Good day, everyone, and welcome to the Tempur Sealy Second Quarter 2024 Earnings Call. Please note this call is being recorded. It is now my pleasure to turn the conference over to Aubrey Moore with Investor Relations. Please go ahead.

Good morning, everyone, and thank you for participating in today's call. Joining me today are Scott Thompson, Chairman, President and CEO; 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. 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. 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 is 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 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 second quarter 2024 earnings call. I'll begin with some highlights from the quarter and then turn the call over to Bhaskar to review our financial performance in more detail. After that, I'll open up the call for Q&A. In the second quarter, net sales were approximately $1.2 billion and adjusted EBITDA was $231 million, an improvement of 6% versus the second quarter of 2023. Our adjusted EPS grew a solid 9% to $0.63, while also improving our leverage ratio. We're pleased to see our global market outperformance mitigate the impact of softer-than-anticipated industry volumes. Despite an estimated mid-single-digit industry decline in the quarter, which was more than our anticipated low single-digit decline for the period, our sales were only slightly below internal expectations. Our strong gross margin performance and solid cost controls resulted in healthy earnings growth in the second quarter. Turning to a few of the second quarter highlights. First, our U.S. business outperformed the market, driven by the enduring strength of our brands and products and supported by some recently introduced consumer-centric innovation and compelling marketing initiatives. Tempur-Pedic emerged as our top-performing brand again this quarter, supported by our all-new Adapt products. As a reminder, our updated collection is designed to alleviate aches and pains by leveraging our innovative Tempur material, which delivers a 20% improvement in pressure relief compared to standard materials. The recently introduced ActiveBreeze product, our advanced heating and cooling sleep system, priced at approximately $13,800 for a queen, has resonated strongly with discerning ultra-luxury customers. In addition to active climate management, this product integrates Sleep Tracker AI and is driving premium tickets upward of $20,000 when bundled with complementary items. While sales volumes are expected to be moderate, we believe this ultra-premium offering plays an important role in enhancing brand perception and signaling the future for bedding innovation. Our North American direct-to-consumer business experienced an ASP uplift and 2% sales growth in the quarter, driven by our new Tempur-Pedic products, clearly outperforming the industry as a whole. Our U.S. Tempur retail stores and e-commerce platform reported a mid-single-digit expansion of ASP over the prior year and both our Tempur-Pedic and Stearns & Foster e-commerce websites experienced strong traffic. Our value-priced products also performed well in the quarter, supported by our recent distribution wins with two large U.S. bedding retailers. These wins drove solid performance within our OEM and Sealy brands, mitigating the impact of soft industry-wide demand for entry-level and value-oriented price points. Overall, our broad-based momentum from our new products and distribution wins drove mid-single-digit growth in North America mattress units. Excluding the growth in our OEM business, North America mattress units were down low-single digits and mattress ASP was consistent with prior years, indicating consumers maintaining their willingness to invest in bedding innovation. To support all our brands, products and third-party retailers, we continue to execute a balanced media strategy with focus on both broad-based and targeted digital outlets to engage consumers throughout their purchasing journey. Our recent creative campaign has grown consumer interest across our product categories, supported the successful launch of our new Tempur offering and the continued momentum of the Stearns & Foster collection. In the second quarter, we introduced new targeted TV spots and digital assets to support the new Tempur-Adapt collection, which resonated with our target customer base and is driving strong interest in our newly rolled-out lineup. We're also continuing to support the Stearns & Foster product with campaigns that reinforce the brand's 175-year legacy of superior comfort, quality and craftsmanship. This investment in Stearns & Foster advertising continues to drive among the fastest-growing levels of Google search interest in the category. In fact, we've realized nearly a 30% increase in Stearns & Foster search interest since January, outpacing search interest in the overall category by a factor of seven times. Second highlight, we are pleased with our performance with our international business, which continues to generate strong results against a challenging operating background. In the second quarter, the Tempur International team delivered solid year-over-year growth and the Dreams business in the U.K. also performed well in what has been a challenging market. Our recently concluded international rollout of all new Tempur mattresses, bed bases and pillows is a key driver to these international results. The new lineup features consumer-centric innovation, a high level of customization and a broader range of price points, ensuring we meet the diverse needs of consumers across various markets and channels. Turning to the third highlight. In the second quarter, we achieved consolidated adjusted gross margin expansion of 200 basis points and adjusted EBITDA margin expansion of 170 basis points year-over-year. Operationally, we continue to drive gross margin efficiencies through enhanced supply contracts, improved labor productivity and optimized logistics. These efforts, coupled with normalized commodity prices, contributed to a significant gross margin improvement in both North America and our international segments. We successfully translated that gross margin expansion into increased profitability, while concurrently investing in certain long-term growth initiatives. Finally, I'd like to highlight the flexibility of our business model, which allows us to remain agile in a dynamic operating environment. Approximately 70% of our total cost flexes with sales, helping to mitigate the impact of periods of softer demand. In the second quarter, our flexible operating model adapted to the muted operating conditions, while continuing to support our brands and delivering best-in-class service to our third-party retailers. Our strong cash flow and solid balance sheet continued to differentiate us from the competition. In the second quarter, we reported a robust $122 million in free cash flow, our strongest second quarter free cash flow since 2021. We also reported debt-to-EBITDA leverage of 2.7 times, well within our target range. We expect our total leverage to trend down as we prepare for the Mattress Firm acquisition. And with that, I'll turn the call over to Bhaskar.

