Good morning and thank you for standing by. Welcome to the Tempur Sealy Second Quarter 2023 Earnings Conference Call. Operator instructions. I would now like to hand the conference over to your speaker today, Aubrey Moore, investor relations. Please go ahead.

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 involve 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 heading 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 also 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.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 is my pleasure to turn the call over to Scott.

Thank you, Aubrey. Good morning, everyone, and thank you for joining us on our 2023 Second Quarter Earnings Call. I'll start by sharing some highlights from our second quarter performance and then Bhaskar will review our worldwide financial performance in more detail. After that, I'll share some closing comments before we open the call up for Q&A. Today, we are pleased to report one of the strongest second quarters in the company's history, second only to the same period in 2021. Importantly, these results were delivered against headwinds from a less-favorable market than we expected, the impact of which was partially mitigated by company-specific performance. Sales growth for the quarter was 5%. Adjusted EPS for the quarter was consistent with prior years after absorbing higher interest costs, major launch costs and elevated taxes. GAAP EPS grew 2%. We believe these results are a reflection of our innovative products, strong sales culture, solid expense controls and our passion for execution. In our largest market, the U.S., we believe industry units declined at least low double digits in the quarter, resulting in historically low aggregate industry volumes for the quarter and first half of the year. Overall, we believe the U.S. market has stabilized at trough unit levels, with the upper end of the market demonstrating a bit more resilience compared to the entry-level market. Today's results demonstrate the robust earnings power and cash flow attributes of the business, as we realized solid earnings and cash flow against this challenging backdrop. As we look to the back half of the year, we anticipate U.S.-produced mattress units trends will slowly improve but remain negative year-over-year. Bhaskar will have more information on the 2023 guidance in a minute. Turning to a few highlights for the quarter. First, we continued to extend our lead as the largest global bedding company in the world. All 3 of our leading U.S. brands, Tempur, Sealy and Stearns & Foster performed well in the quarter, significantly ahead of where we believe the industry trended. We were pleased with the second quarter performance of our International business. The successful Tempur International launch combined with Dreams' crisp retail execution are driving continued outperformance worldwide and positioning us well for the future. Second, we opened our third domestic foaming pouring plant in Crawfordsville, Indiana, expanding our manufacturing capacity to meet expected demand for years to come. We designed the state-of-the-art facility to optimize our manufacturing capabilities across bedding products and components. In addition to pouring Tempur-Pedic material, we have the flexibility to leverage the plant's foaming pouring capacity to manufacture bedding products and components for our Sealy and Stearns & Foster brands as well as our non-branded OEM operations. The facility enhances our ability to service our customers in the Northeast market, creating opportunities to shorten lead times and reduce per-unit logistics costs. This plant also provides additional storage for chemicals, mitigating the risks of future supply or pricing disruption. With the opening of this facility, we've completed our 3-year strategic CapEx program and expect to see CapEx investments moderate significantly going forward. In the second half of this year, we expect CapEx to be down by 50% versus the same period last year, certainly beneficial to free cash flow. Third highlight. We completed the rollout of our new TEMPUR-Breeze products and our new smart base in the U.S. Next-generation TEMPUR-Breeze mattress builds on the success of our proven legacy Breeze products to deliver next-level sleep solutions with enhanced Tempur-Pedic feel characteristics. Featuring new technologies designed by our Tempur-Pedic scientists, the new lineup presents the next generation of consumer-centric solutions focused on helping to alleviate aches and pains. We also continue to raise the bar in cooling performance with our new LuxeBreeze model, dealing 10 degrees cooler all night long, presenting the best-in-class solution for the more than 60% of the households that have at least one person who sleeps hot. Retailers' and consumers' response to these incremental technologies have been overwhelmingly positive, and we and retailers are seeing positive mix and higher average ASP. In tandem with the Breeze mattress refresh, we also introduced an updated adjustable base lineup, which is driving all-time-high retailer advocacy and attachment rates, reaching new records in May and June. Our new smart base features, our new Sleeptracker 2.0 technology, the accuracy of which was validated by a Stanford medical study; and offers industry-leading automatic snore detection and response, addressing a leading sleep concern among consumers. This new lineup also features incremental multisensory relaxation features to help consumers wind down and prepare their bodies and minds for deep, rejuvenating sleep. Over the Memorial holiday, we supported these Tempur lineups with all-new breeze and smart-base multimedia advertising campaigns. These efforts drove incremental search interest in Tempur year-over-year and drove solid e-commerce traffic trends over the Memorial Day selling period. All of our new Tempur products and supporting advertising initiatives are strengthening Tempur's appeal to the premium wellness-minded consumer and driving improvements in attach rates and ASP for our third-party retailers. Fourth highlight. Our investments in Stearns & Foster products, distribution and marketing continue to drive meaningful sales growth and expand brand recognition. In the second quarter, Stearns delivered its third sequential quarter of year-over-year sales growth, significantly outperforming broader market trends. This was possible, thanks to the recent investments in brand and the rollout of our all-new Stearns & Foster collection with superior innovation and elevated design and enhanced step-up opportunities. The new product lineup is delivering strong results. We have grown Stearns' third-party retail distribution by more than 20% compared to the previous collection with gains in both legacy and incremental Stearns' retailers. We're seeing this product resonate with historically underserved premium innerspring consumer, resulting in strong mix and again driving ASP expansion. Our channel diversification strategy is also driving strong brand momentum. The Stearns & Foster e-commerce site we launched last year continues to drive brand recognition and highly profitable incremental sales. Finally, our launch of our all-new international Tempur products continue to track with our expectations. We are launching the new international lineup in over 90 markets worldwide. In the first half of the year, we kicked off our Tempur European and Asian markets. We expect to be fully floored in our last market in the U.K. in the first half of 2024. The U.K. has some country-specific fire retardant regulations, which adds some complexity to the product launch. The consumer-centric innovation and new collection will appeal to our legacy ultra-premium consumers at prices of 3,000 and above but also broadening our price points to expand our addressable market to meet the needs of consumers shopping for mattresses between 2,000 and 3,000. We are streamlining the manufacturing process with this lineup to unlock this incremental price point without materially altering the margin profile of our Tempur International business. As we continue to stagger the rollout by individual markets, we are currently manufacturing both with new line and the old line of products in our international Tempur plant. We plan to optimize production of the new line after the transition period, providing a tailwind to gross margins in 2024. Now I'll turn the call over to Bhaskar.

