hybrids.
This new Sealy lineup is intended to extend the brand’s leadership in the industry by offering superior support and new proprietary material. Looking ahead to late 2022, the team is also working on the next line of Stearns & Foster products. These products are designed to further distinguish our high-end traditional Innerspring brand from the competition, and appeal to consumers that prefer a traditional Innerspring mattress. While Stearns & Foster is on track to have record sales this year, supported by a record amount of advertising dollars, we see ample opportunity to further expand consumers’ awareness of this segment through the introduction of new products and continuing advertising. Turning to International. As we’ve previously announced, we are launching a new line of Tempur products in our European and Asia-Pacific markets next year. These new products will feature the innovative Tempur-Pedic technologies that experienced great success in the U.S. and will be sold at a wider price range compared to legacy Tempur International offerings. Next, I’d like to highlight our recent capital allocation activities. During the last 12 months, we’ve allocated over $1 billion in capital acquiring Dreams, repurchasing shares, paying dividends and investing in our ongoing operations. At the same time, our robust earnings drove a reduction in our leverage ratio.
In the third quarter, we opportunistically repurchased $190 million of our shares, bringing our total share repurchase over the last 12 months to approximately $700 million at an average price of $36 per share. Regarding recent investments in the business, over the last 12 months, we’ve opened three new manufacturing facilities. Additionally, we recently broke ground on our third domestic foam-pouring plant in Crawfordsville, Indiana, which is planned to be operational in 2023. And we’re also expanding our manufacturing footprint within existing facilities and overall warehousing space in several locations. We’re investing to dramatically reduce our exposure to future supply chain disruptions by expanding our capacity to hold key chemical inputs and expand safety stock of certain products. The operational investments we are making today are part of a broader strategy to expand our North American manufacturing capacity, which will allow us to service the long-term demand outlook that we see for our industry’s leading brands and products. As you know, Sealy and Tempur brands are currently ranked as number one and number two best-selling mattresses in the United States. The next highlight is our worldwide wholesale business, which grew a robust 11% this quarter as compared to the same period last year.
We’re pleased with these performances, especially given the strong prior year sales comp and the fact that we were unable to ship all of the market demand in the quarter. As expected, our customers continue to be on allocation, and we exited the quarter with a record backlog. Post quarter end, the normal market seasonality has allowed us to make significant progress on working down our Sealy backlog. Thus, we recently took customers off of allocation. Unfortunately, due to the tremendous demand for Tempur-Pedic products in North America and domestic supply chain issues, the backlog for Tempur-Pedic expanded in the third quarter. We expect to work down this backlog in the fourth quarter and enter 2022 better positioned to fully meet consumers’ demand. Across both brands, our total backlog has increased from the end of the second quarter by about $100 million as of September 30, 2021. Turning to the final item I’d like to highlight. Our direct-to-consumer business had another record quarter, growing 79% over the third quarter of 2020 and growing 17% excluding the Dreams acquisition. With this quarter’s strong performance, our third quarter direct-to-consumer sales has grown a compound annual growth rate of 45% over the last five years.
On an annual run rate basis, our direct channel is now on track to generate over $1 billion of sales. Our companywide retail stores had a standout performance this quarter. The Dreams stores and our legacy company-owned stores both drove double-digit same-store sales growth year-over-year. Our e-commerce operation also performed very well this quarter. We continue to see robust sales growth driven by double-digit improvement in conversion and average order value. Our commitment to investing in the online presence of Tempur-Pedic brands is paying off. While we are pleased with our results, I should once again remind you that both our wholesale and direct sales in North America have been constrained in the quarter. The supply chain constraints once again forced us to turn away business this quarter. We estimate that it was about $100 million. Considering this and the unrealized sales from our increased backlog, our sales could have been higher by over $200 million this period. Turning to our growth outlook and drivers. I’m pleased to reaffirm our expectations that 2021 sales will grow approximately 60% over 2019, a period not impacted by COVID. Our sales and earnings growth over the two-year period has significantly outpaced the overall industry. So I’d like to take a moment to remind you what we said last quarter about the components of this growth.
We estimate about half of our two-year growth is attributable to our new retail partnerships. Another 35% of our growth is derived from our M&A activities and share gains from previously untapped addressable markets. We estimate only about 15% of our expected two-year growth comes from the broader industry. We attribute our performance to our commitment to driving our four key initiatives: first, to develop the highest-quality bedding products in all the markets that we serve; second, promote worldwide brands with compelling marketing; third, optimize our powerful omnichannel distribution platform; and fourth, drive increased EBITDA and prudently deploy capital. Our clear long-term initiatives, robust free cash flow and solid balance sheet have supported the explosive growth that we’ve generated over the last two years. We expect to drive future double-digit sales and EPS growth in 2022 and beyond.
