Good day, and thank you for standing by. Welcome to the Tempur Sealy Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Aubrey Moore with Investor Relations. Please go ahead. Aubrey, your line is now open.

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. After prepared remarks, we will open the call for Q&A. 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 include uncertainties and actual results may differ materially due to a variety of factors that could adversely affect the company's business. These factors are discussed in the company's SEC filings, including its annual reports on Form 10-K 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 was made. The company undertakes no obligation to update any forward-looking statement. This morning's commentary also includes 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.tempursealy.com and filed with the SEC. Our comments will supplement the detailed information provided in the press release. And now, with that introduction, it's my pleasure to turn the call over to Scott.

Thank you, Aubrey. Good morning everyone and thank you for joining us on our 2022 second quarter earnings call. I'll begin with some commentary on the second quarter, then spend some time discussing how we're continuing to drive our long-term growth initiatives in the current very fluid operating environment. Then Bhaskar will review our second quarter financial performance in more detail and discuss our updated 2022 guidance, which has been revised to reflect the changes in the market. Finally, I'll share a few closing remarks regarding how our business model would operate in a recessionary environment, and then we'll open it up for Q&A. In the second quarter of 2022, net sales were $1.2 billion and adjusted EPS was $0.58, both slightly below our expectations, primarily due to the U.S. market and a $30 million sales backlog on U.S. Sealy as we brought our new ERP system online. We made significant progress on this backlog and expect to return to normalized lead times by the end of the third quarter. The second quarter was also impacted by three additional factors: first, flare-ups of COVID variants internationally, particularly in our Southeast Asia markets; second, commodity inflation impacting our cost ahead of the timing of our price increases, which went into effect at the end of June and will benefit future quarters; and third, operational investments to secure our supply chain, to retain labor in order to maintain product quality and customer service. Our international operation performed in-line with our expectations even as we faced challenges. In North America, the overall operating environment deteriorated during the quarter as the forward outlook for the economy and our sector diminished for all the reasons that have been well reported. We believe that the overall U.S. mattress industry, our largest market, had its toughest volume decline in 15 years with units down 20% to 25% this quarter compared to last year. This environment again gave us a chance to demonstrate the resilience of our business model as we generated profit, invested in our business, returned capital to our shareholders, and outperformed the market. The team continues to focus on execution. First, we continue to work on expanding our leading position in the domestic U.S. bedding industry. Over the last few years, our growth initiatives and industry-leading products have driven a meaningful outperformance relative to the market. We continue to drive market outperformance with our focused delivery, best-in-class product quality and customer service. Second, we completed our multi-year journey of transitioning more than 50 of our global subsidiaries from using five different ERP systems to using one common system. This investment in consolidating our operations is expected to drive long-term efficiencies across our global operations, enhance cybersecurity, facilitate customer communications regarding order status and improve our direct-to-consumer capabilities. We now are truly one company as this completes the merger of Sealy and Tempur. I personally want to thank all of the employees who worked on this critical project. Great job. Third, Stearns & Foster performed very well relative to the market in the second quarter and is currently our fastest growing brand in the domestic market. Additionally, we launched the Stearns & Foster e-commerce website this quarter; although still very small, it is performing ahead of our expectations and ahead of where we were at this time when we launched our successful online business by Sealy. Consumer research has identified that there is an unmet market need for high-end traditional industry-leading products and our Stearns & Foster e-commerce channel is designed to provide additional opportunities to serve this demand. Our approach is similar to our direct Tempur strategy in that we drive meaningful brand awareness to the benefit of Stearns & Foster sales across all distribution channels, growing ASP, driving advertising dollars, and profits for all of our partners. We'll launch our all-new collection of Stearns & Foster mattresses in the fourth quarter. The new Stearns & Foster lines are designed to further distinguish our high-end traditional innerspring brand with superior technology, clear product step-up stories, and a new contemporary look. Fourth, in addition to the Stearns & Foster launch, the other new product launches in our pipeline continue to be on track and on plan, furthering our objective to bring industry-leading innovation to market. In the second quarter, we completed the rollout of our new premium Sealy products, which offer improved comfort and support technology. We also launched our new Sealy Natural Collection, which was thoughtfully designed with our commitment to sustainability and environmental preservation. In the fourth quarter, we expect to launch a Sealy mattress with a best-in-class pressure-relieving gel grid layer at a consumer-appealing mid-market price point. This product is designed to target a relatively small category of consumers looking for a non-traditional mattress feel. In 2023, we expect to begin to roll out our lineup of all-new Tempur mattresses, pillows, and bed bases across both Europe and Asia. This new product line features exciting customer-centered innovation, allows better channel and customer differentiation, and covers a wider price point. Retailers' reaction to this new product and price points today has given us confidence that this updated product strategy will enable us to significantly increase our total international addressable market. In addition to Asia and Europe rollouts, in the first quarter of 2023, we plan to introduce our new line of TEMPUR-breeze products in the U.S. along with a new line of adjustable bases with incremental consumer-focused features and benefits. We have made substantial investments in 2021 and 2022 to prepare for these launches, and we're looking forward to bringing these new consumer solutions to market. Turning to the final highlight. In the first half of 2022, the incremental 10 plants diverted 100% of manufacturing byproducts from landfills. We continue to be on track to achieve our goal of zero landfill waste at our wholly-owned Tempur and Sealy manufacturing operations worldwide by the end of the year. Our focus remains on delivering shareholder value through the execution of our long-term strategies by investing in our brands, products, people, and capacity. We also continue to allocate capital to share repurchase as part of our commitment to returning capital to shareholders. We've repurchased over 8% of our shares outstanding year to date. We plan to repurchase at least 10% in 2022. Our key initiatives, which have driven growth from a $500 million company at the time of our IPO to a $5 billion company today, are the underpinning of our confidence and our ability to continue to extend our leading position in the global bedding market. These key initiatives include: first, develop the highest quality bedding product in all the markets we serve; second, promote worldwide brands with compelling marketing; third, optimize our powerful omnichannel distribution platform; and fourth, drive increased EPS through operational execution and by prudently deploying capital. These initiatives have shaped the building blocks to our next stage of growth, which we're laying the foundation for today. In the U.S. we're investing in new products, compelling brand advertising, and expanding channel diversification. In our international operations, we're investing in the 2023 launch of our all-new Tempur products in Europe and Asia to increase our international total addressable market. Our operations are also an investment focus this year as we execute on four key priorities: one, complete the transition to our new ERP system; two, stand up a third U.S. foam-pouring plant; three, strengthen our supply chain worldwide; and four, increase safety stock of imported products, key components and inputs with long lead times. With that, I'll turn the call over to Bhaskar.