Thank you, Scott. As mentioned, in the second quarter of 2024, consolidated sales were approximately $1.2 billion and adjusted earnings per share was $0.63. There are approximately $7 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. Turning to North American results. Net sales declined 4% in the second quarter. On a reported basis, the wholesale channel declined 5% and the direct channel grew 2%. North American gross margin improved a robust 200 basis points to 41.9%, driven by favorable commodities, operational efficiencies and launch costs. These improvements were partially offset by the mix impact of the new distribution win for our OEM business units. North American operating margin improved 100 basis points to 18.4%, driven by the improvement in gross margin, partially offset by investments in growth initiatives, including advertising investments to support our newly-launched products and investments to support our growing direct-to-consumer business. Now turning to international results. International sales grew 1% on a reported basis and 2% on a constant-currency basis. As compared to the prior year, our international gross margin improved 170 basis points to 56.6%, driven by operational efficiencies and favorable launch costs. Our international operating margin declined 90 basis points to 12.5%, driven by investments in growth initiatives to support our new advertising campaigns and Asia joint-venture performance, partially offset by the improvement in gross margin. Now moving on to the balance sheet and cash flow items. At the end of the second quarter, consolidated debt less cash was $2.4 billion and our leverage ratio under our credit facility was 2.7 times, within our historical target range of 2 times to 3 times. We expect to continue to deleverage as we prepare for the Mattress Firm acquisition. Now turning to our 2024 guidance. We now expect adjusted EPS to be in the range of $2.45 to $2.65. At the midpoint of the range, this represents a 6% growth year-over-year, a notable expansion of profitability in a prolonged challenged market. Our guidance is based on slight sales growth in the back half of the year, resulting in full year sales that are approximately consistent with the prior year. This also considers our expectation that 2024 U.S. bedding industry unit volumes will be down mid-single digits, which implies the industry headwinds will moderate sequentially, but will continue through the back half of the year. Our sales performance outperformed the industry due to recent distribution wins in the U.S. and the continued success from the new product launches. With advertising spend approaching $475 million as we support our leading brands and new products, resulting in adjusted EBITDA of approximately $940 million at the midpoint of the range. Our guidance also considers the following allocation of capital in 2024: CapEx of approximately $140 million, down significantly from prior years as our major capital projects are complete. This level of spend is driven by maintenance CapEx of $110 million and growth CapEx of approximately $30 million and the quarterly dividend of $0.13, an increase of 18% year-over-year. Lastly, I would like to flag a few modeling items. For the full year 2024, we expect D&A of approximately $200 million to $210 million, interest expense of approximately $130 million to $135 million, on a tax rate of 25% with a diluted share count of 179 million shares. With that, I will turn the call back over to Scott.

Thank you, Bhaskar. Nice job. Turning to a brief update related to the Mattress Firm acquisition. I'm pleased to share that we have recently successfully executed a new post-closing supply agreement with one of Mattress Firm's medium-sized mattress suppliers. This is one of several post-closing supply agreements that we have executed in preparation for our planned acquisition of Mattress Firm and is consistent with our plan for Mattress Firm to continue as a multi-branded retailer. We will not be providing any further comments on the Mattress Firm acquisition beyond what we've shared on our July 8 update call, a replay of which you can find on the investor website. And because we're in litigation, we will not be taking any questions on the acquisition this morning. Thank you for your understanding as we move through this process. And with that, operator, please open the call up for questions.