With that, I’ll turn it over to Bhaskar.
Bhaskar Rao — Executive Vice President And Chief Financial Officer
Thank you, Scott. I would like to highlight a few items as compared to the prior year. Sales increased 20% to over $1.3 billion. Adjusted EBITDA increased seven percent to $298 million. And adjusted earnings per share increased 19% to $0.88. As expected, there were a few transitory items impacting this quarter’s margins compared to the records in the same period last year. These included: price increases to customers without margin benefit; operational inefficiencies to provide the best possible service to our customers while dealing with supply chain issues; and unfavorable brand mix, again, driven by supply chain issues. As expected, we have been neutralizing the dollar impact to commodities through our pricing actions. Our gross margin was impacted as sales increased with no change in gross profit dollars. This accounts for 350 basis points of the year-on-year change in consolidated gross margins for the quarter. This rate dilution was expected, and the underlying margins for the business remain strong. I also want to reiterate our belief that driving incremental bottom line profitability is the best way of returning value to shareholders.
Now turning to North America. Net sales increased 13% in the third quarter. On a reported basis, the wholesale channel increased 12% and the direct channel increased 20%. North American adjusted gross profit margin declined 490 basis points to 39.9%. This decline was driven by the previously mentioned items. We have implemented several pricing actions over the last 12 months to offset rising input costs. While we have been neutralizing the dollar impact, commodity prices have increased beyond our prior forecast. We expect additional pricing actions to offset these headwinds in 2022, although we will feel a bit of cost pressure in the fourth quarter. North America third quarter adjusted operating margin was 21.2%, a decline of 260 basis points as compared to the prior year. This is driven by the decline in gross margin I previously discussed, partially offset by operating expense leverage. Now turning to International. Net sales increased 73% on a reported basis, inclusive of the acquisition of Dreams. On a constant currency basis, International sales increased 72%. As compared to the prior year, our International gross margin declined to 54.6%. This decline was driven primarily by the acquisition of Dreams and pricing benefit without change in gross profit. Our International operating margin declined to 22.1%.
This decline, again, was driven by the acquisition of Dreams, the decline in gross margin and operating expense deleverage as costs in the current year have returned to a more normalized level. As a multi-branded retailer, Dreams sells a variety of products across a range of price points. Their margin profile is lower than our historical International margins, which is driving the major change in year-over-year margins internationally. Excluding Dreams, the underlying sales and margin performance internationally was in line with our expectations across both Europe and Asia Pacific. Now moving on to the balance sheet and cash flow items. We generated strong third quarter operating cash flows of $285 million. We are running very light on inventory, and we would expect that our inventory days would increase by the end of the year to support our expected sales growth in 2022. At the end of the third quarter, consolidated debt less cash was $1.9 billion, and our leverage ratio under our credit facility was 1.7 times. Our strong financial performance and balance sheet resulted in positive signals from the capital markets. First, we received multiple rating agency upgrades during the quarter, resulting in the strongest credit ratings in the company’s history.
Scott L. Thompson — Chairman Of The Board, President And Chief Executive Officer
Thank you, Bhaskar. Great job. I want to provide some additional details about our plans for future growth. We have complementary building blocks in place that we believe will drive growth in our business for next year and beyond. The first major building block is the launch of our new line of Tempur products in our European and Asia-Pacific markets. The new products will have a wider price range with the super premium ASP ceiling maintained and the ASP floor expanding into the premium category. This will allow us to reach a new segment of customers, substantially increasing our total addressable market internationally. We will launch and invest in these new products across our international markets in 2022. Second key building block is the continuation of our initiative to expand into the domestic OEM market. In 2020, we recognized whitespace opportunity for Tempur Sealy in the OEM market and successfully generated $150 million in sales in our first year. We believe that we can grow our sales by 400% to $600 million by 2025 due to continuing — continuation of utilizing our best-in-class manufacturing and logistics capabilities to manufacture non-branded product. This will allow us to earn our fair share of approximately 20% of the bedding market we believe is serviced by OEM. This also is expected to decrease our cost per unit for our branded product as we spread fixed costs and drive more advantageous supply agreements.
