Somnigroup International Inc. Q4 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Somnigroup Fourth Quarter 2024 Earnings Call. This call is being recorded on Thursday, February 20, 2025. I would now like to turn the conference over to Aubrey Moore with Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and thank you for participating in today's call. Joining me today are Scott Thompson, Chairman, President, and CEO; and Bhaskar Rao, Executive Vice President and Chief Financial Officer. This call includes forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve uncertainties and actual results may differ materially due to a variety of factors that could adversely affect the company's business. These factors are discussed on 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 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 new investor website at investor.somnigroup.com and filed with the SEC. Our comments will supplement the detailed information provided in this press release. And now with that introduction, it's my pleasure to turn the call over to Scott.

Thank you, Aubrey. Good morning, and thank you for joining us on our first ever earnings and business update call at Somnigroup International, SGI on the New York Stock Exchange. As we previously reported, we successfully completed the merger of Mattress Firm and Tempur Sealy on February 5, and we subsequently changed our parent company name from Tempur Sealy International to Somnigroup International and, as I mentioned, changed our common stock ticker from TPX to SGI. We're excited to start this new chapter for our company as a global provider of sleep solutions with a portfolio of outstanding businesses and iconic product brands. As we've previously shared, Tempur Sealy, Dreams, and Mattress Firm will all operate under their own name as decentralized business units under Somnigroup International. Mattress Firm and Dreams will continue to operate as multi-branded retailers. And Tempur Sealy, primarily a manufacturer, will continue to serve third-party retailers as well as Mattress Firm, Dreams, and Tempur Sealy's direct-to-consumer channel. We'll begin reporting Mattress Firm's operations next quarter. Turning to today's earnings release. I'll begin with some highlights from the fourth quarter and full year 2024 and then turn the call over to Bhaskar to review our financial performance in more detail and discuss our 2025 guidance. After that, I will share some thoughts about the opportunities unlocked by the transaction before opening the call up for Q&A. In the fourth quarter of 2024, net sales were approximately $1.2 billion, and adjusted EPS was $0.60. We outperformed our fourth quarter expectations, led by strong performance in our international business. Our North American business continued to extend its lead in the industry as we delivered fourth-quarter sales consistent with the prior year despite an estimated single digit decline in the overall industry. Excluding the negative impact from foreclosed distribution resulting from an unanticipated customer being acquired, our North America sales grew low-single digits in the quarter. Turning to a few highlights. First is the enduring strength of our business model, which allows us to invest in growth initiatives and aggressively explore long-term opportunities while remaining responsive to near-term industry conditions. In 2024, Tempur Sealy outperformed the industry worldwide, differentiated by the strong fundamentals of its business model. We delivered the strongest sales and gross margins in Tempur Sealy's history and reinforced our strategic third-party partnerships by upholding our commitments to industry-leading product quality and service. We also delivered our strongest operating margin in three years, even as we continue to invest in the future. We've ramped up our advertising spend, opened more than 100 company-owned stores and invested in e-commerce platforms for Sealy and Stearns & Foster in the U.S. over the three-year period. We reported a robust $569 million in free cash flow, our strongest annual free cash flow since 2021. We also decreased our debt-to-adjusted EBITDA leverage ratio from 2.9 times at December 31, 2023 to 2.3 times at December 31, 2024 as we prepared for the Mattress Firm transactions, demonstrating our disciplined cash management and ability to quickly deleverage the business. Our results are particularly notable when putting context to the broader industry trend. 2024 was another challenging year for bedding as we believe industry demand declined high-single-digits in the U.S. and the trend similarly in many other key markets in the world. Looking at the last few years, we believe the U.S. industry volume declined more than 30% from peak mattress sales in 2021 to 2024. However, we are confident the fundamentals of the bedding industry remain solid. We believe the market is clearly poised for growth, driven by GDP and population growth, housing turnover, and ASP expansion. We anticipate the market will begin to normalize in 2025 and return to some growth in the back half of the year. Over time, we are confident in the return to the historical mid-single-digit growth rate, driven by innovation, population growth, replacement cycle, and ASP expansion. Additionally, based on the volume decline in the last three years, we also believe that pent-up demand from deferred purchases could provide