Thank you, Scott. I would like to highlight a few items. Consolidated sales increased 4% to $1.2 billion. Adjusted earnings per share was $0.58 and we repurchased over 4 million shares in the quarter. At the end of the second quarter, we successfully implemented a new round of pricing. This follows previous rounds of pricing, all of which were designed to fully offset the headwinds from rising input costs. Our pricing actions are dilutive to gross margins as sales increased with no meaningful change in gross profit. Since 2019, this dynamic has accounted for 400 basis points of headwind to consolidated gross margin. We believe that designing price increases to cover the dollar impact of inflation is both beneficial for near- and long-term retailer advocacy and end-consumer demand. We expect certain input costs may ease beginning in the back half of the year. If this were to come to pass, we anticipate the unfavorable margin dynamic that we have experienced over the past couple of years will reverse, providing a tailwind in 2023. As Scott mentioned, we are leveraging our industry-leading balance sheet and cash flow attributes to invest in the business, laying the groundwork for future growth. We have made investments to diversify our supplier base to fully support our customers while managing through a fragile global supply chain and a tight labor market. We invested an incremental $10 million in our operations in the second quarter to maintain our high standard of product quality and customer service. We anticipate these incremental investments to continue to a lesser degree in the second half of the year. For 2023, we are set up to drive efficiencies as the global supply chain infrastructure stabilizes, and our new ERP system drives synergies. We have adjusted a number of charges during the quarter, all of which are permissible adjustments under the terms of our senior credit facility. $9 million of those adjustments were related to the transition to our new ERP system, which as Scott noted was completed in the second quarter. In addition, we had $4 million of organizational restructuring costs and $3 million of operational startup costs relating to expanding our capacity. We expect there may be a similar amount of adjustments related to these items later this year, primarily from further investments in our new foam-pouring facility in Crawfordsville, Indiana. Now, turning to North American results. Net sales decreased 5% in the second quarter. On a reported basis, both wholesale and direct channels decreased 5%. North American adjusted gross profit margin declined to 38.7%. This decline was driven by operational investments to service our customers and pricing benefit to sales with no gross profit. These factors were partially offset by favorable mix as Stearns & Foster performed well in the quarter. North American second quarter adjusted operating margin declined to 16.5%. This was driven by the decline in gross margin and advertising investments in Stearns & Foster ahead of the planned fourth quarter launch. Now, turning to international. Net sales increased 59% on a reported basis, primarily driven by the acquisition of Dreams. On a constant currency basis, international sales increased 68% as we experienced $10 million of headwind this quarter from unfavorable foreign exchange rates. Foreign exchange continues to fluctuate and we believe that FX will be a larger headwind for us going forward. If current FX rates were to hold, we estimate a year-over-year headwind of at least $80 million to international sales and a meaningful headwind to profit in the second half of 2022. This has been considered in our revised guidance. As compared to the prior year, our international gross margin declined to 53.1%. This decline was driven by the acquisition of Dreams, mix, and the pricing benefit to sales with no gross profit. 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 margin. This is driving the major change in year-over-year margins internationally. Our international operating margin declined to 14.5%. This was driven by the decline in gross margin, the impact of COVID-related shutdowns on our joint venture operation and operating expense deleverage. Now, moving on to the balance sheet and cash flow items. In the second quarter, we had a slight use of operating cash flow. Our inventory days extended throughout the quarter as we reinforced our safety stock of adjustable bases and raw materials to be able to better support our customers across our global operations. We believe our focus on providing our customers with the best service has been the key driver of our outperformance relative to the broader industry. At the end of the second quarter, consolidated debt, less cash was $2.8 billion and our leverage ratio under our credit facility was 2.7x, within our target range of 2x to 3x. Now, turning to our revised 2022 guidance. We have updated our earnings guidance and now expect adjusted EPS to be in the range of $2.60 to $2.80 in 2022. Our guidance contemplates full-year consolidated sales to be consistent with the prior year. North American and international sales to be both down low-single-digits in the second half of 2022 versus prior year. Gross margin to improve from the second quarter into the back half of the year as our latest pricing actions are now in effect, and our advertising rate in the back half of the year to be consistent with our second quarter advertising rate. Also included in our 2022 outlook is our plan to invest over $250 million in CapEx to support the long-term needs of our business. In addition to our maintenance CapEx of $100 million, we are making significant non-recurring investments in our U.S. manufacturing capacity, which includes standing up a new foam-pouring plant, an expanded chemical tank farm and warehousing. The team is on track for these major capital projects and we anticipate in future years that CapEx will moderate as these investments roll off. Lastly, I would like to provide a few modeling items. For the full-year 2022, we expect D&A of about $185 million, interest expense of about $100 million, a tax rate of about 24.5%, and a diluted share count of 180 million shares, which includes our assumption to repurchase at least 10% of our shares outstanding. With that, I will turn the call over to Scott.