Thank you, Scott. In the second quarter of 2023, consolidated sales were approximately $1.3 billion and adjusted earnings per share was $0.58. We have approximately $13 million of pro forma adjustments in the quarter, all of which are consistent with the terms of our senior credit facility. These adjustments are primarily related to costs incurred in connection with the planned acquisition of Mattress Firm, a $4 billion U.S. bedding retailer. Turning to North American results. Net sales increased a solid 5% in the quarter. On a reported basis, the wholesale channel increased 6% and the direct channel increased 3%. North American adjusted gross margin improved to 39.9%, driven by pricing actions and favorable commodities, partially offset by increased product launches and operational headwinds. North American adjusted operating margin improved to 17.4%, driven by the improvement in gross margins. Now turning to International. International net sales increased 3% on a reported basis and 4% on a constant currency basis. Our current year full year expectations for 2023 contemplates neutral FX both for sales and adjusted EBITDA. As compared to the prior year, our International gross margins improved to 54.9%, driven by favorable mix and pricing actions. Our International operating margin declined to 13.4%, driven by launch-related expenses, including discretionary advertising investments, partially offset by the improvements in gross margin. Global commodity prices continue to trend largely in line with our expectations. We continue to expect favorable commodity prices into the back half of the year, though remaining significantly elevated to 2020 levels. Now moving to the balance sheet and cash flow items. At the end of the second quarter, consolidated net debt was $2.7 billion. And our leverage ratio under our credit facility was 3.1x, slightly ahead of the target range of 2 to 3x. We expect to return to our target leverage range in the back half of the year. We generated second quarter operating cash flow of $150 million. In total, we had more than $250 million of operating cash flow in the first half of the year, continuing to demonstrate the attractive cash flow attributes of the company. As expected, our inventory levels declined in the quarter, as we have completed the vast majority of our domestic product launches. This resulted in a sequential 6-day improvement in the cash cycle. As we enter the back half of the year, we expect inventory levels to further decline as well as some improvements in working capital further improving our cash cycle. We have temporarily suspended repurchases under our share repurchase authorization as we work towards closing the Mattress Firm transaction. Over this interim period, we expect to significantly deleverage, as we plan to use the cash to pay down debt ahead of the closing. After the acquisition closes, we would anticipate our leverage ratio to be between 3 and 3.25x. Now turning to 2023 guidance. Due to revised industry expectations, we are trimming the midpoint of our 2023 guidance by approximately 3% on both sales and adjusted EPS. We now expect adjusted EPS to be in the range of $2.50 to $2.70. This considers sales to be consistent to slightly up over the prior year. This includes the execution of our key initiatives, new product launches and the wraparound impact of pricing. This also assumes global industry headwinds, primarily in the low end; sales and marketing investments of $20 million to support our product launches; and maintaining our commitment to record advertising spend of over $500 million as we continue to support our leading brands and new products. This will result in adjusted EBITDA of approximately $940 million at the midpoint of the range. Our guidance also considers the following allocations of capital in 2023: a quarterly dividend of $0.11, representing an increase of 10% relative to 2022; and CapEx of approximately $200 million, which includes $90 million of growth CapEx primarily to fund the completion of our Crawfordsville facility. I should note that, going forward, we expect our CapEx to return to a more normalized level of spend. We think of annualized CapEx as approximately $150 million driven by maintenance CapEx of $110 million and growth CapEx of approximately $40 million. Lastly, I would like to flag a few modeling items. For the full year of 2023, we expect D&A of approximately $190 million to $200 million, interest expense of about $135 million to $140 million, a tax rate of 24% to 25% and a diluted share count of 178 million shares. With that, I'll turn the call back over to Scott.