additional upside to growth assumptions. The second highlight is the outperformance of our U.S. business, supported by innovative new products, targeted advertising initiatives, and expanded distribution. Our Tempur brand outperformed the market and delivered profitable sales growth in 2024, supported by the success of our new products. The refreshed Tempur lineup with its new Breeze products and Smart Base launched in 2023, followed by the rollout of our updated Adapt collection and ActiveBreeze Halo product in 2024 drove retail traffic and ASP. These products are attracting a growing number of health-conscious consumers and include our newest innovative features, which address key barriers to achieving better sleep, including cutting-edge cooling technologies, advanced pressure relief, and AI-driven sleep insights. Stearns & Foster also performed well in 2024, driven by last year's newest product launch, our ongoing investment in advertising, and over 20% growth in our Stearns & Foster e-commerce platform. Our Sealy and OEM business performed well relative to the industry. Mounting industry pressure over the last three years resulted in consolidation, restructuring, and bankruptcies across the U.S. industry. In 2024, results include the negative sales impact of these events on our Sealy and OEM products, as well as incremental provisions or losses triggered by these events. Turning to our 2025 product launch. We're excited to share that after months of incredible retail excitement and feedback, the launch of our all-new Sealy Posturepedic product kicked off last month. This is the largest product launch in bedding history. Orders for the new collection are on track with an estimated 80% of floor samples to be shipped before Memorial Day. This highly-anticipated line is a significant reimagining of the Posturepedic products, brands, and marketing and is aimed at reigniting growth in the value to mid-tier price point where we and retailers see tremendous opportunities. This updated Sealy Posturepedic collection is clearly differentiated from competitive offerings with all-new proprietary coil technology. These patent pending precision-fit coils were expertly designed and engineered in-house to provide superior support, which has been the mission of Sealy Posturepedic since its inception in 1950. The 2025 Posturepedic collection also features a bold new look, thoughtfully designed to offer a fresh style and appeal to a broad audience while staying connected to the Sealy brand legacy. Our new precision fit coils have an initial feel that is highly flexible and conformed for lighter support and body types. It then reacts progressively to an individual's unique weight and shape to give the right amount of total support. These new Posturepedic products deliver a demonstrable step change improvement in comfort and support. This has resonated well with customers and retailers. To support this launch, we'll kick off a national advertising campaign, the first national ad campaign for Sealy in over a decade beginning Memorial Day 2025. This top-of-funnel multimedia campaign is designed to reinforce the Posturepedic difference and drive excitement and purchase intent for the company's largest product brand and America's number-one mattress brand. As evidenced by the above, we continue to make high-return investments in brand and product to drive retailer success. Turning to our third highlight, we are pleased to report strong international business performance in 2024 driven by both continued strength in our legacy Tempur operations and our Dreams business. They delivered solid mid-single-digit growth and expanded operating margin for the full year 2024 reflecting robust momentum despite a generally subdued global market. A key driver of this performance has been the continued success of our all-new international Tempur Collection which completed its main rollout mid-2024 with several channels and customer-specific products continuing to roll out in 2025. This collection of mattresses, bed bases, and pillows has significantly outperformed expectations in key markets such as the U.K., Germany, China and Australia. Since the start of its launch in 2023, we've expanded wholesale distribution by more than 10% and we see substantial opportunities for further growth in distribution over the long term. The strong demand for these products coupled with the additional expansion opportunity underscores our confidence that the international Tempur collection will remain a key growth driver in the years to come. Our fourth highlight is our significant gross margin expansion. In 2024, we achieved a year-over-year improvement of 130 basis points in our consolidated gross margin driven by our ongoing investment in new product innovation and improved product mix and the optimization of our manufacturing processes and cost reduction initiatives. These strategic initiatives have allowed us to increase operating efficiency which in turn has provided us with more resources to reinvest in advertising, product development and our people. While we've made strides to grow and fortify the business in 2024, we believe that significant opportunities still lie ahead. Our continued focus on key growth and cost-efficiency initiatives will ensure that we are in an optimal position to benefit from the global bedding industry recovery. With that, I'll turn the call over to Bhaskar.

