Tempur Sealy International, Inc. (TPX) Q2 2023 Earnings Call Transcript

Aug. 03, 2023 2:47 PM ETTempur Sealy International, Inc. (TPX)

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Q2: 2023-08-03 Earnings Summary

EPS of $0.58 beats by $0.02 | Revenue of $1.27B (4.85% Y/Y) beats by $29.20M

Tempur Sealy International, Inc. (NYSE:TPX) Q2 2023 Earnings Conference Call August 3, 2023 8:00 AM ET

Company Participants

Aubrey Moore – VP, IR

Scott Thompson – Chairman, CEO & President

Bhaskar Rao – EVP & CFO

Scott Thompson

Thank you, Aubrey. Good morning, everyone, and thank you for joining us on our 2023 Second Quarter Earnings Call.

I’ll start by sharing some highlights from our second quarter performance and then Bhaskar will review our worldwide financial performance in more detail. After that, I’ll share some closing comments before we open the call up for Q&A.

Today, we are pleased to report one of the strongest second quarters in the company’s history, second only to the same period in 2021. Importantly, these results were delivered against headwinds from a less-favorable market than we expected, the impact of which was partially mitigated by company-specific performance.

Sales growth for the quarter was 5%. Adjusted EPS for the quarter was consistent with prior years after absorbing higher interest costs, major launch costs and elevated taxes. GAAP EPS grew 2%. We believe these results are a reflection of our innovative products, strong sales culture, solid expense controls and our passion for execution.

In our largest market, the U.S., we believe industry units declined at least low double digits in the quarter, resulting in historically low aggregate industry volumes for the quarter and first half of the year. Overall, we believe the U.S. market has stabilized at trough unit levels, with the upper end of the market demonstrating a bit more resilience compared to the entry-level market.

Today’s results demonstrate the robust earnings power and cash flow attributes of the business, as we realized solid earnings and cash flow against this challenging backdrop. As we look to the back half of the year, we anticipate U.S.-produced mattress units trends will slowly improve but remain negative year-over-year. Bhaskar will have more information on the 2023 guidance in a minute.

Turning to a few highlights for the quarter. First, we continued to extend our lead as the largest global bedding company in the world. All 3 of our leading U.S. brands, Tempur, Sealy and Stearns & Foster performed well in the quarter, significantly ahead of where we believe the industry trended. We were pleased with the second quarter performance of our International business. The successful Tempur International launch combined with Dreams’ crisp retail execution are driving continued outperformance worldwide and positioning us well for the future.

Second, we opened our third domestic foaming pouring plant in Crawfordsville, Indiana, expanding our manufacturing capacity to meet expected demand for years to come. We designed the state-of-the-art facility to optimize our manufacturing capabilities across bedding products and components. In addition to pouring Tempur-Pedic material, we have the flexibility to leverage the plant’s foaming pouring capacity to manufacture bedding products and components for our Sealy and Stearns & Foster brands as well as our non-branded OEM operations.

The facility enhances our ability to service our customers in the Northeast market, creating opportunities to shorten lead times and reduce per-unit logistics costs. This plant also provides additional storage for chemicals, mitigating the risks of future supply or pricing disruption.

With the opening of this facility, we’ve completed our 3-year strategic CapEx program and expect to see CapEx investments moderate significantly going forward. In the second half of this year, we expect CapEx to be down by 50% versus the same period last year, certainly beneficial to free cash flow.

Third highlight. We completed the rollout of our new TEMPUR-Breeze products and our new smart base in the U.S. Next-generation TEMPUR-Breeze mattress builds on the success of our proven legacy Breeze products to deliver next-level sleep solutions with enhanced Tempur-Pedic feel characteristics. Featuring new technologies designed by our Tempur-Pedic scientists, the new lineup presents the next generation of consumer-centric solutions focused on helping to alleviate aches and pains.

We also continue to raise the bar in cooling performance with our new LuxeBreeze model, dealing 10 degrees cooler all night long, presenting the best-in-class solution for the more than 60% of the households that have at least one person who sleeps hot. Retailers’ and consumers’ response to these incremental technologies have been overwhelmingly positive, and we and retailers are seeing positive mix and higher average ASP.

In tandem with the Breeze mattress refresh, we also introduced an updated adjustable base lineup, which is driving all-time-high retailer advocacy and attachment rates, reaching new records in May and June. Our new smart base features, our new Sleeptracker 2.0 technology, the accuracy of which was validated by a Stanford medical study; and offers industry-leading automatic snore detection and response, addressing a leading sleep concern among consumers. This new lineup also features incremental multisensory relaxation features to help consumers wind down and prepare their bodies and minds for deep, rejuvenating sleep.