We'll take our first question from Susan Maklari with Goldman Sachs. Please go ahead.

Thank you. Good morning, everyone.

Good morning, Susan.

Good morning, Scott. I want to start with the demand side of the equation. There's been obviously a lot of focus on the health of the consumer and overall demand trends through the quarter. Can you talk about how things did change as we moved through the second quarter and how you're thinking about the setup relative to your guide for the back half to be up modestly, the full year flat with the volumes down mid-single digits. Just put some context to that perhaps around those parts and how we should think about it relating to the broader consumer?

Sure. Thank you for your question. If you look at the pace of sales during the quarter, the quarter started out solid and positive. Retailers were loading up for the holiday and we were fairly optimistic going into the holiday. Then the sell-through was a little weak during the holiday and sales were lighter towards the end of the quarter. After quarter-end, sales returned to normal and we're roughly flat post-quarter end, with high-end Tempur actually being positive after 6/30. That's the trend. On the setup, Bhaskar, do you want to talk about the guide? I think the primary reconciling item is share gain that we continue to have each quarter.

Absolutely. So, when you think about the back half, as you pointed out, Susan, we would expect slight growth in the back half and international doing a bit better than the U.S. And as we think about share opportunity, the continuation of what we've seen is continued outperformance versus the competitive set. Fundamentally that is focused on the new distribution that we have in our OEM channel as well as the continued success we have with new products on the Tempur side.

We'll take our next question from Rafe Jadrosich with Bank of America. Please go ahead.

Great, thank you. Thanks for taking my questions. I just wanted to—when you think about the promotional environment across the industry, it looks like price has held up even though the end-market has been a little bit choppy. How do you think about pricing through the back half and into next year with the challenging end-market environment? Have you seen any changes on the broader promotional environment?

Sure. I'd say the promotional environment is a tad more promotional this year than the same period last year. That has more to do with duration of promotions rather than depth. Some manufacturers with excess capacity and share issues have been more promotional for longer periods. We try to match promotions when appropriate, but we focus mainly on profits. From a share perspective, we had reasonable share gain in the U.S. and good share gain internationally. If you look at share gains from a profit standpoint, our profit performance holds up very well. If the market remains soft, I would expect a slightly more promotional environment in terms of length of promotional periods, but not a significant change in ASP depth.

Question comes from Bobby Griffin with Raymond James. Please go ahead.

Good morning, everybody. Thanks for taking my question. Bhaskar, I wanted to switch over to gross margins. Clearly a lot going on in the industry. You guys are regaining some operational efficiencies, you have deleverage, maybe some commodity tailwinds and different things with the new manufacturing facility. But when you strip all that out, how do you view this level of gross margins? Is it sustainable, is it over-earning, is there anything we should keep in mind about this as we think about eventually getting to an industry recovery and immediately predicting that is becoming harder and harder to do on a quarterly basis?

Bobby, great question. The way I think about our gross margin performance is we started seeing green shoots in the back half of last year, really driven by operational productivity. As a reminder, coming out of COVID, we made some investments to support our customers and we committed to ourselves that we would get that back. From an operational standpoint, we are well within that journey. I'm excited about the durability of what we've demonstrated. The operational efficiencies we saw in the second quarter have legs. They will drive gross margin and EBITDA improvement, both sequentially and year-over-year in the back half. Looking into 2025, this is just the beginning of the journey, not the end. There's opportunity left, not only from a gross margin standpoint, but also for that to flow through to EBITDA margin.

I'd also add that it's generally easier to get gross margin expansion when the market is growing. To deliver strong gross margin performance in a softer market is an encouraging indicator and bodes well for when the market turns around.

Our next question comes from Michael Lasser with UBS. Please go ahead.

Good morning. Thank you so much for taking my question. I know this is a tough question to answer, but if interest rates come down, but that's because unemployment is weakening, what does that mean for the outlook for units and overall industry revenues for the next 18 months? And then separately, it does seem like as the industry softness continues, some of the players are pulling back on promotional activity and advertising in an effort to preserve profitability. Doesn't that create an opportunity for Tempur Sealy to be more aggressive, gain even more market share and be in an even better spot coming out of this downturn? Thank you very much.