Thank you, Scott. In the fourth quarter of 2024, consolidated sales were approximately $1.2 billion and adjusted earnings per share was $0.60. We have $45 million of pro forma adjustments in the quarter, all of which are consistent with the terms of our senior credit facility. These adjustments are largely comprised of costs incurred for professional fees related to the acquisition of Mattress Firm and the unexpected foreclosed distribution Scott previously mentioned, including transition and wind-down costs. Turning to North American results. Net sales in the fourth quarter were consistent to the prior year. On a reported basis, the wholesale channel was consistent and the direct channel was up 3%. North American adjusted gross profit margin improved to 40.8%, primarily driven by operational efficiencies. North American adjusted operating margin declined to 14.8%, driven by operating expense deleverage from investments in advertising and fully reserving the balance sheet for the event Scott mentioned a moment ago. Now turning to international. Net sales increased 14% on a reported basis and 13% on a constant-currency basis in the fourth quarter. As compared to the prior year, our international gross margin improved to 58%, driven by operational efficiencies and favorable mix. Our international operating margin improved to 21.2%, driven by the improvement in gross margin and operating expense leverage, partially offset by a decline in our Asian joint-venture performance as it manages through a weak Chinese market. Now moving on to the balance sheet and cash flow items. At the end of the fourth quarter, consolidated debt less cash was $2.1 billion and our leverage ratio under our credit facility was 2.3 times, within our historical target range of 2 times to 3 times. In the fourth quarter, we generated operating cash flow of $129 million. Following the close of the Mattress Firm transaction, our net leverage was approximately 3.5 times. We expect to return to our target leverage range of 2 times to 3 times and for share repurchases to be minimal over the near term. Should note that under the terms of our credit facility, our leverage calculation going forward will include the benefit of run-rate synergies. Our expectation is that we will realize at least $100 million in annual run-rate synergies by 2028. Before I discuss the 2025 outlook in detail, I want to highlight how we are reflecting the transaction in our guidance. Our guidance considers the previously announced divestiture and the elimination of intercompany sales between Mattress Firm and Tempur Sealy. We expect the intercompany sales to represent approximately 18% of Global Tempur Sealy 2024 sales. Intercompany eliminations will reduce Tempur Sealy sales but will be margin-accretive and neutral to EPS. Please note these two factors will impact our reported sales going forward. I will be highlighting like-for-like guidance to normalize for these items in some of the guidance commentary that follows. We also expect first-year synergies to benefit of approximately $10 million primarily realized in the back half of the year with an anticipated ramp in subsequent years. I should also note there will be some P&L landscaping across COGS and operating expenses to align accounting policies for the two organizations. Please refer to the investor presentation posted to our IR website this morning for further details on the impact of this policy alignment and other acquisition-related items. As we begin reporting Mattress Firm in our consolidated results in the first quarter, we will maintain our historical reporting segment with the addition of a new segment for the Mattress Firm business. Now turning to our 2025 guidance. We expect adjusted EPS to be in the range of $2.60 to $3.00, which at the midpoint is a 10% growth versus 2024. Our guidance is based on sales after intercompany eliminations to be between $7.5 billion and $7.8 billion on a reported basis. Our guidance also reflects our expectations that the global bedding industry will be stable versus the prior year, which implies a slight headwind in the first half and recovery in the second half of 2025. Our like-for-like Tempur Sealy sales growing slightly and on a reported basis down high teens due to the acquisition factors previously discussed. Our Tempur Sealy North-America sales to be flattish on a like-for-like basis, driven by outperforming the industry due to the continued momentum of our product and channel strategies and comping over the foreclosed distribution and prior year floor models, which combined represent a mid-single headwind in North America Tempur Sealy sales. Our international business growing low-single digits, which includes the continued momentum of our omnichannel expansion strategy and a slight headwind in the first quarter as we lap prior-year launch. We also expect high single-digit growth on a constant-currency basis in our International segment. And our like-for-like Mattress Firm sales growing slightly, supported by in-store initiatives to drive average order value and conversion. We also expect reported gross margins to be similar to reported 2024 gross margin, which includes a $15 million headwind from foreign exchange, $730 million of advertising investments, which implies a slight step-up in Tempur Sealy advertising, all resulting in adjusted EBITDA of approximately $1.3 billion to $1.4 billion. Regarding capital expenditures, we expect a 2025 CapEx of approximately $250 million, including $50 million of investments to refresh Mattress Firm stores. Over the long term, we expect the normalized run-rate Somnigroup CapEx to be approximately $200 million. Lastly, I would like to flag a few modeling items. For the full year 2025, we expect D&A of approximately $295 million to $305 million, and interest expense of approximately $265 million to $275 million on a tax rate of 25% with a diluted share count of 210 million shares. With that, I'll turn the call back to Scott.

