Tempur Sealy Overview from Investors’ Call
Thank you, Aubrey. Good morning and thank you for joining us on our 2020 second quarter earnings call.
Our thoughts continue to be with all the people around the world whose lives have been impacted by the global health crisis. I’ll begin with providing an overview on how we’ve strengthened our competitive position. Then Bhaskar will review in detail our quarterly financial performance, discuss several second quarter highlights and review the balance sheet and liquidity. Finally, I’ll conclude with some thoughts about our long-term business outlook.
Our second quarter global operations were dramatically affected by COVID-19. The board of directors and I, are proud of the company’s swift response to the unprecedented challenges that the worldwide health crisis has presented. We focused on the safety of our employees who are working tirelessly to continue delivering on our commitments to our retailers and supplier partners.
It was definitely a quarter of lows and highs, ending clearly on a high note. Despite the remarkable amount of volatility and transformation within our industry, we’re reporting a second quarter net sales decrease of only 8%. In fact, U.S. sales grew 2%. We’re pleased to report adjusted EBITDA for our credit facility decreased only 3% compared to prior years. Our leverage ratio improved to a record low of 2.8 times adjusted EBITDA, down significantly from 3.7 times as of June 30, 2019. And short-term liquidity expanded to over $600 million.
I want to spend some time discussing how we’ve strengthened our competitive position in the marketplace, and how we see the opportunity to continue our momentum in future periods. Over the last five years, we’ve focused on finding problems and addressing them with an eye to creating long term value. This has kept us nimble and guided our decisions in making our investments in people, products, and processes. These decisions created a solid foundation which began to pay off in a big way last year. We saw this trend accelerate into the first quarter of 2020 and set the company up well to deal with the unforeseen worldwide health crisis.
I want to briefly touch some of the foundational elements that have improved our competitive position over the past five years. First, we’ve completed the largest launch of our all new innovative Tempur products in the U.S. in our history. These products have done well in the marketplace. Our product quality was evident when Tempur-Pedic was awarded number one in customer satisfaction for retail mattress segment in J.D. Power’s 2019 Mattress Satisfaction Report
Second, our multi-year investments in Sealy operations have resulted in high quality products, high levels of service for our customers, but also improving our profitability. After a strong year of growth in 2019, we believe Sealy is now the largest bedding producer in the United States.
Third, we expanded our relationship with new and existing third-party retailers through multiple new supply agreements. Retailers have recognized the investments we’ve made in our products, brands, customer service, and manufacturing operations. And we continue to receive inbound interest from retailers who want to lean more heavily into Tempur Sealy family of products and brands.
In addition, our Retail Edge program has allowed us to provide cutting edge market insights and sales tools to our third-party retailers. The majority of this program is focused on expanding retailer’s web-based business and their understanding of customer trends. The program is working well as our legacy-based retailers have ramped up their online business which provides us more share in the growing online market.
Fourth, our omni-channel focus resulted in rapid expansion in our direct channel, diversifying distribution and allowing product representation wherever customers want to shop. We’ve experienced tremendous success within the direct channel to-date. By the end of 2019, our full year global direct channel sales had nearly doubled during the two-year period.
More recently, this quarter has seen online growth rates of over 125% and solid brick-and-mortar store performance once the stores reopened. Our U.S. direct business is expected to be over $300 million this year, ranking it in the top 10% all U.S. bedding retailers on a standalone basis. Unlike many other DTC competitors, our direct-to-consumer business is highly profitable with decreasing customer acquisition cost and significant cash flow generation for the company.
Fifth, we’re a targeted product. We’ve rapidly expanded our presence within alternative distribution channels, particularly with online retailers, on time, only retailers. It is still very early in this rollout. We are pleased with the momentum and the profits that we’ve generated.
Sixth, we’ve pivoted our media strategy in the U.S. to include online channels as we follow customer trends. This change in our media mix allows us to optimize our strategies for consumers early and late in their shopping process, while continuing to drive high interest in our brands and products.
Seventh, we completed several opportunistic tucking acquisitions including Sherwood Bedding and Sleep Outfitters, which are expected to have high return on invested capital and further our vertical integration.
Eighth, we strengthened our balance sheet and improved our cash flow, and Bhaskar will discuss our financial strength in more detail shortly.
Finally, the ninth and most important component of our business, our committed, capable people who have strong shared values, we have a culture to deliver for our customer all over the world and from that, a gross shareholder value. The foundation we’ve built over the last five years is rooted in adaptability and prudent capital allocation. This positions us well to address unforeseen disruptions in the market due to COVID-19, which had a peak impact on our business in the early part of the second quarter. Our proactive response has maintained our functionality for our business in the fog of uncertainty.
