Tempur Sealy International Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 8, 2024

There are 13 speakers on the call.

Operator

Good day and thank you for standing by.

Operator

Welcome to the Tempur Sealy 4th Quarter 2023 Earnings Conference Call.

Speaker 1

At this time, all participants are

Operator

in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Aubrey Moore, Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for participating in today's call. Joining me today are Scott Thompson, Chairman, President and CEO and Bhaskar Rao, Executive Vice President and Chief Financial Officer. This call includes forward looking statements that are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward looking statements involve uncertainties and actual results may differ materially due to a variety of factors that could adversely affect the company's business.

Speaker 1

These factors are discussed in the company's SEC filings, including its annual reports on Form 10 ks and quarterly reports on Form 10 Q under the headings Special note regarding forward looking statements and risk factors. Any forward looking statement speaks only as of the date on which it is made. The company undertakes no obligation to update any forward looking statements. This morning's commentary will include non GAAP financial information. Reconciliations of this non GAAP financial information can be found in the accompanying press release, which has been posted on the company's investor website at investor.

Speaker 1

Tempersili dot com and filed with the SEC. Our comments will supplement the detailed information provided in the press release. And now with that introduction, it's my pleasure to turn the call over to Scott.

Speaker 2

Thank you, Aubrey. Good morning, everyone, and thank you for joining us on our 2023 4th Quarter and Full Year Earnings Call. I'll begin with some highlights from the quarter full year and then turn the call over to Bhaskar to review our financial performance in more detail and discuss our 2024 guidance. After that, I'll provide an update of our proposed acquisition of Mattress Firm before opening up the call for Q and A. In the Q4 of 2023, net sales were approximately $1,200,000,000 And adjusted EPS was $0.53 Our results were in line with our expectation for the quarter with sales and adjusted EPS approximately consistent with prior years.

Speaker 2

Turning to a few highlights for 2023. First, I'd like to highlight our resilience of our business model, our robust cash flow and industry leading balance sheet. Our solid financial position has given us flexibility to capitalize on the industry's opportunities. We're delivering strong operating cash flow, investing in the business and outperforming the broader bedding market in North America and internationally. In the last 3 years, we've generated over $1,000,000,000 in cash flow after investing $1,300,000,000 and advertising and over $600,000,000 in CapEx.

Speaker 2

We believe the strategic investments in our brands, capabilities and capacity enabled us and our retailers to succeed in a dynamic environment. Versus the prior year, adjusted EBITDA to net debt leverage declined from 3.1 to 2.87. We expect to continue to reduce our leverage in the coming quarters as we prepare for the closing of the proposed Mattress Firm transaction. The U. S.

Speaker 2

Bedding industry, which is our largest market, was challenged in 20 23. Based on preliminary figures, we believe the category units were down double digits versus the prior year. As U. S. Produced mattress units were below the 20 year trough for the industry.

Speaker 2

However, We have recently seen stabilization of the category demand. The international markets we operate in have generally demonstrated similar trends on a consolidated basis. Over the prior 2 decades, The bedding industry has consistently grown through both ASP and unit expansion over time. We anticipate that the category will return to historical trends of consistent growth. With our strong financial position, resilient operating model and the recent investments we've made in the business, Tempur Sealy is uniquely positioned to reap the benefits of an improving market.

Speaker 2

The second item I'd like to highlight is our successful rollout of our new iconic premium products and continued expansion our extensive manufacturing capabilities. These actions in 2023 solidified our position as a leading vertically integrated global bedding company. Internationally, we successfully launched and all new lineup of Tempur mattresses, pillows and bed bases in over 90 markets, introducing new innovation and expanding our total addressable market globally. The consumer centric innovation and expanded price points in the new collections are driving positive traction in broad range of customers, including our legacy ultra premium consumers at mattress prices at 3,000 and above as well as consumer shopping for mattresses starting at 2,000. The reaction to the new products has been positive.

Speaker 2

On the cost side, we have streamlined the construction of the new products to maximize manufacturing efficiencies, enhance our ability to efficiently customize products to meet customers' needs in diverse markets and channels. In the U. S, the new Tempur Breeze and Stearns and Foster product portfolio completed their rollout in 2023 and realized notable year over year growth. The Tempur Breeze portfolio achieved double digit sales growth and a 5% increase in mattress and foundation ASP, While Stearns and Foster portfolio also delivered strong sales growth over the same period, these premium brands significantly outperformed the market and drove higher ASP for the entire category at a time retailers are dealing with reduced floor traffic. In 2024, we expect to complete the full refresh of our U.