Thanks for your question. Regarding interest rates, to put some math around it, a 100 basis point decline in interest rates generates approximately $10 million of EBITDA for us. That comes from roughly $5 million in interest savings on variable debt and about $5 million in reduced financing costs on the retail side, given the size of our direct business. There's also an indirect benefit as retail customers can offer more attractive financing to drive traffic. So we are a little more interest sensitive than you might initially think, and lower rates would be a tailwind for us and the industry. On the strategy point, some manufacturers have pulled back on advertising due to financial constraints, and that has presented opportunities for us to gain share. We continue to gain share in the U.S. and overseas.

Correct.

Our next question comes from Peter Keith with Piper Sandler. Please go ahead.

Hi, thanks. Good morning, everyone. I was hoping you could touch on the North American business, maybe with a few more specifics. I think if we're looking at industry data points generally suggests that Q2 was less negative than Q1 industry-wide, but your sales did get a little bit worse. So, could you pull that apart a bit maybe with the lapping of floor models? And did anything change on the competitive front?

Absolutely. From a quantitative standpoint, the industry was slightly better sequentially from Q1 to Q2. However, on a year-over-year basis, we had a sizable impact from floor models in the prior year. On a reported basis, consolidated units were up, driven by new distribution, but if you factor out floor models, we still captured share year-over-year. So the apparent deterioration is partly a timing and comp issue related to floor models, not an indication that our competitive position weakened.

Our next question comes from Keith Hughes with Truist. Please go ahead.

Thank you. My question is on international. You said in the prepared comments it would probably be greater growth than domestic. The 2% excluding currency quarterly—is that kind of what you're expecting for the second half or what directionally number are we looking for?

Good question. In the first half of the prior year, that's when the new products started launching, which affected comparisons. The underlying legacy international business has approached double-digit growth through the back half of last year. Once you factor out floor models, you see that continued strength. What's implied in the guide for the back half is mid-to-high single-digit growth from an international perspective. It's not necessarily an improvement in trend so much as it becomes visible because we're not comping the floor models.

And we will move next to Brad Thomas with KeyBanc Capital Markets. Please go ahead.

Thanks. Good morning. I will follow up on the margin side of things. Bhaskar, wondering if there's any more color you could share about how you're thinking about margins in 3Q and 4Q? Thanks.

Absolutely. From a gross margin and EBITDA margin standpoint, we expect both margins to improve in Q3 and Q4. Seasonally, the third quarter is the biggest, and historically our gross margins are higher in Q3 versus Q4. We expect expansion in both EBITDA margin and gross margin, sequentially and year-over-year. However, the rate of expansion we saw in the first half will be somewhat less in the back half as we begin to lap some productivity initiatives. One of the benefits of our model is business flexibility; approximately 70% of costs flex with sales. From an advertising standpoint, we've called out about $475 million of spend, and you should think about holding that rate into the back half of the year.

Our next question comes from Seth Basham with Wedbush Securities. Please go ahead.

Thanks a lot and good morning. I'd like to follow up on the share performance in the U.S. It seems like you are still gaining share, but especially if you strip out some of the OEM business wins, the share gains are more limited and that could be within the higher-end potentially. Any commentary there would be helpful. And then relatedly, as we see the anti-dumping measures go into effect in the U.S., are you seeing inventory levels of the importers coming down such that we could see more share gains for you guys at the lower end of the industry despite the excess capacity that many manufacturers in the U.S. have?

Let me unpack that. On the second part of your question, yes, I do think inventories of imported goods are coming down, which should benefit us at the low end in terms of units. However, there's relatively little profit in those low-end segments, so while it could be a tailwind to units, it may not be large from a profitability standpoint. Regarding share gains, we gained share in the U.S. in the second quarter, though the magnitude was likely less than in the first quarter, primarily because of promotional activity that we chose not to match. We manage sales and profits, not just sales. I would expect us to continue gaining share in the U.S. for the next few quarters based on current visibility. Internationally, our share gains likely expanded as our new product rollout is performing well.

Our next question comes from Phillip Blee with William Blair. Please go ahead.

Hi, good morning. Thanks for taking my question. It seems like newness continues to be a big driver of demand in the space. Can you speak about how some of your newer products are performing relative to the rest of the assortment? Any key drivers behind the variance in performance, whether it's price, advertising or consumer appetite? And how should we think about sustainability of that going into next year? Thank you.