The third building block of future growth is our expectation that we’ll be able to service the entirety with a robust demand for our brands and products through the wholesale channel. Throughout 2021, because of supply chain issues, we’ve had to turn away new North American customers opportunities and have had our existing customers, including our e-commerce and retail operations, on allocation. Beginning in 2022, we anticipate being able to fully service demand and reengage with those new customers who approached us in the past about bringing on our brands and non-branded products. We also expect to return to a normalized brand mix dynamics as supply chain improves for both Tempur and Sealy operations. The fourth building block is continued expansion through our direct channel. As I’ve said before, we believe that we have one of the fastest growing, most profitable direct-to-consumer bedding businesses in the world. We expect both our e-commerce and company-owned stores to have robust growth opportunities going forward. Our e-commerce will continue to focus on converting customers interested in purchasing online directly from a brand, while our retail operations are driving both same-store sales growth and expansion of new store counts. We currently operate over 600 retail stores worldwide and see opportunities to further increase our store count organically, about double digits annually for the next several years.
The fifth building block that will drive our future growth is continued investment in innovation. Consumers are growing — consumers have a growing appreciation for the importance of sleep to overall health and wellness and, as a result, are increasingly searching for new solutions and technology to help improve their sleep. We have a strong legacy of delivering award-winning products that provide breakthrough sleep solutions to consumers, backed by over a century of knowledge and industry-leading R&D capabilities. Our planned 2022 product launch simplifies how we will relentlessly drive innovation to continue to bring consumer-centric solutions to market. Lastly, we expect to continue to execute on our capital allocation strategy. We run a balanced capital allocation plan, which contemplates supporting the business, returning value to shareholders via share repurchase and dividend and, on opportunistic basis, acquiring businesses that enhance our global competitiveness. We believe that our execution across these key building blocks will sustain double-digit sales and EPS growth in 2022 and position the company very well for sustainable long-term growth. In closing, I briefly want to touch on ESG. We’ve embedded environmental, social and government factors into our core strategy to help deliver long-term value.
For example, our new eco-friendly mattress collection I discussed a moment ago. We made a responsibly sourced material. We also expect our new U.S. foam-pouring facility to allow us to hire approximately 300 local employees. Our average annual salary for our U.S. manufacturing employees is above the national average, and it’s about $42,000 a year. This facility will also include state-of-the-art equipment, which is expected to improve energy efficiency on a per product basis.
Scott L. Thompson — Chairman Of The Board, President And Chief Executive Officer
Good morning and thank you for your question. I mean you’re asking about our confidence going into 2022. I mean look at it from our standpoint. We just reported, I think, this is the ninth out of the last 10 quarters we’ve had double-digit sales and EPS growth. So a lot of momentum to start with within the business. If you look particularly at the third quarter, I think we were at 20% growth in sales, but clearly highly constrained. We tried to outline the impact of that constraint. We had an increase in our backlog of about $100 million, primarily driven by Tempur. And then we’ve had customers on constraint, and that’s primarily been North America Sealy.
So I mean if you really put the $200 million, we feel we were constrained in the quarter, the underlying demand for our product was probably closer to 40%, and the organization wasn’t able to realize that demand. You can see from our comments that we’re working very hard to increase our capacity. So assuming no macroeconomic events, assuming the virus is trending the way it is, we go into 2022 feeling very good about demand. And it’s really about just our ability to produce, and that’s something that we’re relatively in control of, assuming the supply chains kind of normalize. But feel very good, particularly about Tempur worldwide.
I’d also say, if you look at our direct business, which is a business that we obviously have total control over, the compound annual growth rate and that’s what, 40-plus percent over the last five years, the stores, I think we called it out in the prepared remarks, are running 20% same-store sales. So our expertise in retailing continues to give us confidence. You also slipped in an extra question because you’re very skillful at that. So you kind of threw in a supply question. Look, the supply chain, I would say, in general, is getting better. I think we all still have to realize that the supply chain in the world is a little bit fragile, so it could get shaken up by something we don’t know about.
But as we sit here today, the supply chain issues are improving. As I think we called out last quarter, we are hoping we get normal seasonality, particularly in Sealy North America, where we’ve been constrained. We have gotten some normal seasonality in the fourth quarter on Sealy, and we’ve rapidly caught up in the backlog as it relates to Sealy. And the good news about that is it takes our customers off constraint in North America starting probably in the last week or so. But that’s the first time they’ve been unconstrained — what, Bhaskar, about a year?