Speaker 2

S. Tempur portfolio by introducing our next generation of Adapt products. The new Adapt products are focused on meeting one of the highest consumer needs in mattresses, reduced aches and pains. This line includes our most advanced Tempur material, uniquely designed to deliver 20% more pressure relief than the standard temporary material. The Adapt products paired With our own proven line of innovative smart adjustable bases, we'll build on the success of prior generations and Tempur Sealy's robust R and D track record.

Speaker 2

We have over 60,000 new Adapt mattresses ready as we prepare for the rollout to begin in the Q1 and expect to reach substantial completion before Memorial Day holiday. In 2023, we also opened our newest and largest state of the art plant, Crawfordsville, Indiana. This new facility located in the Midwest complements our existing manufacturing footprint enhances our ability to serve Northeast customers. Our expanded U. S.

Speaker 2

Manufacturing footprint will allow us to capture the projected long term demand for our products and to support our rapidly growing OEM business. The new facility has the capabilities to manufacture a wide variety of bedding products and components for branded and non branded operations. Our third highlight is the diversification of our business model and go to market approach. One of our long term initiatives is to increase the visibility with the consumer wherever and however they choose to shop. We follow the customers' lead and aim to provide quality products at every price point, both on and offline.

Speaker 2

In support of our broader portfolio diversification strategy, We are pursuing growth initiatives through innovation and development of industry leading products, growing our wholesale business through existing and new retail relationships and increasing our investments in Stearns and Foster brand. We'll also look to expand further into the OEM market and grow our direct to consumer business good expansion of our e commerce channels and company owned stores. All these initiatives are in line with our pursuit of long term sustainable growth. For example, Our direct to consumer channel has increased from $150,000,000 in 20.15 to over 1,200,000,000 in 2023, a compound annual growth rate of 30%. This was in part thanks to the expansion into hundreds of new company owned stores around the world and the successful launch of our Stearns and Foster and Sealy e commerce websites.

Speaker 2

Additionally, we began offering OEM and private label products in 2020. And today, We generate 100 of 1,000,000 of dollars in profitable private label and OEM sales with further opportunities for growth in 2024 and beyond. Lastly, our growth in wholesale has been broad based across existing and new distribution. In fact, in April, we'll be expanding our products into additional big box stores with one of the largest U. S.

Speaker 2

Bedding retailers. 4th, I'd like to highlight significant expansion In our year over year consolidated gross margin, we delivered year over year improvement of 260 basis points in our consolidated gross margin to 44.2% in the Q4 of 2023. This is a result of efforts from the team to drive profitability by leveraging our fixed cost structure over multiple growth initiatives. As mentioned, our new product innovation investments in manufacturing processes and plant and diversification of our go to market strategy have all contributed to improve gross margin. As we continue to drive greater efficiency, we increase our ability to invest in advertising, product development and our people.

Speaker 2

We also benefit from a larger pool of free cash flow to drive EPS growth and reduce our net leverage. While we expect the retail environment to remain dynamic, we have a track record of delivering results during challenging cycles. In fact, we generated $4,900,000,000 in sales and $2,200,000,000 in gross profit for the full year 2023, both of which were just shy of our highest ever annual sales and gross profit figures. In 2024, we plan to stay focused on our long term initiatives, stay agile to capture opportunities and deliver higher sales and profits. Our last highlight is on our commitment to protect and improve our communities and the environment as we detailed in our recently published 2024 Corporate Social Values Report.

Speaker 2

Report is available on our IR website. We are proud of our achievements over the last year, including our 0 waste to landfill status at our Canadian and Mexican manufacturing facilities and maintaining our 0 waste to landfill status at our U. S. And European manufacturing operations. This year, we contributed over 800 $1,000 in charitable contributions through our Kemper Sealy Foundation and donated more than 12,100 mattresses worth approximately $16,900,000 bringing our cumulative 10 year donation total to over 100,000,000 With that, I'll turn the call over to Bhaskar.