Thanks, Bhaskar. Great job. Before opening the call up for questions, I want to provide a couple of updates. First, I want to address the cybersecurity event affecting certain parts of our IT system, which was disclosed Monday in our 8-K. Following the discovery of the event, our team activated its CEO-approved incident response and business continuity plan. The plan was approved years ago and is designed to contain incidents. The plan included proactively shutting down certain IT systems, resulting in the planned temporary interruption of our operations. We began bringing our systems back online last Friday and expect it to take time to return to normal operations. Our investigation remains ongoing and we continue to work to determine the impact of the disruption. If we determine that any personal information was involved, we would, of course, comply with any reporting obligations we have under applicable law. Currently we're working hard to catch up with the lost production from the shutdown. In total, our systems were down for a week, and we are currently working to get back to full production. We expect cyber-related expenses, net, will be reflected in our third quarter financial results. Lastly, I'd like to provide a brief update on our pending acquisition of Mattress Firm. We're currently responding to the Federal Trade Commission's second request and continue to expect to close the transaction in mid- to late 2024. Over this interim period, Mattress Firm's leadership team provides us with a high-level update of their financial performance. Mattress Firm's recent quarterly results, which they reported yesterday, were consistent with our expectations. And we look forward to bringing the Mattress Firm team onboard. And with that, I'll open up the call for questions, operator.

Operator instructions. Our first question comes from Bobby Griffin with Raymond James.