Thank you, Bhaskar. Great job. Clearly, the risk of an economic slowdown has increased today relative to just a few quarters ago. But before opening the call up for Q&A, I want to take a moment to discuss the resilience of our business model. Our highly variable cost structure, working capital strength, and low leverage profile preserve the strength of the business during challenging periods and limit the pressure to make unhealthy short-term decisions that may hurt the strength of our brands or impede the business from capitalizing on new opportunities. Our global and geographic diversity mitigates the impact from market-specific downturns. The business has faced global sales volume declines in 2017 and 2020. In both periods, the flexibility of the business model allowed us to focus our efforts to come out of each situation stronger than we were at the start. This is a good reminder of how our business is well-structured to weather challenging periods. As sales trends change, first, approximately 70% to 80% of our costs flex down to accommodate declining unit demand. Second, our input costs normally decline as they are typically tied to global economic activity. Third, our working capital needs reduce, freeing up cash. Fourth, our capital expenditures flex down to maintenance CapEx. Note, in the last few years, we've been leaning into growth investments. Regardless of the market environment, we have a track record of executing and outperforming the industry. We're not in a defensive situation today, but we have cut back on expected hiring, we've elongated some of our capital project timelines. Additionally, our early 2023 planning reflects the change in the operating environment with a greater focus on driving operating efficiencies. With that operator, can you please open the call up for Q&A?