Speaker 3

Thank you, Scott. In the Q4 of 2023, consolidated Sales were approximately $1,200,000,000 and adjusted earnings per share was $0.53 We have $33,000,000 of pro form a adjustments in the quarter, all of which are consistent with the terms of our senior credit facility. These adjustments are primarily related to the cost incurred in connection with our planned acquisition of Mattress Firm. Turning to North America results. Net sales decreased 4% in the 4th quarter.

Speaker 3

On a reported basis, the wholesale channel decreased 6% and the direct channel increased 11%. North America adjusted gross Profit margin improved to 40.7 percent primarily driven by favorable commodities and operational efficiencies, partially offset by unfavorable product mix. Product mix is primarily being driven by the continued growth of our OEM initiative. North American adjusted operating margin improved to 15.9% driven by improved gross margins, partially offset by investments in growth initiatives. Now turning to international.

Speaker 3

Net sales increased 8% on a reported basis and 4% on a constant currency basis in the 4th quarter. As compared to the prior year, our international gross margin improved to 55.7% driven by commodities, partially offset by unfavorable mix. Our international operating margin decreased to 19.2% driven by higher operating expense from investments in growth initiatives, partially offset by improvements in gross margins. One of our growth initiatives is expanding our retail store footprint, and we now operate over 7 50 stores globally. Now to balance sheet and cash flow items.

Speaker 3

At the end of the 4th quarter, consolidated debt less cash was $2,500,000,000 and our leverage ratio under our credit facility was 2.87 times, within our historical target range of 2 to 3 times. In the Q4, we generated operating cash flow of $91,000,000 We're pleased to report that we have successfully entered into a $625,000,000 delayed draw term loan and increased the availability of our existing revolver by $40,000,000 This is in connection with our financing plan for the anticipated acquisition of Mattress Firm in late 2024. Upon closing the acquisition, we plan to fund the cash portion of the transaction with a combination of cash on hand and through existing and incremental borrowings. Our financing plan for this acquisition is consistent with our history a balancing financial flexibility, leverage and the cost of capital. We have already executed on elements of this strategy By successfully refinancing our credit facilities in 2023 and now with the new delayed draw term loan, We anticipate raising incremental borrowings closer to the closing of the transaction and expect net leverage to be between 3 and 3.25 times assuming a closing in the second half of twenty twenty four.

Speaker 3

We expect to return to our target leverage ratio range of 2 to 3 in the 1st 12 months after closing. Now turning to our 2024 guidance. We expect adjusted EPS to be in the range of $2.60 to $2.90 Our guidance is based on sales increasing lowtomidsingledigits versus 2023. This also considers our expectation that the U. S.

Speaker 3

Bedding industry unit volumes are stable versus the prior year, which implies slight headwinds in the first half and recovery in the second half of twenty twenty four. Our sales outperforming the industry due to new distribution wins in the U. S. And the continued success from the new product launches overseas and advertising spend of about $500,000,000 as we continue to support our leading brands and new products. All of this resulting in adjusted EBITDA of approximately $1,000,000,000 at the midpoint of the range.

Speaker 3

I want to note 2 phasing items for 2024. First, we believe the year over year negative unit trends seen in the U. S. Bedding industry over past year are mitigating. We believe industry units will likely be down high single digits through the end of 2023.

Speaker 3

And while we expect the Q1 will be down some, we believe units for the industry will return to year over year growth later this year. 2nd, we recently opened our new Crawfordsville facility to provide us with incremental capacity to support our long term growth. In April, we will start servicing our new distribution that Scott spoke to previously, which will mark the beginning of our growth into this capacity. The phasing between this capacity and our new volume will result in our historical seasonality being a bit off. As we grow into Crawfordsville, the timing of the shipping of new distribution and our near term category outlook, we expect this to pressure profits in the Q1 likely resulting in EPS being between $0.45 $0.50 We expect to return to delivering year over year EPS growth starting in the Q2 of 2024.

Speaker 3

As we noted, we expect our full year adjusted EPS to grow 15% at the midpoint of our guidance. Our guidance also considers the following allocations of capital in 2024. CapEx of approximately $150,000,000 down significantly from prior years as our major capital projects are complete. This is a more normalized level of spend driven by maintenance spend of $110,000,000 and growth spend of approximately $40,000,000 and a quarterly dividend of $0.13 representing an increase of 18% relative to 2023. Lastly, I would like to flag a few modeling items.