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

Let me answer; it’s a somewhat long response, but I’ll be clear. First, from the cyber event, great job by the internal IT department — it was an enterprise-wide effort and congratulations to everyone internally. We also had a lot of help from external IT teams we have on retainer for these kinds of events, and Microsoft’s elite team did a great job. Let me go through what we know today. This is not an easy estimate, but based on the information we have right now, the event itself is not material to the intrinsic value of the enterprise and is not material to our 2023 expected sales or EBITDA. Before insurance, and noting we have an insurance limit of $5 million, our best estimate is about a $10 million to $20 million negative impact to EBITDA in the third quarter. We expect the vast majority of that will qualify as an add-back adjustment in the third quarter. My EBITDA estimate breaks into two pieces: one is clearly incremental costs related to the activity that should be covered by insurance at some point, which we will account for as we receive it, and the other half is potential lost sales. Potential lost sales for the third quarter are roughly $20 million to $30 million, which is about 2% of the quarter’s sales, give or take, and the vast majority of that would be Sealy U.S., because we have plenty of inventory in the Tempur organization. We have not experienced any material changes in our balance of share, and retailers have been very understanding. Lastly, addressing your guidance question: the event has been considered in our 2023 guidance. We expect an add-back in the third quarter for the costs and will account for insurance when applicable, and we will disclose any claim filings. Any other change to guidance would be driven entirely by macro factors. Looking at the second quarter, we kind of scraped through; the market was weaker than we expected, but we outperformed the industry by more than we anticipated. Netting those effects, our results were relatively solid relative to others in the industry in the second quarter. Looking forward, we lowered our expectations for the industry, which required us to fine-tune guidance by roughly 3%.

Our next question comes from Susan Maklari from Goldman Sachs.

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

Thank you for the 33 questions you asked me, Susan. Let me speak to it and see if I can answer like 30 and leave 3 unattended. First of all, yes, we're very happy with the performance in the quarter. We think it gives us an opportunity to show the strength of the business even in a little bit of a down cycle in its cash flow generation. I would highlight in our numbers, because this goes to the consumer question you asked. If you look at our ASP, it was up 13% in the quarter, and all but about, let's call it, 2% of that is price. The vast majority of that is people mixing up. And so what that would tell you is the top end of the consumers are doing very well and where you're seeing sales pressure is at the lower end. If I do it by brand standpoint, our high-end brands did better than our low-end brands, i.e., Stearns & Foster did better than Sealy. And Stearns & Foster grew double digits in a market that, I don't know, pick your number, but it was clearly down double digits. It grew double digits. So I'm going to say the strength of the high-end customer everywhere we looked looked very good. We look at individual mattresses within the Tempur lineup. The high-end Tempur products did much better than the low-end Tempur products. So we're continuing to be fairly bullish on a high-end customer. Where you feel the pressure is in the low end, and the low end has gotten hit very hard. So you had a question in there about outlook, as far as consumers going forward. We've been bouncing around the bottom in the bedding industry for probably three quarters, and so I don't know. Next quarter or two, we certainly think that the industry should start doing better. Some people can point to green shoots. Yes, we see some, but you have some good weeks and you have some slower weeks. But the main thing from our perspective is we see our products incrementally performing very well in the marketplace against the competition. And part of her question I missed, Bhaskar, that you can remember?

About competitive landscape.

Look. We've got a very competitive market. It's lots of competitors in bedding worldwide, other brands that have brand strength that we all know. They're out there. They're competing every day. I haven't seen anything in any of the competitors that I would call a significant sea change in their activities or their strategy, but it's a competitive market. And we'll continue to compete the best we can.

And we have a question from Keith Hughes with Truist.

Yes. You had talked earlier about raw material costs, I guess, coming down recently. Can you give me a kind of quantification how much they're down either in the quarter or your estimates for the second half of the year? Dollars would be helpful.

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

Our next question comes from Curtis Nagle with Bank of America.

This is Steven McDermott on for Curtis Nagle. Just for your Mattress Firm acquisition, I know you called out kind of second half of 2024. Is there any changes in what you are seeing from a regulatory approval standpoint? And then as far as gross margins kind of touch beyond just the commodities, how are we thinking about the cadence going into 2H and kind of all the puts and takes there?

Thank you for your question. I'll address the FTC. Look. As you know, the FTC process is long and complex. What I would say is we're working through the process. There have not been any surprises in the process. We're providing them significant information on their second request. Lawyers and folks are meeting and discussing professionally as we both learn each other's perspective. And I think that process will continue to go on for several months, and probably sometime in the fourth quarter, we will probably get down to the point where we figure out whether or not we have a meeting of minds or we don't have a meeting of minds, but I would tell you that process is progressing normally. Everybody is working cordially together. And they have responsibility on their side that we certainly respect, and we look forward to continuing to visit with them.