Thank you, Bhaskar. Great job. Before turning the call over for Q&A, I'd like once again to express my long-term optimism about the recently completed acquisition of Mattress Firm. We have collaboratively worked with Mattress Firm for over 35 years and we are thrilled to welcome them into our organization and unlock incremental benefits to all stakeholders. Let me conclude by taking a step back to share our long-term perspective. We've seen our markets performing below their historical trend-line growth. And despite this, our execution has led to adjusted earnings per share growth. We believe 2025 will benefit from continued execution and the Mattress Firm transaction. Looking beyond this year, we are planning for markets to return to growth, while simultaneously realizing incremental benefits from the Mattress Firm transaction and continued industry-leading execution. We are internally targeting sales to grow at a compound annual growth rate of mid-single digits starting in 2026. This indicates Somnigroup's adjusted EPS would increase from $2.80, the midpoint of the guidance for 2025 to approximately $4.85 by 2028, a compound annual growth rate of 20%. That ends our prepared remarks, operator. Please open the call up for questions.

Your first question comes from Susan Maklari with Goldman Sachs. Your line is now open.

Thank you. Good morning, everyone.

Good morning, Susan.

Good morning, Scott. I want to start with your expectations for some normalization in the industry this year. Could you talk a bit more about what is driving that outlook given the macro environment that we're coming into the year with and the state of the consumer? And then just talk a bit about your ability to execute against that and how we should think about first half versus second half?

Sure. Thank you for the question. Look, I would say we're still in that 'bouncing around the bottom' pattern we've used here for the last couple of years where you have starts and stops. I would expect the first half of the year to be a little bit less robust than the back half. We had a strong period towards the end of last year and the start of this year and then ran into a little bit of an air pocket during Presidents' Day, which I think has been well reported. That period was a little bit slow or muted during Presidents' Day, but we're continuing to see what I call steady business. We expect normalization really until you get to 2026. I think some of that is driven based on new product. We're very optimistic about the Sealy launch. Some Sealy products have been in the market for a while. As we've mentioned, this is the largest launch in bedding history. That product is just now getting on the floors and where it's being placed, it's being well received. But we're continuing to be cautious near term and optimistic long term. If for some reason the market is different than we expect, our business model is relatively flexible and we can flex up if we need to or we can flex down if the market tells us that's what we need to do.

Your next question comes from Rafe Jadrosich with Bank of America. Your line is now open.

Hi, good morning. Thanks for taking my question.

Thank you.

I wanted to follow up on the long-term guidance that you provided the $4.85. Can you give a little bit more color on how much of that is accretion maybe relative to core TPX? And is that assuming $100 million of synergies or is that just getting operating leverage on Mattress Firm? And then the mid-single-digit growth you're assuming — is that industry or is that TPX and industry something below that?