Speaker 3

For the full year of 2024, we expect D and A of approximately $200,000,000 to $210,000,000 Interest expense of approximately $135,000,000 to $140,000,000 on a tax rate of 25% with a diluted share count of 179,000,000 shares. With that, I'll turn the call back over to Scott.

Speaker 2

Thank you, Bhaskar. Nice job. Before opening up the call for questions, Let me provide a brief update on our pending acquisition of Mattress Firm. In the 4th quarter, We certified substantial completion with the FTC second request. We continue to work with the FTC to advance the transaction approval process and anticipate these conversations will continue through the Q1.

Speaker 2

As previously disclosed, we continue to expect the transaction to close in mid to late 2024. In connection with and contingent upon the acquisition, we are proactively pursuing a divestiture plan and engaging with Mattress Firm's suppliers. In parallel, Tempur Sealy and Mattress Firm continue to make joint progress on integration planning. Lastly, A brief comment on Mattress Firm's financial performance. Mattress Firm recently made their quarterly results available on their website, which were consistent with our expectations.

Speaker 2

We encourage you to review Mattress Firm's website for more information on their financial performance for the most recent quarter. In summary, Our progress towards the transaction close is on track and we look forward to joining with the Mattress Firm team. And with that, I'll open up the call for questions. Operator?

Operator

And our first question will be coming from Susan Maklari of Goldman Sachs. Your line is open.

Speaker 4

Thank you. Good morning, everyone.

Speaker 5

Good morning, Susan.

Speaker 4

Good morning, Scott. Maybe just start with why don't we talk a little bit about demand. You mentioned that it seems like we have bottomed out in the 4th quarter and that This year we could see a sequential improvement as we move through. How are you thinking about that, I guess, relative to the macro backdrop, the potential for rates to come down? And What else do you think is stimulating the consumer a bit perhaps to start to see some improvement on the unit side?

Speaker 5

Well, obviously, we have easier comps, which is probably the first thing that's got to be pointed out. 2nd thing, obviously, we are at an all time low when we're the U. S. In volume. So we are really at rock bottom from a historical standpoint.

Speaker 5

And as you mentioned, there's some green shoots. Obviously, we're in an environment where interest rates are trending down. We're also, if you look at the bedding industry and we just got back from the Vegas bedding show, there's good innovation in the industry. We've got new product coming out and others have some new product coming out that's very interesting. We've also seen some of our larger retailers, I'm going to say refocus on advertising and we've got several of them increasing their advertising budgets going into 2024.

Speaker 5

So yes, in general, it feels like I've used the term bouncing around the bottom. We're kind of bouncing around the bottom. If you go back and look at the Q4 and kind of look at it, parse it by month, October was not good in the U. S. And then it got better throughout the quarter.

Speaker 5

And then you get to the January period. And obviously, it's very difficult in this world to forecast. If we look at our own order book In January, it's positive. If I look at our online sales in January, It's up double digits. So it looks like some green shoots, but you have to dampen that when you look at some of the details.

Speaker 5

The order book is positive, but it's concentrated in some larger customers. It's not as broad based as we'd like to see. If you go talk to the retailers and look at listen to them, the floor traffic is down double digits And their January, when you look talk to retailers in general, are talking about being down 10%. And you think about January, it's only 30% of the quarter. So what I'm kind of saying, it's all mixed and we continue to get some mixed signals, But clearly, bouncing around the bottom seems to be the best description currently.

Speaker 4

Okay. That's helpful color. Thank you. Good luck.

Operator

And one moment for our next question. And our next question will be coming from Peter Keith of Piper Sandler. Your line is open.

Speaker 6

Hey, thanks. Good morning, everyone. Maybe it's a bit of a financial question for Bhaskar, but I was hoping you could quantify the EPS or EBITDA impact from these facility startup costs in Q1 and then also provide a little bit of color on how you guys are thinking about input costs year on year and launch costs year on year?

Speaker 7

Absolutely. So let me take those one at a time. If you think about the Q1 specifically, a couple of things happening there. We called out the phasing of revenue. We called out our expectations on a category.