Bhaskar Rao — Executive Vice President And Chief Financial Officer
Correct.
Scott L. Thompson — Chairman Of The Board, President And Chief Executive Officer
So thrilled to get the salespeople back out in North America to drive new customers and feel really good about our times to delivery on Sealy that we’ve struggled with over the last year. Thank you for your question.
Bobby Friedner — Piper Sandler — Analyst
Good morning. It’s Bobby Friedner on for Peter Keith. Just wanted to ask around high-end versus low-end sales trends and if there’s anything to call out there as to a bifurcation between the two with the high-end leading feedback we hear from retailers that premium has been very strong. So wondering if you’re starting to see any divergence in trends between the two?
Scott L. Thompson — Chairman Of The Board, President And Chief Executive Officer
Yes. I don’t have any analytical data to prove it. But my gut feeling is exactly what you said. I think high-end and premium is doing the best. I think at the lower end it’s probably cooled off some from what might have been a little bit of stimulus checks earlier in the year, but still good, but premium is clearly leading the way. And some of that may be from consumers more focused on health and being willing to spend on health and wellness as it relates to their experience with the pandemic, yes. I think that’s absolutely true. And quite frankly, that’s a good trend for the manufacturers. Because obviously, we make more not just dollars, but margin, on the higher-end product in Tempur and Sealy and Stearns & Foster are certainly well positioned within the industry at the premium end.
Keith Hughes — Truist — Analyst
Thank you. I had questions about the new Sealy product launch, the gel, the gel product. Can you just talk about how many SKUs will be part of that when you think you’re going to get that out in the market and any other details you’re willing to share?
Scott L. Thompson — Chairman Of The Board, President And Chief Executive Officer
Sure. I’d tell you kind of the crushable wafer is kind of my slang word for it. We’ve got the product developed. It will be a Sealy product, call it middle market. Exact number of SKUs hasn’t been determined. We expect it to be in the market in 2022. It’s in testing to make sure it’s best in class as we sit here today. I don’t think it’s a big product. I don’t think it would be material to the organization. It’s another one of those examples of where we find niche opportunities. And as the largest bedding manufacturer in the world, there’s probably not a bed we can’t make if we believe that there’s a market there that’s worth attacking. And so we’re going to attack that market.
November 5, 2021
I’m A Twenty Year Truck Driver, I Will Tell You Why America’s “Shipping Crisis” Will Not End
Ryan JOHNSONOct 27·10 min read
I have a simple question for every ‘expert’ who thinks they understand the root causes of the shipping crisis:
Why is there only one crane for every 50–100 trucks at every port in America?
No ‘expert’ will answer this question.
I’m a Class A truck driver with experience in nearly every aspect of freight. My experience in the trucking industry of 20 years tells me that nothing is going to change in the shipping industry.
Let’s start with understanding some things about ports. Outside of dedicated port trucking companies, most trucking companies won’t touch shipping containers. There is a reason for that.
Think of going to the port as going to WalMart on Black Friday, but imagine only ONE cashier for thousands of customers. Think about the lines. Except at a port, there are at least THREE lines to get a container in or out. The first line is the ‘in’ gate, where hundreds of trucks daily have to pass through 5–10 available gates. The second line is waiting to pick up your container. The third line is for waiting to get out. For each of these lines the wait time is a minimum of an hour, and I’ve waited up to 8 hours in the first line just to get into the port. Some ports are worse than others, but excessive wait times are not uncommon. It’s a rare day when a driver gets in and out in under two hours. By ‘rare day’, I mean maybe a handful of times a year. Ports don’t even begin to have enough workers to keep the ports fluid, and it doesn’t matter where you are, coastal or inland port, union or non-union port, it’s the same everywhere.
Furthermore, I’m fortunate enough to be a Teamster — a union driver — an employee paid by the hour. Most port drivers are ‘independent contractors’, leased onto a carrier who is paying them by the load. Whether their load takes two hours, fourteen hours, or three days to complete, they get paid the same, and they have to pay 90% of their truck operating expenses (the carrier might pay the other 10%, but usually less.) The rates paid to non-union drivers for shipping container transport are usually extremely low. In a majority of cases, these drivers don’t come close to my union wages. They pay for all their own repairs and fuel, and all truck related expenses. I honestly don’t understand how many of them can even afford to show up for work. There’s no guarantee of ANY wage (not even minimum wage), and in many cases, these drivers make far below minimum wage. In some cases they work 70 hour weeks and still end up owing money to their carrier.