Thank you. Our first question comes from the line of Bobby Griffin with Raymond James. Your line is now open.

Good morning, Scott. Thanks for taking my questions. Scott and team, first, could you help us understand a little more detail on how the quarter progressed through the months? Was there any slight improvement toward the end of June or going into July around the Fourth of July? And second, within the guidance for the back half, what does that assume from a unit perspective? Is it roughly the same as what we've seen so far this year or a modest improvement? Anything that can help us put the back half in context versus what we've seen year to date would be helpful.

Sure. Let me take the last question first. When you think about the cadence throughout the year, as we mentioned, the units from an industry standpoint, whether it be the first quarter or the second quarter, were challenged. We performed well and significantly better from an industry standpoint. As we think about the back half, we would expect slight to modest improvement in our own units as we go into the back half. So, when you think about what that means, not only do we get a bit of improvement from volume, we would expect some pricing benefit as well. Pricing that we took for the latest round of commodities, we get the full impact of that in the back half. As we think about cadence through the quarter, the normal seasonality of the business is back, and it's seasonal around holiday selling periods. Consistent with prior years, in the non-promo periods we see some base softness; then in the promo periods or holiday periods, we see nice growth. Hopefully that helps.

Thank you. Our next question will come from the line of Seth Basham with Wedbush. Your line is now open.

Thanks a lot and good morning. Scott, you've referenced how you can flex costs down significantly when the economy and demand turns lower. Your guidance for the back half of the year implies significant pressure on operating margins. Can you talk about when you will decide to reduce your fixed costs and CapEx more aggressively to current demand levels if they persist?

Sure. Great question. First, let me frame what we've done so far. When we looked at this year going into the year, we were expecting a fairly solid year. Then we had macro issues: the conflict in Europe, inflation, COVID impacts, China shutdowns, and FX. We ended up with a different operating environment than expected. On our prior earnings call, I said we were set from an offensive position. Obviously, when we got into the second quarter, it became clear that it wasn't going to be as robust a year as we thought, but at the same time, we were in the primary selling period, the second quarter and the third quarter. It didn't seem like anytime during the busy season to be doing major cost controls. So, we've trimmed around the edges a little bit. We'll play through the third quarter to get more information about the market, and I suspect at the end of the third quarter we'll have to make a decision as to how we want to position the company for late 2022 and into 2023. I would expect that we'll be more conservative in our budgeting next year. That said, we've spent some extra money to make sure we are ready in case the market was robust. We are essentially a just-in-time supplier to our customers, so it's critical that we have the capabilities to meet demand. If you look at how we're performing relative to market, our strategies have worked. I think when we get industry results for the second quarter, we'll have continued to take market share and maybe accelerated our market share capture during the second quarter. It's working, but it has been a little bit expensive and we'll work through it. To answer your question directly, you should expect that at the end of the third quarter we'll look very closely to ensure we have the right balance.

Perhaps to add to that, if you think about our margin performance, we would expect back half EBITDA margins to improve from the second quarter. In the second quarter there was a bit of uniqueness happening, whether it be geopolitical issues or commodities where we were not able to get price in until June or early July. So, that timing should help bridge the gap into the back half. However, versus prior years, be mindful that the price without incremental gross margin is about 400 basis points versus 2019. So, while that is unfavorable when you think about the math and the rate, it also shows our ability to move on price to cover cost increases.