Speaker 7

Also is that we have Some great news is we're really excited about what's happening from a Tempur Adapt. And also good news is that the Adapt is going out earlier than where Debris did in prior year. So that's a couple of pennies between the 1st and second quarter. Specifically, as it relates to the question you asked about Crawfordsville, as a whole about $30,000,000 of D and A increase on a year over year basis. So when you parse that out for the quarter, think of that at about a couple of $0.03 As it relates to input costs from a full year perspective, We still remain constructive.

Speaker 7

We've seen some tailwinds in 2023. It's very consistent with where we left it And coming out of the Q3 as it relates to our input cost expectations. At that point, we called out, let's call it 20, 30 points bps a benefit for 2024. So that's basically where we remain today. All that said is that we are mindful of what's happening in the Red but our expectations are still positive as it relates to the commodity input costs.

Speaker 7

And then closing it out with launch expenses, on a full year basis is we would expect launch costs to be flat. However, as I called out, there is some phasing that happens between 1Q and 2Q, given the timing of the Adapt is a bit earlier than where it was with Breeze in prior year.

Speaker 5

I'll pile on that just a little bit, Bhaskar, and highlight Crawfordsville. Obviously, that's a huge investment for us and while others in the industry are closing plants and reducing capacity, We're adding capacity. And what you're seeing in the Q1 is basically turning on the plant full. And so you get the fixed cost of the plant coming through the income statement before you get the profits coming from the product, which will come in the Q2. The good news is we've got orders.

Speaker 5

We need the plant and it's busy. We've just got a timing on the building of the product and when revenues show up because the cost of the products will show up in inventory, but the whole fixed cost of the plant has got to go through the income statements. So we're really excited about the future of that operations.

Speaker 6

Okay. Thank you very much, guys.

Operator

And one moment for our next question. And our next question will be coming from Bobby Griffin of Raymond James. Your line is open.

Speaker 8

Hey, good morning, everybody. Thanks for taking my question. So Scott or Bhaskar, I was just hoping, when we look at the 2024 sales guidance, Flat industry units kind of as the starting point and then maybe build a little bit to your guide of call it maybe 3% to 4% at the midpoint. Can you unpack the drivers to get there? Is it mostly market share gains, mix, price, just anything to help put some context around what's assumed in the building blocks and the size of those building blocks to walk us from the industry to Tempur Sealy's performance?

Speaker 5

Sure. I'll let Bhaskar do the details. But foundationally, we have 2 big distribution wins that have been executed And those sales will show up in April. Rich, do you

Speaker 7

want to build the floor? Absolutely. So just starting with the category, as we indicated is that our expectation is that it will be flat for the full year. However, as you call that as well, there will be a build. So let's call that big round numbers down in the down low singles in the first half and up in the back half.

Speaker 7

So when you think about the phasing of sales And with the new distribution that Scott spoke to is that it is a build as you go from 1 to 2 and then you see the growth in 3 From a couple of different areas, the new products getting out there in DAP, the continuing momentum that we're seeing in international and the improvement from a category standpoint. Specifically disaggregating that a little bit, we're super excited about what we're seeing internationally. We would expect the growth in our international new product launch. We saw the green suits in the Q3. It continues to grow in the Q4 and we're very excited about what that could do for us in 2024 and beyond.

Speaker 7

So the expectation is that we would see growth in international in all of the quarters. And then now bouncing back to the U. S, So what that would imply is, is that taking share internationally. When we get into the U. S.

Speaker 7

Is our The way that we think about this, it is really the market share gains would be tied to the new distributions, wins that we have in hand, obviously, that's our expectation is that's what we've assumed in the guide, but our expectation as always is to continue to outperform the market.

Speaker 8

Very good. I appreciate the details. Best of luck here executing this year.

Operator

And one moment for our next question. And our next question will be coming from Jason Hawes of Bank of America. Your line is open.

Speaker 9

Hey, good morning and thanks for taking my questions. I'm curious if you could provide a little bit more color on the distribution gains that you cited. Was that really in reference So one big box retailer, are you seeing some more broad distribution gain? Thanks.

Speaker 5

We've got 2 large distribution gains in house that the revenues will come starting in, call it, April. So there's 2 big ones. And then like always, there's hand to hand combat on the smaller side, but there are 2 that are Little more needle moving, I guess, would be a fair way to say it.

Speaker 9

Got it. That's helpful. Thank you.

Operator

Our next question will be coming from Seth Basham of Wedbush. Your line is open.