When I think about gross margins going from the first half to the second half, the first thing I would point out is I would anticipate the normal seasonality of the business. Generally the second half is bigger than the first, so therefore, we get some leverage upon our fixed. So clearly I would anticipate that would happen. In addition to that, we had some unique events that were investments that we made in the first half, whether it be product launch expenses, whether it be the four models that we have out there. So as we get into the back half of the year that's not going to be a headwind from a gross margin standpoint. And then finally I will call out that we've been making some investments in our supply chain and our operations. Let's call that we've been filling some EBITDA to make sure that we've been servicing our customers. And as we think about the back half of the year those headwinds should turn into tailwinds. So what all that means is I would anticipate that gross margin continues to step up, with Q3 being the highest of the year. Then I would also say, as we think about margins overall from a go-forward standpoint, I feel like we have a number of tailwinds to margin, whether it be the product mix, whether it be the operational initiatives that we have not only this year but as those continue. We're very excited about our direct-to-consumer business. DTC should be a tailwind for us from a go-forward standpoint. And then finally I'll close it with International. International is we spent many, many years in developing a product that will hit a new total addressable market. Generally, International margins are higher than the U.S., so I'd anticipate, as International continues to grow, that will be a tailwind as well.

The only thing that made me think as you were talking, Bhaskar, is margins that we probably should have called out in the second quarter, our advertising expense. We spent the same amount as last year, even though the market was choppy we didn't pull back on advertising to try to optimize EBITDA or something like that. And in fact, if you look at our direct advertising, our direct advertising to support a little weaker market is up double digits in the second quarter in support of the marketplace.

Our next question comes from Peter Keith with Piper Sandler.

Congrats on the continued share gains. I guess, a two-part question, hopefully, related. Number one, could you give us the sales lift in the second quarter from the product launches that you had? And then secondarily, it looks like now your guidance implies that revenue is going to slow in the back half. At the same time, I think the industry trends, what we're seeing general agreement on, is that things are kind of getting less bad; and you're kind of guiding for things to get worse, so I hope you could reconcile that dynamic.

Absolutely. So the way I would think about it is specifically as it relates to the four models, in the second quarter, let's call that 2% to 3%. And so that's the lift we got there. When I think about the back half, reasonable as it relates to what the back half looks like from a sales standpoint. However, here is the way I think about it. In the first half of the year, we did have some benefit from the last round of pricing actions that we took in 2022. That lapsed in the first half, meaning that we don't have that benefit as we think about the back half of the year. Finally, our four models, which are going to support future growth, are largely in the first half of the year, so when you think about our expectations in the back half of the year, what that does imply is that from an organic standpoint those initiatives are going to continue to allow us to grow in a very challenged market. So how I think about that is from sales being flat to slightly up implies in the back half of the year that we would see a bit of growth and really being fueled by those initiatives in a very challenged market.

Our next question comes from Seth Basham from Wedbush Securities.

I have a follow-up question to Peter's. Just on the outlook for the industry for the balance of the year. If you take into consideration what's happening from a macro standpoint and a credit availability standpoint, what are you expecting industry units to do for the full year and for the back half of the year that underpins your guidance?

Good question. So the way we think about it is, let's call it mid-single-digit to high single-digit decline. And what that would imply is for the back half of the year, call it mid-single-digit decline. It's our expectation that for the second quarter, when the information comes out, our estimate is that we'll see low double from a decline standpoint.

And our next question will come from Brad Thomas with KeyBanc Capital Markets.

A couple of follow-ups, if I could. Scott, I believe you talked about thinking that you may not have as much from share gains in the back half as what you've been seeing in the first half. I was wondering if you could elaborate on that any more. And then Bhaskar, I was hoping you could talk a little bit more about the commodity component of margins and maybe how you're thinking about that from a big picture standpoint and perhaps how that sets up as a potential tailwind for you even as you move into 2024.