Early in the second quarter, we took material actions to adapt to an expected depressed long-term sales outlook. However, we were met with a sudden surge in demand beginning in May, as consumers started to shop for bedding again, all over the world. We worked quickly to ramp up our operations to support the robust sales environment. The strong demand for bedding in general and our product specifically, has continued into the third quarter, unabated.
Second quarter sales could have been stronger. But both we and our suppliers had reduced capacity early in the quarter in response to the falling demand and our U.S. Sealy manufacturing operation was unable to keep up with the increased demand for our products as the quarter progressed. The Tempur-Pedic manufacturing process is less labor intense and has fewer components than the Sealy process and thus is not as impacted by the current issue.
Our U.S. order bank at the end of the second quarter was twice as large as compared to the prior year. We’re still in the process of ramping our U.S. production capabilities to meet the heightened demand, and we expect to continue experiencing capacity constraints on U.S. Sealy products through the third quarter. We believe an important driver of the robust sales wave is the recent shift in consumer spending habits, as consumers are focused on in-home products versus travel and entertainment. The duration and magnitude of this trend as well as the continued acceleration in sales we are seeing leads us to believe that our sales trends are not only due to pent-up demand or government stimulus, but that we are likely experiencing a new favorable long-term trend.
We’re well positioned to benefit from this new environment. Our research points to the fact that consumers have become omni-channel shoppers, and our powerful omni-channel platform is well positioned to capitalize on the current market, as consumers can find our products wherever they wish to shop. Our research shows that 90% of consumers shop online at some point in their mattress buying process.
You might find it also interesting that our research on consumers before the virus indicated that three out of four online buyers visit a brick-and-mortar store before buying a mattress online. The point is that our customers are omni-channel buyers and we are built to serve that kind of customer. We estimate about 25% of our U.S. sales are purchased directly online through either our own e-commerce or through existing third-party retailers, which is up from the time before COVID-19 reached the U.S.
We also continue to work with our third-party retailers to improve their online presence through our Retail Edge program, so that we can continue to help customers shop for our products, both online and offline.
During the second quarter, we saw a number of new customers on our own websites more than double versus prior year, but also see a healthy level of repeat sales. We believe our e-commerce business is truly best-in-class, with a high level of customer loyalty and engagement. One benefit of the current operating environment is more efficient spent for media.
Total advertising spend was down 16%. Our second quarter net sales were only down 8%. We believe, we’re getting more for our money in advertising on a national level and expect leverage on advertising to continue into the third quarter.
Additionally, our digital customer acquisition cost continues to fall. Our direct team continues to optimize for profit and are capitalizing on the recently reduced digital advertising costs in the marketplace. This makes the third quarter in a row of falling cost to acquire a customer, proving we’re not buying volume, we’re chasing unprofitable sales.
Our second quarter adjusted EBITDA shows how strong our competitive position is within the industry. We’re pleased with a quarter to achieve adjusted EBITDA for our credit facility of $110 million.
As we’ve discussed before, we see our financial strength as a powerful competitive advantage in a thinly capitalized industry that enhances our operating and strategic flexibility. The last six months have heightened the importance of this attribute. To this end, we’re lowering our targeted leverage ratio for the second time in the last 12 months. Our new revised ratio of net consolidated indebtedness-to-adjusted EBITDA, target is now two to three times.
Reduction in our leverage target is not due to any market concerns. It is a strategic move to provide us with industry leading flexibility. You can clearly see from our recent performance that the company’s business model and experienced executive team can handle economic volatility and still generate strong cash flow. We believe this lower leverage ratio will benefit our show shareholders over the long term.
Lastly, due to our strong adjusted EBITDA performance in the fourth quarter of 2019 and the first half of 2020, it is now possible that by the end of the third quarter 2020, we may achieve a trailing four quarter adjusted EBITDA in an amount equal to or greater than the $600 million needed to trigger the threshold payout under our aspirational long-term incentive comp plan.
As a reminder, the aspirational plan was put in place five years ago to motivate the company’s approximately 150 top leaders to turn around the business in a difficult and changing industry. The threshold target of $600 million represents a 44% improvement in trailing four quarter adjusted EBITDA from the time the plan was put in place.
The current aspirational plan will terminate December 31, 2020. And we do not anticipate adopting a similar plan in the future. If the plan is triggered, the company would incur non-cash stock compensation expense. In order to ensure that we have adequate time for the third quarter financials to undergo additional review, we plan to host our third quarter earnings calls slightly later than usual.« Previous Post Next Post »