Speaker 6

Thanks a lot and good morning. My question is on the margin outlook for 2024. Hoping for some more color between expectations for gross margins and SG and A. Seems like you expect material gross margin improvement probably from commodities, but what about from improved operational efficiency? And on the SG and A side, it seems like advertising growth likely to be about in line with sales growth, but are you expecting deleverage and other costs?

Speaker 6

Thank you.

Speaker 7

Scott, want me to take that? Yes, you go ahead. So from a gross profit perspective, good call outs, Seth. It would be our expectation is that we would see nice year on year improvement from gross margin. So a couple of big drivers I would call out.

Speaker 7

I spoke to commodities briefly in the prior question. We would expect that to be a tailwind. We're very excited about the continuing momentum that we see in our U. S. Operations.

Speaker 7

Just to put a reference on that, we invested in customers and spilled some EBITDA historically. We started seeing the benefits of that starting to turn around in the back half of twenty twenty three. The expectation is that that would continue to build momentum as we get into 2024. So that would be a tailwind for us as well. Previously, I think I mentioned something around $50,000,000 to $60,000,000 It would be our expectation that that would continue.

Speaker 7

On a year on year basis, yes, there's some phasing between quarters as it relates the launch, but big picture floor model should be a slight tailwind for us versus the prior year. And then Crawfordsville would be a headwind. So when I think about that Crawfordsville, again, a headwind on rate. However, if Crawfordsville was not there, it would be difficult for us to manage this new distribution wins that we would have without incurring over time and with our various other facilities. So that's really the gross profit story.

Speaker 7

As I think about From an operating expense perspective, a couple of things is, we continue to manage this business for long term growth. So we're going to invest in those things that will give us that growth and outlook perspective. When you think about OpEx on an overall basis is that we would expect Just a bit of deleverage. On the advertising perspective, just parsing that out is, I would think of The North American business being flat on rate on a year over year basis. And internationally, we're going to invest to really support that growing into that new addressable market.

Speaker 7

So what that blends to when you put all that together, we expect incremental investments on rate from advertising. Also, we continue to be very excited about the potential of our direct to consumer business, not only in the bricks and mortar, which is a global story. In fact, our brick the doors on a year over year basis from Q1 to Q1 have grown 40,000,000 sorry, have grown 40 stores. So we're going to continue to invest in that initiative as well as the e com. As you know, we have a robust e commerce business in the U.

Speaker 7

S. And now all of our brands are represented CERN, Sealy as well as Tempur. And then we spoke to international, but just parsing that a bit as China remains a big opportunity for us. So we're going to spend some money there. So really what's again flat to slightly up as it relates to rate from an OpEx perspective, but really what's driving it is the investments we're making in future growth.

Operator

Our next question will be coming from Brad Thomas of KeyBanc Capital Markets. Your line is open, Brad.

Speaker 6

Hi, good morning. I was hoping we could talk a little bit more about the international segment and perhaps a bit more about the outlook for new product rollouts And some of the timing of some of the margin opportunities that you have as we look forward? Thanks.

Speaker 5

Sure. I'll talk a little bit about the international rollout. It's gone really well. And I think it's just probably the beginning from the international standpoint. And you can see from, I think, Bhaskar's earlier comments about what we're doing from an advertising standpoint, we feel We've got the right product now at the right price points.

Speaker 5

We're spending a little more money in advertising because we think the returns are going to be good, but all that is a very bullish sign for international on a, we'll call it, a multi year strategy. It's taken us quite a while, quite a number of years to get the product, get it right, get the manufacturing process right. But we think we're in the early innings from an international growth standpoint. Russell, do you want to add anything?

Speaker 7

What I would say from timing of a margin view is, as I think about gross margin is, we mentioned the typical seasonality. We're not going to see that necessarily this year, just given as we ramp into that new distribution and given Crawfordsville, from a gross margin expectation standpoint, again, overall up year on year And then margins consistent with prior years is that it would increase as we go throughout the year, really driven dry a couple of different items. One is that we do expect from a growth standpoint sales growth more in the back half than we would in the first half, therefore giving us some leverage from a gross margin on the gross margin line. And as well as those as the operational improvements is that will gain momentum and continue to build on itself.

Speaker 6

Great. Thank you very much.

Operator

One moment for our next question. Our next question will be coming from Michael Lasser Your line is open, Michael.