One moment for our next question. Our next question comes from Keith Hughes with Truist. Your line is now open.

Thank you. My question is on pricing. If you could give us some details on the pricing in the second quarter, how much pricing you got in the quarter and then with another round, how much you expect in the second half?

Absolutely. Let me answer the full-year question first. When we think about all-in pricing versus prior year, including the pricing actions we've added, think low-to-mid single-digits. Specifically in the second quarter, the latest pricing actions we announced did not go into effect until late in the quarter. We commented that the exposure between commodities and price was about $15 million that we recouped in the back half. So, overall, we would get a bit more pricing benefit in the back half than we did in the first half or the second quarter.

Operator, we're ready for another question.

Thank you. Our next question comes from the line of Peter Keith with Piper Sandler. Your line is now open.

Hi, thanks. Good morning, everyone. As we look to the back half, Bhaskar, you noted input costs might start to come down a little bit. Could you provide specifics on what areas you're seeing potential reduction? And would the plan be to hold price so you would get a gross profit dollar benefit, or would you flex pricing as input costs come down?

From an industry standpoint, typically when commodity prices go up, pricing is taken, and when commodities come in, that pricing typically sticks. That's the general industry philosophy and that would be our strategy as well. Within our commodity portfolio there are ups and downs. Chemicals and purchased foam have had movements, oil has come off the high of $125 a barrel, lumber has come in a bit. We're seeing some positive movement in certain inputs, while others like steel are holding in. All of that has been considered in our outlook, and our bias is that there's more benefit than downside versus where we were last year. If that comes to pass for 2023, it would be incremental gross profit dollars flowing through, and the margin deterioration from price without gross profit would turn into a tailwind.

Thank you. Our next question comes from Carla Casella with JPMorgan. Your line is now open.

Hi. Given your comments about raising or building more inventory, more safety stock, can you talk about how we should think about working capital for the next couple of quarters? Do you see that typical benefit in the third quarter like in past years, and can you give any sense of how much build you did in inventory and if there are any other offsets in working capital?

We've probably fully built the working capital needs that we have from a strategy standpoint to strengthen the supply chain and ensure safety stock for our customers. If anything, you're likely to see more favorable working capital trends in the third quarter than historically, because we built in the second quarter. But there's no incremental working capital need to implement the strategy.

I agree 100%. The typical seasonality of the business is that we start seeing working capital benefits in the back half of the year, and that should come to pass. We did ramp specifically on Tempur and raw material from a safety stock standpoint and around adjustable bases due to lead time and shipping considerations. So I suspect working capital trends will be better in the back half than they have been historically. But certainly not negative based on what we know today.

Thank you. Our next question comes from David Malinowski with Bank of America. Your line is open.

Hi. On for Curtis Nagle here. A couple quick questions on the price increase taken in June. Was it across all brands? And have you observed any demand destruction or trade-down from pricing actions already taken?

If you look at the Tempur brand across higher-end versus lower-end products, the higher-end products have done better than the lower-end products within Tempur. From a brand standpoint, Stearns & Foster actually grew during the quarter, Tempur was the next performing brand, and Sealy was the lowest performing brand. Historically, we're not seeing any demand destruction from previous pricing actions, nor am I hearing any concerns from retailers. The pricing that went in June was across all brands. Bhaskar, is that correct?

Yes, across all brands. As always, we're thoughtful about how we spread pricing. Generally, a higher-end consumer can handle pricing better than a value product, so we were thoughtful in how we spread it.

From a pricing standpoint, I don't think we've seen any issues. The bigger issue you felt in the second quarter was really a traffic issue, with consumers being more conservative in their shopping.

Thank you. Our next question comes from Brad Thomas with KeyBanc. Your line is open.