Over the Memorial holiday, we supported these Tempur lineups with all-new breeze and smart-based multimedia advertising campaigns. These efforts drove incremental search interest in Tempur year-over-year and drove solid e-commerce traffic trends over the Memorial Day selling period. All of our new Tempur products and supporting advertising initiatives are strengthening Tempur’s appeal to the premium wellness-minded consumer and driving improvements in attach rates and ASP for our third-party retailers.

Fourth highlight. Our investments in Stearns & Foster products, distribution and marketing continue to drive meaningful sales growth and expand brand recognition. In the second quarter, Stearns delivered its third sequential quarter of year-over-year sales growth, significantly outperforming broader market trends. This was possible, thanks to the recent investments in brand and the rollout of our all-new Stearns & Foster collection with superior innovation and elevated design and enhanced step-up opportunities.

The new product lineup is delivering strong results. We have grown Stearns’ third-party retail distribution by more than 20% compared to the previous collection with gains in both legacy and incremental Stearns’ retailers. We’re seeing this product resonate with historically underserved premium innerspring consumer, resulting in strong mix and again driving ASP expansion.

Our channel diversification strategy is also driving strong brand momentum. The Stearns & Foster e-commerce site we launched last year continues to drive brand recognition and highly profitable incremental sales.

Finally, our launch of our all-new international Tempur products continue to track with our expectations. We are launching the new international lineup in over 90 markets worldwide. In the first half of the year, we kicked off our Tempur European and Asian markets. We expect to be fully floored in our last market in the U.K. in the first half of 2024.

The U.K. has some country-specific fire retardant regulations, which adds some complexity to the product launch. The consumer-centric innovation and new collection will appeal to our legacy ultra-premium consumers at prices of 3,000 and above but also broadening our price points to expand our addressable market to meet the needs of consumers shopping for mattresses between 2,000 and 3,000.

We are streamlining the manufacturing process with this lineup to unlock this incremental price point without materially altering the margin profile of our Tempur International business. As we continue to stagger the rollout by individual markets, we are currently manufacturing both with new line and the old line of products in our international Tempur plant. We plan to optimize production of the new line after the transition period, providing a tailwind to gross margins in 2024.

Scott Thompson

Thanks, Bhaskar. Great job. Before opening the call up for questions, I want to provide a couple of updates. First, I want to address the cybersecurity event affecting certain parts of our IT system, which was disclosed Monday in our 8-K. Following the discovery of the event, our team activated its CEO-approved incident response and business continuity plan.

The plan was approved years ago and is designed to contain incidences. The plan included proactively shutting down certain IT systems, resulting in the planned temporary interruption of our operations. We began bringing our systems back online last Friday and expect it to take time to return to normal operations.

Our investigation remains ongoing and we continue to work to determine the impact of the disruption. If we determine that any personal information was involved, we would, of course, comply with any reporting obligations we have under the applicable law. Currently we’re working hard to catch up with the lost production from the shutdown. In total, our systems were down for a week, and we are currently working to get back to full production. We expect cyber-related expenses net will be adjusted from our third quarter financial results.

Lastly, I’d like to provide a brief update on our pending acquisition of Mattress Firm. We’re currently responding to the Federal Trade Commission’s second request and continue to expect to close the transaction in mid- to late 2024. Over this interim period, Mattress Firm’s leadership team provides us with a high-level update of their financial performance. Mattress Firm’s recently — quarterly results, which they reported yesterday, were consistent with our expectations. And we look forward to bringing the Mattress Firm team onboard.

Robert Griffin

Our first one is to just maybe follow up on the guidance reduction and just maybe get a little more clarity on some of the moving parts assumed in there. So is the reduction in earnings and sales all just a function of the industry maybe being a little bit softer than we originally anticipated and we laid out? Or are you baking in some conservatism that this IT event or the cyber event will have some type of impact on earnings and revenue in the second half?

Scott Thompson

Yes, let me — it’s kind of a — let me answer it because it’s a little bit of a long answer, but let me be clear about it. First of all, from the cyber event, great job by the IT, internal IT department. They did a great job. In fact, it was an enterprise-wide effort. And congratulations to all the people internally. We also had a lot of help from external IT teams that we had on retainer for these kind of events and a great job by Microsoft’s elite team.

Let me go — kind of go through the estimates of what we know today. Obviously, this is not an easy estimate, but let me tell you what we know based on all the information that we have right now. First of all, the event itself is certainly not material to the intrinsic value of the enterprise. The event is not material to our 2023 expected sales or EBITDA.