Yes, thanks for the question. Let me be a little clear. It's more the way we do budgeting, more than expectation, when it comes to share gains or outperformance in the marketplace. Clearly we continue to have quite a bit of outperformance in the marketplace, but when we actually put our budgets together and we do guidance, we don't anticipate that activity. We let that activity flow into the numbers as a good guy. And maybe it offsets an unknown bad guy. But as far as like what do you really think your share gains are going to be, we haven't seen anything in the marketplace from any of the competitors that would make us think that our share gains would slow down. All of our brands had really strong second quarter. And we haven't seen anything that would make us think that wouldn't continue in the third quarter. So that's probably me misspeaking or thinking about our budgeting process, more than anything else.

As it relates to the components of gross margin, to follow up on Keith’s earlier questions: about $15 million of commodity benefit in the quarter, which translates to roughly 350 basis points of rate improvement. On commodities, we had a view of the full year that assumed continued favorability as the year progressed, and with some puts and takes the results are broadly in line with that expectation. That implies we should continue to see sequential and year-over-year commodity improvement for the rest of the year. That said, we remain well off our 2019 levels from a commodity standpoint, so the dynamic where price changes did not fully flow through to gross margin still exists. We have recouped some ground as commodities have come down, but we are still far from historic 2019 levels, and while you would expect normalization over time, some elements are likely to be stickier than others in returning to pre-pandemic levels.

Our next question comes from Atul Maheswari from UBS.

Bhaskar, just to follow up on the commodity piece of gross margin. Based on your estimate as it stands today, how much of a—if I back up a step. I think in the past what you've mentioned is that commodities have collectively been a 400 basis points headwind to gross margin over the last few years. As of the end of '23, how much of that do you expect to recover? Just so that we can properly calibrate what's left outstanding for 2024 and beyond.

Sure. Let me do that math as I'm thinking about it. I think we're well off of where we were in the pre-pandemic levels. I don't think we're approaching half of where we were before. So somewhere between 150 and 200 basis points perhaps is what we've captured. And that's consistent with what we've seen in the first half of the year, so I'd anticipate that to play through a little bit. And really that reinforces the point that things are better than where they were during the pandemic. However, just from a pure inflation standpoint we've still got a ways to go.

Our next question comes from Laura Champine with Loop Capital.

If I look through the quarter that Mattress Firm just reported, it looks like their sales declined 6%. Do you view them as holding onto market share in a weaker market? Or is there an issue there that you would need to turn around, should you become the owner of the Mattress Firm assets, recognizing that it would be a year?

Sure. We don't have all the information yet that we get in the marketplace to fully answer that question, but certainly the early indications are that, from a retail perspective, I suspect the retailers were down double digits in total. I'm looking at Bhaskar to agree because we don't have all the numbers we triangulate. They were down 6% in sales and up, I think, 3% in EBITDA in a market that I would say probably sales for retailers were double digits. So I think they probably took a little bit of share. If you were to segregate the market between what I'll call the big retailers and the small retailers, they were probably, in-line maybe with the large retailers because generally the trend has been larger retailers have been taking share from smaller retailers. But their report, which is their third quarter and our second quarter, that came out last night was very much in line with our expectations of what they were going to do this year, pre-signing the definitive agreement, so they're tracking to our internal expectations.

Our next question comes from William Reuter from Bank of America.

I just have one. Given a little bit of the weaker demand at the lower end, is the—and lower commodity prices, do you expect that you may either be more promotional? Do you expect you would reduce list prices? Have your retailer partners come to you with any suggestions on how to increase volumes there? That's it.

No. I don't really see any pricing actions at the lower end. Is it promotional? Yes. The low end is always very promotional. And in the industry, the low end doesn't have much profit in it, so there's not a lot to work with at the low end. And where we've seen retailers aggressively try to promote and drive lower end, generally we've seen those activities not be successful from a return on advertising or promotion dollars. The low-end market is just not there right now. Again, maybe in marketing terms, the fish aren't there right now. So no, as far as continually looking for ways to help stimulate the market, yes. But I don't think it's really a pricing issue, but if I got to be king for the day, what I'd like to see is more advertising in the marketplace by other manufacturers and others to help just stimulate activity. Because I think there's quite a bit of dollars out there in the middle of the market and the upper end of the market, but entry level is just tough right now.