Speaker 2

Good morning. Thank you so

Operator

much for taking my question.

Speaker 2

How do you think about the incremental margin on either sales upside or potential downside as the year unfold and into next year assuming that the bedding recovery continues to gain steam? Thank you so much.

Speaker 5

Okay. I'm going to speak for a second, then I'm going to let Bhaskar answer it. It's interesting. It's really interesting question. On the upside, It's obviously good.

Speaker 5

I think the part I want to call out is on the downside, if for some reason we've missed our call on the industry, We've got a lot of flexibility in the system to take cost out because we've got the company positioned, I'm going to call it aggressively for growth. And when you position a company aggressively for growth, you're spending some money as we've talked about earlier in this call. If for some reason there was a downside case someone is working with, we have the ability to take out a good bit of cost if we reposition the company for that kind of environment that we don't see. Do you want to talk about that a little bit,

Speaker 6

Absolutely.

Speaker 7

What I would say on a blended basis, the way I've historically thought about this business, the incremental contribution profit call it is somewhere between 30% to 35%. As I sit here today, it feels closer to 35, maybe a bit above that versus where we have been historically. And that in context is all things being equal. As we pointed out, we have expectations about the category. And As the consumer starts coming back and they will, bedding is not going obsolete, mattresses are not going obsolete.

Speaker 7

There will be a mix of when those units come back, again positive from an EBITDA standpoint, positive from a contribution profit standpoint. However, that mix would be something to think about as this industry begins to recover.

Speaker 2

Thank you so much.

Operator

One moment for our next question. Our next question will be coming from Keith Hughes of Truist. Keith, your line is open.

Speaker 6

Thank you. Question on the new facility in Indiana. Once you get up to full capacity, How much of your foam pouring will that represent? And will you actually hit full capacity in the second quarter?

Speaker 5

Really complicated question. Let me put some words around it. No, we will not hit full capacity in the second quarter. And it depends on when you talk about capacity, whether you're running 1 shift, 2 shifts, all that kind of stuff. The way you should probably think about it is, look, Q1, a little bit of a drag to get it going by the time you're into the second and third quarter, Crawfordsville is contributing, okay?

Speaker 5

But you should think about optimize. Optimized, it's probably a couple of years out as far as being totally optimize depending on what the bedding market is and it gives us great flexibility. But with Crawfordsville and the other plants we have and the ability to go to 2nd shifts, you should think about Tempur has capacity for the foreseeable future, both in pouring OEM foam and regular foam.

Speaker 6

Okay. One follow-up question to that is. Go ahead. Do you think you're going to in terms of like spring production, you think you'll do some more backward integration on spring production in the future as well, particularly given the volume you're starting to move in the industry?

Speaker 5

I don't know. That's something we've always looked at. We've got a great partnership With Leggett for sure, they do a fabulous job for us. We've got some other manufacturers, they're doing a good job for us. And we make a Good bit of our springs already.

Speaker 5

We make our own springs in the Asian market. JV Mexico, we make our own springs. We make a few here in the U. S. So we'll continue to use kind of what I'll call a blended strategy of best in class spring manufacturers and build some of our own and continue to look at the economics and the pluses.

Speaker 5

But right now, I think we're very happy with the current relationships we have and the mix It's both, we'll call it in source and outsource from a spring standpoint.

Speaker 6

Okay. Thank you.

Operator

And one moment for our next question. Our next question will come from Laura Kempe of Loop. Your line is open. Good morning. Thanks for taking my question.

Speaker 10

Could we get any more context on how TPx formulated the divestiture plan Related to the Mattress Firm acquisition and then just anything you're comfortable saying about next steps?

Speaker 5

Yes, you're probably not going to get much there. The FTC See lawyers will call me after the call and whip me like a dog. What I would tell you is, There is a formal process that goes on in that area and it's ongoing and flexible. But other than that, I really can't give you any color other than to tell you there's been good interest in the package and the activity.

Speaker 10

Thanks, Scott. I did not mean to cause you peril. Maybe we could Talk a little bit about expected AUR in mattresses this year and that will be a little less controversial.

Speaker 5

There you go. AUR that'd be you, Oscar.

Speaker 7

Yes. And that just to make sure that we're on the same page, that's ASP, average sales price? Correct. Correct. Absolutely.