So when the coastal ports started getting clogged up last spring due to the impacts of COVID on business everywhere, drivers started refusing to show up. Congestion got so bad that instead of being able to do three loads a day, they could only do one. They took a 2/3 pay cut and most of these drivers were working 12 hours a day or more. While carriers were charging increased pandemic shipping rates, none of those rate increases went to the driver wages. Many drivers simply quit. However, while the pickup rate for containers severely decreased, they were still being offloaded from the boats. And it’s only gotten worse.
Earlier this summer, both BNSF and Union Pacific Railways shut down their container yards in the Chicago area for a week for inbound containers. These are some of the busiest ports in the country. They had miles upon miles of stack (container) trains waiting to get in to be unloaded. According to BNSF, containers were sitting in the port 1/3 longer than usual, and they simply ran out of space to put them until some of the ones already on the ground had been picked up. Though they did reopen the area ports, they are still over capacity. Stack trains are still sitting loaded, all over the country, waiting to get into a port to unload. And they have to be unloaded, there is a finite number of railcars. Equipment shortages are a large part of this problem.
One of these critical shortages is the container chassis.
A container chassis is the trailer the container sits on. Cranes will load these in port. Chassis are typically container company provided, as trucking companies generally don’t have their own chassis units. They are essential for container trucking. While there are some privately owned chassis, there aren’t enough of those to begin to address the backlog of containers today, and now drivers are sitting around for hours, sometimes days, waiting for chassis.
The impact of the container crisis now hitting residencies in proximity to trucking companies. Containers are being pulled out of the port and dropped anywhere the drivers can find because the trucking company lots are full. Ports are desperate to get containers out so they can unload the new containers coming in by boat. When this happens there is no plan to deliver this freight yet, they are literally just making room for the next ship at the port. This won’t last long, as this just compounds the shortage of chassis. Ports will eventually find themselves unable to move containers out of the port until sitting containers are delivered, emptied, returned, or taken to a storage lot (either loaded or empty) and taken off the chassis there so the chassis can be put back into use. The priority is not delivery, the priority is just to clear the port enough to unload the next boat.
What happens when a container does get to a warehouse?
A large portion of international containers must be hand unloaded because the products are not on pallets. It takes a working crew a considerable amount of time to do this, and warehouse work is usually low wage. A lot of it is actually only temp staffed. Many full time warehouse workers got laid off when the pandemic started, and didn’t come back. So warehouses, like everybody else, are chronically short staffed.
When the port trucker gets to the warehouse, they have to wait for a door (you’ve probably seen warehouse buildings with a bank of roll-up doors for trucks on one side of the building.) The warehouses are behind schedule, sometimes by weeks. After maybe a 2 hour wait, the driver gets a door and drops the container — but now often has to pick up an empty, and goes back to the port to wait in line all over again to drop off the empty.
At the warehouse, the delivered freight is unloaded, and it is usually separated and bound to pallets, then shipped out in much smaller quantities to final destination. A container that had a couple dozen pallets of goods on it will go out on multiple trailers to multiple different destinations a few pallets at a time.
From personal experience, what used to take me 20–30 minutes to pick up at a warehouse can now take three to four hours. This slowdown is warehouse management related: very few warehouses are open 24 hours, and even if they are, many are so short staffed it doesn’t make much difference, they are so far behind schedule. It means that as a freight driver, I cannot pick up as much freight in a day as I used to, and since I can’t get as much freight on my truck, the whole supply chain is backed up. Freight simply isn’t moving.
It’s important to understand what the cost implications are for consumers with this lack of supply in the supply chain. It’s pure supply and demand economics. Consider volume shipping customers who primarily use ‘general freight’, which is the lowest cost shipping and typically travels in a ‘space available’ fashion. They have usually been able to get their freight moved from origination to delivery within two weeks. Think about how you get your packages from Amazon. Even without paying for Prime, you usually get your stuff in a week. The majority of freight travels at this low cost, ‘no guarantee of delivery date’ way, and for the most part it’s been fine for both shippers and consumers. Those days are coming to an end.
People who want their deliveries in a reasonable time are going to have to start paying premium rates. There will be levels of priority, and each increase in rate premium essentially jumps that freight ahead of all the freight with lower or no premium rates. Unless the lack of shipping infrastructure is resolved, things will back up in a cascading effect to the point where if your products are going general freight, you might wait a month or two for delivery. It’s already starting. If you use truck shipping in any way, you’ve no doubt started to see the delays. Think about what’s going to happen to holiday season shipping.