And our last question comes from Carla Casella with JPMorgan.

I'm wondering about inventory and working capital and your thoughts. Third quarter, I know, is usually a big cash flow quarter for you. Do you think—are you expecting that again this year? And for the full year, do you still expect working capital release? And do you expect to be able to fully pay down your revolver in the next quarter?

Absolutely. Here is the way I would think about it. So we made some investments in working capital as we exited 2023, whether it be in advance of the new product introductions that we have as well as just carrying more safety stock as the supply chain was a little uncertain at that time. As we sit here today, our cash cycle has seen some nice improvements, specifically about 6 days in inventory. As the year plays out I would anticipate that we would see some continued improvement in working capital overall, a little bit from inventory, but I would expect something from the other components as well, that being payables and receivables. As we exit the year, I would anticipate that working capital will continue to be a source of cash. From a historic standpoint the flow-through on EBITDA to cash flow is we should continue to see that same relationship. Absolutely, the back half of the year is that we generate more cash than the first half. So I would say that we would expect that again this year. What I would further say is that we feel very excited about what we've done from a new plant standpoint. That's in Crawfordsville. That was a $300 million investment in growth CapEx that we made over the last couple of years. And we're very excited to say that we've got some units coming out of that plant. Also what that means from a free cash flow standpoint is that investment is behind us, so on a year-over-year basis, free cash flow should be greater by about 50% than what it was in the prior year.

And then I guess the other part is we've not been doing stock buybacks while we're preparing for the Mattress Firm acquisition, so we're going to be generating more cash. The leverage ratio should be falling significantly over the next few quarters.

That's right. I think what we're anticipating is we'll get back within our leverage range in the third quarter. As we sit here today, I would expect to be somewhere at the midpoint of our range of 2x to 3x as we exit the year.

And we have one last question from Brad Thomas with KeyBanc Capital Markets.

A couple of things that investors have been asking us this morning. I was wondering if I could ask. For one, it's been an exciting year with some new retail partnerships like Sam's Club. Scott, I was just wondering if you could give us any update on distribution and how partnerships are going and floor space. And then secondly, just a question on the cybersecurity issue: Is the expectation that operations are normal for the Labor Day selling season? Or do you think it goes into that at all?

Well, congratulations on slipping in one more question and then making it a five-point question. First of all, you mentioned a large customer, Sam's. We think that's going well. And we think that, if you ask them, they would say it's going well, so we're thrilled with that relationship. I think you know that Stearns & Foster captured a 20% increase in slots, and we certainly feel good about that. Clearly from our sales numbers relative to the industry, whether you want to compare it to other public companies or spring volumes or anything, we're clearly taking share. So floor space is increasing and velocities within those slots have been increasing. As for the cyber event, we obviously have the 8-K out. We're generally building and shipping beds right now. We're taking orders right now. We generally lost about a week's worth of production around the world. And then as we bring up the systems, it usually takes a few days to get back to kind of normal efficiency. We also had some parts of the organization that weren't impacted by any of the cyber event, like the Asian joint venture, Dreams, Sherwood, Sleep Outfitters. They weren't affected at all. Our worldwide e-commerce wasn't affected, except for a bit of slow shipping, so no. I think we're working off a backlog, but I think we're going to get caught up. And I don't really expect to leave the third quarter with any significant backlog, so I don't think it's going to have an impact. And we've certainly tried to work through that when we gave you estimates of the impact of the event.

Thank you. That's all the time we have for questions. I would like to turn the call back to Scott Thompson for closing remarks.

Thank you, operator. To our over 13,000 employees around the world, thank you for what you do every day to make the company successful. A special call out again to our IT folks in a very difficult quarter and a great job in dealing with the uncertainty that we faced. 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.

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