Great. Let me talk for a while and I'm sure I'm going to miss some of the questions and Bhaskar will clean me up a little bit. Look, we wanted to give you a perspective. I wouldn't call that formal guidance, but this was such a transformational acquisition. We knew we'd blow up people's models and we thought we ought to put something out there to give people some context. Generally it's got $100 million of synergies in it over the period with what I call a slow start for various reasons. The teams are just now getting back together. The 5% or so revenue growth assumption is our internal baseline and may be conservative. We mentioned pent-up demand as a potential upside. I hope the teams will work harder and potentially realize a larger synergy number over time. Bhaskar, do you want to speak to some of that?

Absolutely. So when you think about the category, think about it globally as Scott mentioned — we would expect to grow market share ahead of the category. From a category standpoint, think about 3% to 5% growth. Synergies — yes, we're targeting at least $100 million over that period. There is a component of incremental productivity through manufacturing processes as units recover. At the end of 2028, assuming the category assumptions, we do not expect to need incremental capacity or significant incremental CapEx to support that level of business. The investments we mentioned for advertising and refurbishing Mattress Firm stores are embedded in those projections, as is the incremental depreciation. Put that all together and you get to mid-single-digit top-line growth with EPS growing at roughly a 20% CAGR in our internal target.

Your next question comes from Bobby Griffin with Raymond James. Your line is now open.

Good morning, everybody. Thanks for taking my questions and congrats on getting the deal done.

Thank you.

I want Bhaskar to hit on just the core Tempur Sealy manufacturing efficiencies and kind of your view of the gross margins that we saw in fiscal year 2024. Is that a fair starting base? Where do you think things are? Is the business over-earning on some assets or under-earning on others? Then my second part: the $2.60 low end of guidance versus reporting $2.55. Can you connect that? Is that industry down again in 2025 that basically flat despite having Mattress Firm in there? Curious on the low end of guidance, the drivers behind that.

So starting with gross profit, Bobby, yes, the fourth quarter showed more than 100 basis points of improvement, largely driven by productivity and leverage in our plans. Going forward on a like-for-like Tempur Sealy standalone basis, we expect productivity to continue to be a driver in 2025 and beyond. In the fourth quarter we did absorb some non-recurring items, including about $10 million of bad debt related to the foreclosed distribution customer and consequences from an abrupt foreclosure in part of our OEM business, which cost us a couple percent in the fourth quarter top line. We were pleased with revenue performance in the fourth quarter, particularly internationally, and the landscaping across the P&L with gross profit continuing to be a positive story. The deleverage you saw in operating margin was largely due to our decision to fully reserve the balance sheet for those events and to continue investments in advertising. Regarding the low end of guidance, the $2.60 is a cautious position that protects us if the industry is down in 2025. We expect the Mattress Firm acquisition to start being accretive in the second quarter and more so through the balance of the year. There are several open items, including divestitures and aligning operations, which will be completed in the coming months and will also affect near-term results.

So to be clear, the low end of guidance is effectively protecting us for a weaker industry performance in 2025.

Exactly. The low end of guidance is protecting us if 2025 the industry is down as opposed to bouncing around the bottom. Also, the expectation is the divestitures will be transferred by May 1st on the Mattress Firm and Sleep Outfitters side, which will complete that part of the process. We expect accretion from the acquisition to start in Q2 and continue for the balance of the year and beyond.

Your next question comes from Peter Keith with Piper Sandler. Your line is now open.

Hi, thanks. Good morning. Nice finish to the year. Congrats on the acquisition. If we just think about that EPS range for the full year of $2.60 to $2.80, is there a way you could break out how you're contemplating the EPS accretion from that Mattress Firm acquisition?

Absolutely. The expectation is that the acquisition will start to be accretive beginning in the second quarter and then ramp through the year. We will have some divestitures to complete and there are processes to work through. But the cadence is accretion starting in Q2 then increasing in Q3 and Q4 as integration actions are implemented.

Your next question comes from Michael Lasser with UBS. Your line is now open.

Good morning. This is Dan Silverstein on for Michael. Thanks so much for taking our question. Our question is on the potential for synergies beyond the $100 million that you've identified, specifically around advertising. Do you think you could see some benefit from consolidating your buying power or will you lean in further and explore some new opportunities? Thank you.