Speaker 7

So, the way that we're thinking about it currently is, again, very excited about what's happening with Adapt. Breeze continues to have legs. So just to make sure we're grounded, Adapt largely will be complete in the Q1 and then it's out there. That's great. It's ahead of where we were from a Breeze standpoint.

Speaker 7

So the momentum will build. And what's very nice about that is our expectation is that Adapt And Breeze will live harmoniously together, if you exclude the impact of 4 models. So what that would mean is we're not expecting that ASP will be materially one way or the other, let's call it flattish. On an overall basis, when you think about the U. S, our expectation is that there's not going to be a Significant difference sitting here today as it relates to how we think about units and dollars.

Speaker 7

So the implication there is that ASP is going

Speaker 6

to be

Speaker 7

flattish broadly speaking across the world. Again, what I would call out is I referenced this before is that eventually the consumer is going to come back. We feel like there's momentum that's happening from a consumer getting back a little bit as we think about the back half of the year and beyond. So as that consumer does come back, They will come back at all price points. However, it is that incremental EBITDA, but it is something to be mindful of as those units come back and where they come back to.

Speaker 10

Great. Thank you very much.

Operator

Thank you. And one moment for our next question. Our next question will be coming from William Reuter Bank of America. Your line is open.

Speaker 11

Hi. This kind of follows on that last question. But you mentioned you expect ASP to be flat. Are you seeing a trade down currently? Are you currently seeing ASP flat?

Speaker 11

Or are you seeing greater strength at lower price points? I know you had Kearns and Foster rollout last year, so that may be contributing some greater success there, but any comments on mix?

Speaker 5

Yes. On mix, we're generally seeing the higher Price units do better than the lower priced units. That's a trend that has been around for a year or so. I would say the gap is narrowed some, but we continue to see that mix. We haven't seen Any deterioration in the strength of the higher end.

Speaker 5

And I think in general, What I think Bhaskar is talking about, correct me if you're not, on a like for like basis, we aren't expecting to see ASP increases as there's Quite a bit of pricing put in the market over the last few years due to commodity increases and it feels like the commodity thing is behind us and price on a like for like basis is stabilized.

Speaker 3

That's fair.

Speaker 6

Thanks so much.

Operator

One moment for our next question. Our next question will come from Jonathan Matuszewski of Jefferies. Your line is open.

Speaker 12

Great. Good morning and thanks for taking my question. Scott and Bhaskar, I was hoping you could And upon your recent conversations with retail partners, it sounds like you're hearing from them a little bit of a change in mind that regarding advertising spend, with them signaling to use some year over year increases in their budgets for 2024. So any added color that could provide context for us in terms of what's changing their mindset to get a little bit more in their own ad spend? Thanks so much.

Speaker 5

Sure. Look, when you look at the retail business model, It's got quite a bit of fixed cost. The retailers have absorbed quite a bit of sales decrease. And so I think the obvious thing to do if you're a retailer and you're trying to get your sales going, if you look at your content, make sure you're advertising quality content and see whether or not you can spend a little bit more and get a high return on investment because and floor traffic has been down. Clearly, we're waving the flag about the need for the industry, not just any individual retailer or Manufacture to advertise, but it takes a village and we've been fairly aggressive about asking others to pony up and we're of course doing our share by historical standards.

Speaker 5

We're leaning in heavy. And I think the people that have invested in advertising are getting good returns. And to the extent that that continues, Hopefully, we'll get some other manufacturers and some more retailers leaning in. And like I said, we've got, I can think of 2 off the top of my head that are leaned in and I think that's going to be part of the turnaround story in 2024 is the market people getting back to understanding the category and the category is driven sure on consumer confidence, but you also have to have a good bit of advertising in the marketplace for the industry to succeed.

Speaker 12

That's really helpful. Thank you.

Operator

Okay. And I'm showing no further questions at this time. I would now like to turn the call back to Scott Thompson for closing remarks.

Speaker 5

Thank you. To our 12,000 employees all around the world, thank you for all you do every day to make the company successful. To our retail partners, thank you for your outstanding representation of our brands. To our shareholders and lenders, thank you for your confidence in Tempur Sealy's leadership team and its Board of Directors. This ends the call today, operator.

Speaker 5

Thank you.

Operator

Certainly. This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Tempur Sealy International Q4 2023
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