Hey, it's Brad. Thanks for taking my question. A bit more on trends in North America and expectations in the second half with respect to mix and the performance of the Tempur brand. You called out mix being positive for margins in 2Q — what are you assuming in terms of how mix plays out and how Tempur holds up? It feels like tough comparisons hurt the middle and lower-end of the market. How are you looking at higher-end and premium-end of the market?

We expect the higher-end to perform better than the overall market, and Tempur has continued to take share in the U.S. market. That said, we're not expecting a very robust period in the back half.

When you think holistically about North America, call it a low-single-digit decline. Generally, during these periods, the high-end holds up better relative to the low-end. We're excited about what Stearns has already done in the second quarter and prior, and we are continuing to support that brand with the launch in the fourth quarter. Holistically, the high-end should hang in better than the low-end.

When we look at our Tempur stores, the flagship Tempur retail stores had a reasonably good second quarter compared to the market. Once we get the final data for the second quarter, I think they'll look like they performed very well.

Thank you. Our next question comes from Jonathan Matuszewski with Jefferies. Your line is open.

Great. Thanks so much. Historically, wholesale bedding units and sales correlate with GDP and consumer confidence. What does your implied second half sales guidance assume regarding those macro dynamics? Are you assuming a sequential deterioration in GDP and consumer confidence or stability?

I'll start and then let Bhaskar add. Clearly, we're not expecting a very robust back half of the year with industry units probably declining in the single digits. Whether you call it a recession or not, our outlook is that at best you're talking about a flattish environment for the next two to three quarters.

If you look at the macro indicators versus where we were in the first quarter and where we are today, things have turned a bit. Reiterating Scott, we expect no material improvement from here and no material deterioration from here — that's how we're thinking about the back half.

Thank you. Our next question comes from Bob Drbul with Guggenheim Partners. Your line is now open.

Hi, good morning. A couple questions on inventories. I'm trying to understand what you're seeing with retail partners and their willingness to be promotional given the weakness. Could you give insights on retailer inventories and promotional activity?

By its nature, the bedding industry doesn't have much inventory in the system at the retailers because of short order delivery times, so they don't carry a lot of inventory. Furniture retailers are a different business and may have longer inventories, but that's not about mattresses and bedding. Generally, retailer inventories are low. Retailers are stepping back into normal promotional cadence and aggressiveness that the industry was used to before the pandemic. They're stepping up in advertising and promotions and will likely continue to be more aggressive than during the COVID years — more of a return to normal promotional cadence.

Thank you. Our next question comes from Atul Maheswari with UBS. Your line is open.

Thank you and good morning. Bhaskar, quick clarification: I think you mentioned you expect your own units to improve slightly in the back half relative to year-to-date. If that's right, why would you expect improvement given potential macro weakening later this year? Second, Scott, you mentioned industry units down 20% to 25% in this quarter — do you believe the industry has shaken off excess demand from the pandemic? Have units returned to 2019 levels or will more quarters of decline be needed?

On the second quarter decline of 20% to 25% year-over-year, it's a very hard compare because last year's second quarter saw extraordinary strength. Though I don't think there was broad pull-forward across the entire COVID period, the second quarter of last year was particularly strong when stimulus checks hit, and it's possible some sales were pulled forward within the year. If you look at full-year 2021, units were not far off historical trend. Regarding the back half, our expectation for modest improvement considers that our comps are easier in some periods and that we took market share during the period. Also, our competitive position is stronger than it was this time last year across many players. Online businesses have become a bit more challenging, and some competitors have had capital constraints. Our products have performed well in the marketplace, so blending that together with our outlook, we believe we can achieve some positive unit performance.

To address the question about units first half versus back half: last year's second quarter was an extremely hard comp. When we think about the back half, our expectation of modest improvement versus the first half is based on that comp dynamic and on our observed performance.

Thank you. Our next question comes from William Reuter with Bank of America. Your line is now open.

Hi. My question is on capital allocation. You're slowing share repurchases in the second half and you're above the midpoint of your leverage target. In this uncertain environment and looking at next year, do you plan to allocate more capital to keeping leverage toward the bottom end of the range or are you comfortable within the range regardless?