Sure. On synergies, to get everyone grounded, the $100 million are cost synergies. We haven't budgeted revenue synergies in that number; revenue synergies would be incremental. Advertising is a big bucket and a major opportunity. Somnigroup will be the largest mattress advertiser in the U.S. by a significant margin, so advertising is a powerful asset for us. Synergies in advertising come from two areas: buying power and, importantly, the quality and coordination of advertising where one plus one can equal more than two. That improved effectiveness will drive better sales and better return on ad spend. It will take some quarters to fully implement, but we see a meaningful opportunity in advertising effectiveness beyond simple price leverage.

Your next question comes from Keith Hughes with Truist Securities. Your line is now open.

Sorry about that, I was on mute. Welcome to you again. At what point do you think you will have a better view of what other things you could do together with Mattress Firm? Is that something at the beginning of next year or how long do you think it will take?

It's not going to take that long. During the trial the teams were not talking and many integration activities were paused. Teams are restarting now. Groups are meeting starting next week to reengage. I think we'll know a lot more by the end of Q2 and by the end of Q3 we'll have a significantly clearer picture. We don't expect it to take years. We'll implement some items this year and realize fuller benefits in 2026 as the teams get aligned and change processes where necessary.

Yes, Keith. The firewall that existed during litigation paused detailed integration work. Now as teams come back together, we'll identify the synergies and then prioritize implementation. We expect to realize some synergies this year, ramp more in 2026, and continue capturing opportunities thereafter.

Your next question comes from Seth Basham with Wedbush Securities. Your line is now open.

Thanks a lot. Good morning and congratulations. On the long-term guidance, Scott, in terms of 20% EPS growth, maybe you could break that down for us and tell us how much you expect from deleveraging. In other words, how much growth do you expect over the time period in EBITDA versus EPS? Thank you.

I'll let Bhaskar give you the details. I believe the calculation we provided does not assume stock buybacks; it's primarily driven by EBITDA growth with some benefit from deleveraging.

That's right. From a capital allocation standpoint, the projection assumes no share buybacks. The vast majority of the EPS growth comes from EBITDA growth. We will generate cash flow in that period and will pay down debt, so some portion of EPS improvement will come from lower interest expense, but the primary driver is double-digit EBITDA growth.

Your next question comes from Bradley Thomas with Capital Markets. Your line is now open.

Hi, good morning. Congrats again on closing the deal here. Can you talk a little bit about the recent trends that you've been seeing at Mattress Firm and how you're thinking about same-store sales for the business in 2025? And maybe lastly, can you address the leadership transition underway at Mattress Firm? Thanks.

Sure. On trends, we've seen starts and stops. There was a positive period late last year and into January, and then activity softened around early February and Presidents' Day. Some of that is weather, but it doesn't fully explain the muted Presidents' Day. Regarding same-store sales, Mattress Firm historically has gained share, so same-store sales will depend on the market and on in-store initiatives. We haven't fully reviewed their real estate strategy or all store-level detail yet; that work starts next week. On management, we recently made a leadership change at Mattress Firm. We'll continue to work with the team to ensure we have the right people in the right positions with the right authority. We expect to have more detailed updates within a quarter.

Your next question comes from Jonathan Matuszewski with Jefferies. Your line is now open.

Great. Good morning and thanks for taking my question. A follow-up on synergies: recognizing the walls are just coming down now, could you discuss the cadence of realization? The $10 million in the second half — what is that initially coming from (logistics, manufacturing efficiencies, lifecycle management, etc.) and how do these buckets evolve as synergies ramp in 2026 and 2027?

Sure. The $10 million in the first year, primarily back-half loaded, will be concentrated in sourcing initiatives and corporate function consolidations where we get scale benefits. There will also be some manufacturing efficiencies as we coordinate better now that the teams can engage. Think of the initial $10 million as primarily procurement and corporate functions with some operations productivity. The cadence is a slow build: a small initial number in year one that grows meaningfully in years two and three as the more complex operational synergies are implemented.