Before insurance — and we have an insurance limit of $5 million, but before any insurance, our best estimate is about $10 million to $20 million negative impact in EBITDA in the third quarter. We expect the vast majority will qualify as an add-back adjustment in the third quarter. In the estimate that I gave you on the impact of EBITDA, it really breaks out into kind of 2 pieces, 1 which is clearly incremental costs related to the activity and should be cleared by — covered by insurance at some point, but of course, we’ll account for that as we receive it. And then 50% of it is from potential lost sales.

When you look at the potential lost sales for the third quarter, you’re talking about $20 million to $30 million. That’s about maybe 2%-ish, give or take, of the quarter sales; and again that’s potential. And the vast majority of that would be Sealy U.S., okay, because we have plenty of inventory in the Tempur organization. We’ve not experienced any material changes in our balance of share. And retailers, quite frankly, have been very understanding in the situation.

Now lastly, more kind of directly to your guidance question. For the 2023 guidance, the event has been considered, but as we mentioned before, we would expect an add-back in the third quarter for the costs. And certainly we’ll account for the — like I said, the insurance. Whenever we ever file a claim, we’ll call that out.

Any other impact on changing the guidance, totally macro. When you look at the second quarter and — okay, well, let’s say we kind of scraped out the second quarter. The market wasn’t as strong as we expected it to be, but we also performed better and outperformed the industry by a greater extent than we expected. And when you net the two, we had it relatively solid, in fact very solid, relative to others in the industry in the second quarter. And looking forward, we brought back — we brought down our expectations for the industry; and that required us to fine-tune 3%-ish from a guidance standpoint.

Susan Maklari

Yes. I think staying on the theme of demand, Scott. As you think about the macro setup with rates possibly at or very close to the peak, housing getting a little better, it feels like maybe the consumer will start reengaging and spending in some of these other categories as travel starts to moderate a bit in there. How are you thinking about the industry’s ability to start to see some level of improved demand as we move through the next couple of quarters; and your ability to continue to outperform relative to that as some of your peers perhaps move up off of these industry declines of the 25%, 30% range?

Scott Thompson

Thank you for the 33 questions you asked me, Susan. Let me speak to it and see if I can answer like 30 and leave 3 unattended. First of all, yes, we’re very happy with the performance in the quarter. We think it gives us an opportunity to show the strength of the business even in a little bit of a down cycle in its cash flow generation. I would highlight in our numbers, because this goes to the consumer question you asked. If you look at our ASP, it was up 13% in the quarter. And all but about — let’s call it 2% of that is price.

The vast majority of that is people mixing up. And so what that would tell you is the top end of the consumers are doing very well and where you’re seeing sales pressure is at the lower end. If I do it by brand standpoint, our high-end brands did better than our low-end brands. i.e., Stearns & Foster did better than Sealy. And Stearns & Foster grew double digits in a market that — I don’t know, pick your number, but it was clearly down double digits. It grew double digits.

So I’m going to say the strength of the high-end customer everywhere we looked, looked very good. We look at individual mattresses within the Tempur lineup. The high-end Tempur products did much better than the low-end Tempur products. So we’re — we continue to be fairly bullish on a high-end customer. Where you feel the pressure is in the low end, and the low end is — has gotten hit very hard.

So you had a question in there about outlook, as far as consumers going forward. We’ve been bouncing around the bottom in the bedding industry for probably 3 quarters, and so I don’t know. Next quarter or 2, we certainly think that the industry should start doing better. Some people can point to green shoots. Yes, we see some, but you have some good weeks and you have some slower weeks. But the main thing from our perspective is we see our products incrementally performing very well in the marketplace against the competition. And part of her question, I missed, Bhaskar, that you can remember?

Keith Hughes

Yes. You had talked earlier about raw material costs, I guess, coming down [indiscernible]. Can you give me a kind of quantification how much they’re down either in the quarter or your estimates for the second half of the year?

Bhaskar Rao

Sure. So let me think about it this way. Is that we did have an expectation from a commodity standpoint as we entered the year. Largely speaking is that those commodities are coming in very much in line with those — with our expectations. We would expect to continue to see incremental commodity benefit as we get into the back half; however, all contemplated in our initial thoughts as it relates to what we thought commodities were going to do. As it relates to the commodity benefit that we saw in our GP rate, is we’ll have a little bit more information in our queue. It’s going to drop here in a little bit, but I’ll go ahead and give you a peek on it. It’s from a commodity standpoint is what we’d want to expect to see is about 150 basis points of improvement.

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