Great question. The answer can change based on facts and circumstances we learn regularly. We plan to buy at least 10% and we'll manage the balance sheet based on the economic outlook. We are around the midpoint of our leverage target today. Assuming no dramatic changes, we'll likely run somewhere around the midpoint of our leverage range, give or take. If things look more challenging, we'll move closer to a 2x leverage target. If things brighten, we might move closer to 3x. But our expectation is to hover around the midpoint.

Thank you. Our next question comes from Laura Champine with Loop Capital. Your line is now open.

Thanks for taking my question. If industry units were down 20% to 25% in Q2, what were Tempur Sealy's units?

Ours were not down that much. We took considerable share, but I don't have the exact unit number to give on the public call for competitive reasons. We were down significantly less than the industry.

Thank you. One moment for our next question. I have a follow-up from Carla Casella with JPMorgan. Your line is open.

Just a follow-up on working capital gains in the back half. Do you expect to be fully out of the revolver this year or to chip away at some of that revolver draw from the quarter?

No, from a utilization standpoint and efficient use of our debt structure, we would expect to still be using the revolver at the end of the year. We do expect leverage to come down slightly from current levels as the year progresses.

Thank you. Our next question comes from Peter Keith with Piper Sandler. Your line is open. Peter, are you muted?

I am muted, sorry about that. Thanks again. Big picture question on housing: housing turnover drives maybe about 20% of unit volumes. We're going into a challenged market for home buying. Do you have any updated views on how that impacts the business as a percent of units or high-end versus low-end?

There is no question housing starts impact the business, but I don't think it's one of the top two or three drivers. Housing slowing is a minor headwind. For me, the most important statistic is consumer sentiment and consumer confidence, which track better to our sales performance. Housing affordability is a concern and we watch it, but I focus more on consumer sentiment and confidence.

Thank you. Our next question comes from Bobby Griffin with Raymond James. Your line is open.

Hey, thanks for letting me back in the queue. Bhaskar, you mentioned second half ad expense is relatively in-line with 2Q, but I don't think we have 2Q as the base. Can you tell us second quarter ad spend as a percent of sales?

Let's call it 9.2%.

Bobby, apologies, bad math — 9.8%.

Our next question comes from Atul Maheswari with UBS. Your line is open.

Thanks for taking my follow-up. Some competitors are ramping up promotions. At what level of sales decline would Tempur Sealy decide to raise its own promotions, be it price discounts or otherwise, to stimulate customer interest?

I think our promotional cadence will be relatively consistent with last year, with some adjustments. We pulled back a bit on Sealy at times because of delivery constraints, but we are comfortable with the strength of our brands and don't expect to change our historical promotional cadence materially. On the manufacturing side, some manufacturers have tried to drive volume with price and we haven't seen that work very well — lowering price didn't move the needle much. Spending on advertising, product quality, and salesforce quality tends to be better drivers for manufacturers.

Thank you. Our next question comes from Brad Thomas with KeyBanc. Your line is open.

Hi, Brad Thomas again. Thanks for letting me back in. Scott, could you talk about the acquisition landscape? You've done a great job finding opportunities to invest in — is that changing and how might your appetite be changing given the macro environment?

Thank you. Recent acquisitions like Sherwood and Dreams are performing very well and our acquisition strategy over the last few years has been accretive and made us stronger. Multiples have come down and our stock has declined, which makes some transactions more challenging because we won't do anything that we don't think is accretive or creates value. Over the last four or five months the number of candidates has increased worldwide and we continue discussions. We made a relatively small investment in a company with interesting technology. We want best-in-class technology, some of which we generate internally, and some we acquire. We invested a small amount in a company called Bright, which has interesting adjustable base technology that is not commercial yet but shows promise. We'll continue to look at acquisitions, but the pricing environment and earnings normalization challenges make us cautious. We continue to talk to people worldwide.

I would now like to turn the conference back to Mr. Scott Thompson for any closing remarks.

Thank you, operator. To our over 12,000 employees around the world, thank you for what 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 our call today. Thank you.

This concludes today's conference call. You may now disconnect. Everyone have a wonderful day.