To add, the process will be leader-led committees across functions to identify and prioritize synergies. Operations and logistics groups are meeting next week. There will be some quick hits in back-office consolidation that should be easier and faster to implement; larger manufacturing and retail initiatives will take more time but can produce larger benefits over time.

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

Thanks for taking my question. Once you digest Mattress Firm, what's your outlook for retail location growth, say 2026 and beyond, across your platforms in the U.S. and U.K.?

Great question. For Dreams in the U.K., we still see opportunities for store expansion; the team has a long-term plan that could represent single-digit percentage growth in store count. For Mattress Firm, we have not yet completed a full review of their store footprint. Their real estate team is sophisticated and has managed their portfolio for years; we will assess it as we integrate. At this point, I would expect store count to be broadly flat in the near term until we fully review their strategy. There will be rotation across markets and potential for targeted expansion where attractive opportunities exist. We will provide more detail as we get fully informed during the year.

Your next question comes from Phillip Blee with William Blair. Your line is now open.

Hi, good morning. Can you talk more about the upcoming Sealy launch? How do you think about the brand's growth potential this year compared to Tempur-Stearns over the past few years during their product launches? What kind of contribution can it have this year? And Bhaskar, on the margin side, how should we think about headwinds related to brand mix going forward?

Thank you. Sealy's launch is the largest in U.S. bedding history and represents a big refresh. We expect Sealy's growth potential in 2025 to likely exceed Stearns & Foster and Tempur in that year because Sealy is being refreshed after a long time in market and the new product is generating excitement and strong retailer reception. That said, Sealy is generally a lower ASP brand than Tempur and Stearns & Foster, and the lower-end consumer has been more challenged in recent years, which could moderate some upside. Overall, we expect a strong contribution from Sealy this year given the scale of the launch and the national advertising campaign.

On gross margins, thinking about Tempur on a like-for-like basis in 2025, productivity is expected to drive further margin improvement — roughly 100 basis points or a bit more — though that will be partially offset by commodities headwinds. We also called out a $15 million FX headwind in our commentary. Mix will be a factor: the foreclosed business and some OEM disruptions in 2024 were a drag, while international growth is expected to be favorable, which helps mix. Overall, we expect like-for-like Tempur Sealy to generate favorable margin trends driven by productivity, acknowledging some commodities and FX headwinds.

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

Hi, I was wondering if you'd given any thought to the new potential reciprocal tariffs that may be put into place and if you've done any work around what that could mean if the policies that were announced last Thursday, February 13th were put in place, in terms of margin headwinds?

When I think about tariffs, they are moving around a lot. Whether it's reciprocal tariffs or tariffs involving Canada, Mexico, or China, the visibility is limited. For those tariffs that have already been enacted or are visible today, the impact to us appears relatively de minimis, in part because we have long-standing supplier relationships and some lag between enactment and P&L impact, which gives us time to mitigate through pricing or sourcing. We are monitoring exposure, and where tariffs could affect finished goods or components, we have operational flexibility to move production. There is a lot of uncertainty, and tariffs can create both headwinds and potential upside depending on how trade flows change.

It's complicated, but from a competitive standpoint, our scale and supplier relationships give us advantages in managing tariffs compared to smaller competitors. We may see a short-term impact in a quarter or two depending on how tariffs land, but we expect mitigation and repositioning of production to reduce the long-term impact. If tariffs result in cost increases, the industry typically passes through increases to consumers over time; our size and supply chain flexibility help us manage that process. Overall, while tariffs are a potential headwind in the near term, they also create competitive advantages for larger, well-structured participants like Somnigroup.

There are no further questions at this time. I will now turn the call over to Scott Thompson for closing remarks.

Thank you, operator. To our 20,000 associates around the world, including our new 8,000 Mattress Firm employees, thank you for what you do every day to make Somnigroup successful. To our retail partners, thank you for your outstanding representation of our brands. And to our shareholders and lenders, thank you for your confidence in Somnigroup's leadership team and its Board of Directors. This ends our call for today, operator.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.