Sure. Newer products by definition have performed better than older products—the new offerings capture consumer interest. The Adapt product has been especially successful. We're preparing for a relatively large launch of the 2025 Sealy brand, which we expect will be robust regardless of industry conditions. Advertising, consumer confidence and innovation remain foundational drivers of demand. These elements continue to support our performance and our product launches are designed to sustain interest going into next year.

We will move next with Laura Champine with Loop Capital. Please go ahead.

Thanks for taking my question. It's really about your marketing spend. I think maybe last quarter you talked about continuing to spend to try to drive people to the category, which may or may not be working. So, I just wanted to talk about where those marketing dollars are going, if you've switched channels at all or focus, whether it comes to top-, mid- or bottom-funnel.

Great question. We maintain a balanced media mix across the funnel. We have redirected some advertising dollars to support promotional activity when necessary. Specifically, we've shifted some dollars from top-of-funnel activities that drive customers into retail stores into promotional support so our products are on sale when competing products are on sale. We've had a bit of a timing mismatch the last couple of quarters, and we've adjusted to match promotional activity. The net effect is largely EBITDA neutral, as we are shifting dollars between advertising and promotion rather than significantly increasing overall spend.

We'll move next with Jonathan Matuszewski with Jefferies. Please go ahead.

Great. Good morning and thanks for taking my question. I wanted to ask about the commodity cost tailwind for gross margin this quarter. Could you expand on the puts and takes that drove that and then elaborate on the expectations embedded in the guide for the second half? Thanks so much.

Absolutely. From a commodity standpoint, we saw about a 100 basis point benefit year-over-year. The tailwinds included improvements in costs for steel, chemicals such as CDI and MDI, cotton, and similar inputs. One drag in the first half, and specifically in the second quarter, has been transportation costs, particularly ocean cargo. For the back half, we expect the commodity benefit to moderate compared to the first half. The expectation embedded in the guide is that we'll see some commodity benefit in the back half that will support gross margin and EBITDA improvement, but not to the extent we saw in the first half.

We will move next with William Reuter with Bank of America. Please go ahead.

Good morning. The expectation that industry declines will moderate in the second half of the year seems somewhat in conflict with broader consumer weakness. Is your expectation that lower interest rates will benefit you more than consumer products spending in general, or to what do you attribute the expectation that declines will decelerate across the industry?

Great question. The expectation for moderation in declines is driven more by industry-specific factors, primarily easier comps. The mattress market went into a downturn earlier, so our second-half comps are easier. It's more of a comparison and timing issue than a broad macro view that the consumer suddenly strengthens.

That's right. When you think about second-half expectations, as Scott said, it is comp-driven. We're expecting only a slight improvement in the rate year-over-year.

Thank you. Our next question comes from Peter Keith with Piper Sandler. Please go ahead.

Oh, thanks again. There's been some bankruptcy risk with a few of your distributor partners and I think one is going through a full liquidation. Is that factored into the outlook? And what percentage would that be as a hit to sales for the back half?

Yes, that's fully considered in the guidance and it's insignificant to the portfolio. Generally this is lower-end bedding. We have broad distribution, and about 98% of receivables are current. In an elongated downturn, there will be some blips among lower-end retailers. It's assumed in the guide but not significant from a financial standpoint.

Just to double tap on that, coming out of COVID retailers were in strong health, but with the elongated downturn we've seen some pressure. We are broadly distributed, and consumers can find our products through alternative distribution points. From a credit exposure standpoint, the position is fairly healthy at 98% current, and this is assumed in the guide.

Thank you. We will take our last question from Bobby Griffin with Raymond James. Please go ahead.

Hi guys, thanks for letting me get back in. Bhaskar, I was hoping we could talk a little more about the moving parts around floor samples. If my notes are correct, the floor samples, given the timing shift this year, were a year-over-year revenue headwind to reported 2Q North America revenue? And what was the impact in 1Q—was it actually a tailwind to 1Q 2024? When thinking about sequential performance, I need to neutralize that.

That's correct. It was a slight benefit in the first quarter, roughly 8%, and in the second quarter it was roughly a 3% impact on a consolidated basis, with most of the effect in North America.

Thank you. And I will now turn the call over to Scott Thompson for 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 the company's leadership and its Board of Directors. That ends our call today. Thank you.

Thank you. And this does conclude today's conference. Thank you for your participation. You may disconnect at any time.