What is going to compel the shippers and carriers to invest in the needed infrastructure? The owners of these companies can theoretically not change anything and their business will still be at full capacity because of the backlog of containers. The backlog of containers doesn’t hurt them. It hurts anyone paying shipping costs — that is, manufacturers selling products and consumers buying products. But it doesn’t hurt the owners of the transportation business — in fact the laws of supply and demand mean that they are actually going to make more money through higher rates, without changing a thing. They don’t have to improve or add infrastructure (because it’s costly), and they don’t have to pay their workers more (warehouse workers, crane operators, truckers).
The ‘experts’ want to say we can do things like open the ports 24/7, and this problem will be over in a couple weeks. They are blowing smoke, and they know it. Getting a container out of the port, as slow and aggravating as it is, is really the easy part, if you can find a truck and chassis to haul it. But every truck driver in America can’t operate 24/7, even if the government suspends Hours Of Service Regulations (federal regulations determining how many hours a week we can work/drive), we still need to sleep sometime. There are also restrictions on which trucks can go into a port. They have to be approved, have RFID tags, port registered, and the drivers have to have at least a TWIC card (Transportation Worker Identification Credential from the federal Transportation Security Administration). Some ports have additional requirements. As I have already said, most trucking companies won’t touch shipping containers with a 100 foot pole. What we have is a system with a limited amount of trucks and qualified drivers, many of whom are already working 14 hours a day (legally, the maximum they can), and now the supposed fix is to have them work 24 hours a day, every day, and not stop until the backlog is cleared. It’s not going to happen. It is not physically possible. There is no “cavalry” coming. No trucking companies are going to pay to register their trucks to haul containers for something that is supposedly so “short term,” because these same companies can get higher rate loads outside the ports. There is no extra capacity to be had, and it makes NO difference anyway, because If you can’t get a container unloaded at a warehouse, having drivers work 24/7/365 solves nothing.
What it will truly take to fix this problem is to run EVERYTHING 24/7: ports (both coastal and domestic),trucks, and warehouses. We need tens of thousands more chassis, and a much greater capacity in trucking.
Before the pandemic, through the pandemic, and really for the whole history of the freight industry at all levels, owners make their money by having low labor costs — that is, low wages and bare minimum staffing. Many supply chain workers are paid minimum wages, no benefits, and there’s a high rate of turnover because the physical conditions can be brutal (there aren’t even bathrooms for truckers waiting hours at ports because the port owners won’t pay for them. The truckers aren’t port employees and port owners are only legally required to pay for bathroom facilities for their employees. This is a nationwide problem). For the whole supply chain to function efficiently every point has to be working at an equal capacity. Any point that fails bottlenecks the whole system. Right now, it’s ALL failing spectacularly TOGETHER, but fixing one piece won’t do anything. It ALL needs to be fixed, and at the same time.
How do you convince truckers to work when their pay isn’t guaranteed, even to the point where they lose money?
Nobody is compelling the transportation industries to make the needed changes to their infrastructure. There are no laws compelling them to hire the needed workers, or pay them a living wage, or improve working conditions. And nobody is compelling them to buy more container chassis units, more cranes, or more storage space. This is for an industry that literally every business in the world is reliant on in some way or another.
My prediction is that nothing is going to change and the shipping crisis is only going to get worse. Nobody in the supply chain wants to pay to solve the problem. They literally just won’t pay to solve the problem. At the point we are at now, things are so backed up that the backups THEMSELVES are causing container companies, ports, warehouses, and trucking companies to charge massive rate increases for doing literally NOTHING. Container companies have already decreased the maximum allowable times before containers have to be back to the port, and if the congestion is so bad that you can’t get the container back into the port when it is due, the container company can charge massive late fees. The ports themselves will start charging massive storage fees for not getting containers out on time — storage charges alone can run into thousands of dollars a day. Warehouses can charge massive premiums for their services, and so can trucking companies. Chronic understaffing has led to this problem, but it is allowing these same companies to charge ten times more for regular services. Since they’re not paying the workers any more than they did last year or five years ago, the whole industry sits back and cashes in on the mess it created. In fact, the more things are backed up, the more every point of the supply chain cashes in. There is literally NO incentive to change, even if it means consumers have to do holiday shopping in July and pay triple for shipping.
This is the new normal. All brought to you by the ‘experts’ running our supply chains.
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