Earnings Call Transcript - SGI Q1 2022

Operator, Operator

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

Aubrey Moore, Investor Relations

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 statements speak only as of the date on which it is made. The company undertakes no obligations to update any forward-looking statements. This morning’s commentary will also include non-GAAP financial information. Reconciliations of the non-GAAP financial information can be found in the accompanying press release, which has been posted on the company’s investor website at investor.tempursealy.com and filed with the SEC. Our comments will supplement the detailed information provided in the press release. And now, with that introduction, it’s my pleasure to turn the call over to Scott.

Scott Thompson, Chairman, President and CEO

Thank you, Aubrey. Good morning, everyone, and thank you for joining us on our 2022 first quarter earnings call. I’ll begin with some brief comments on this quarter sales and earnings results, then address certain top of mind issues and how they impact our global operations. To conclude our prepared remarks, Bhaskar will discuss our record first quarter financial performance in more detail. In the first quarter of 2022, net sales grew 19% year-over-year to $1.2 billion and adjusted EPS grew 8% year-over-year to $0.69. This was a record first quarter financial performance. But as we shared in our market update at the end of March, sales came in below what we had initially expected entering the year and commodity prices, primarily energy, moved against us. However, taking into account the turbulence of the global operating environment, we are pleased to report another quarter of double-digit sales growth, the 10th out of the last 11, as well as EPS growth. I should also note there were no adjustments in our operating performance this quarter. The team achieved several noteworthy non-financial accomplishments during the quarter as well. We began the rollout of our new premium Sealy product in the U.S., continued the successful launch of our new ERP system in the U.S., launched the new Stearns & Foster e-commerce platform and fully returned to normalized order-to-delivery times for both Tempur and Sealy. I should also mention that our new Tempur plant that we’re building in Crawfordsville is on plan to be operational next year. Now, I’d like to take a moment to address a few macroeconomic issues and discuss how we’re managing the business in this rapidly changing operating environment. Like you, we are watching the tragic events that are unfolding in Ukraine in absolute horror. In an effort to support those displaced by the war, the Tempur Sealy International Foundation contributed financial aid to support Ukrainian children and families. Our European operations have donated over 1,000 bedding products to refugee centers with more on its way. In terms of the impact to our business, while we do not have any operations in Ukraine or Russia, the war has introduced near-term risk to our international supply chain, which has been largely mitigated at this point. It is also having a ripple effect on consumer confidence in Europe, which has negatively impacted our trends in the region. To give you an idea of the impact, our order trends were running up approximately 30% in Europe in the eight weeks pre-invasion and turned negative in the eight weeks since the invasion. Given the uncertainty around the evolution of this conflict, we expect these pressures on the European market to continue in the near-term. As previously announced, given the circumstances, we’ve elected to postpone the launch of our new Tempur International product line that was planned for 2022. We now expect to begin to launch in the first quarter of 2023 to allow time for the international retail market to normalize. Consequently, this will be moving $20 million of associated costs into 2023. Additionally, we’ll have to move expected sales growth from the new product line out a few quarters. Turning to the U.S., U.S. consumer confidence has been shaken by the rampant inflation and geopolitical uncertainty in recent months. Yet, we also see signs in the market that point to resilience in the U.S. consumer such as record wage gains, low unemployment, and a projected 3% domestic GDP growth in 2022, despite significant pressures from COVID and supply chain challenges. We anticipate that once we work through the immediate shock to the recent macro developments and we lap the impact of stimulus in the prior year, we should see a modest improvement in the U.S. retail market, most likely in the back half of 2022. The third external factor is commodity inflation. As we’ve previously discussed, input costs for the entire bedding industry have been rising over the last two years. In response, we’ve been able to neutralize the dollar impact of these commodity increases through multiple pricing actions. Last time we reported, we had fully passed on price inflation; subsequent to that, another wave of inflation driven by oil and fuel supply issues generally caused by the Ukrainian war hit the market. Our latest outlook for 2022 commodity cost has increased, so we have announced another round of pricing actions for both our domestic and our international markets that will take effect in the second half of 2022. We expect these additional pricing actions will offset the expected incremental inflation headwinds, resulting in normal profitability on a dollar basis once fully rolled out across the markets worldwide. Turning to COVID. COVID continues to impact operations. Although cases have been decreasing globally, benefiting our operations in many of the markets we serve, recent flare ups of variants in China have negatively impacted our wholly-owned and joint venture operations that operate in Asia. As a ballpark number, we expect a $10 million EBITDA headwind in the second quarter as a result of this most recent COVID outbreak. Lastly, I want to update you on the ongoing supply chain disruptions. The global supply chain is in better shape overall this year than it was this time last year, although it certainly continues to have some challenges. For example, the recent challenges in China have materially impacted the supply chain in East Asia. Though it has had minimal impact on our North American and European supply chains, as most of our supplies come from the U.S. and Europe, we do source adjustable bases from East Asian suppliers, but we’ve largely mitigated that risk in the near-term as we are well stocked for 2022. As I mentioned, our supply chain has improved, although we are still experiencing some plant inefficiencies. It may take a few more quarters for the plants' operations to normalize. We’ve taken many actions to secure our global supply chain against future disruptions, including diversifying our supplier base, improving vendor and customer communications and strengthening our inventory positions of both Tempur finished goods and adjustable bases. The team is focused on driving long-term growth of the company through delivering on key initiatives, which we believe will facilitate future EPS growth. These include: first, develop the highest quality bedding products in all the markets that we serve; second, promote worldwide brands with compelling marketing; third, optimize our growing omni-channel distribution platform; and fourth, drive increased EPS and prudent deployment of capital. Over the last few years, our long-term initiatives led us to diversify our brands, products, channels, markets and technologies to meet the needs of more consumers, wherever and however they want to shop. This diversification of our business has significantly broadened our addressable market worldwide, securing our position in the global bedding industry. The same initiatives are driving the building blocks to our next stage of growth. Each building block includes investing in innovation to meet consumer needs; seeding Stearns & Foster to be our next $1 billion brand; growing our global wholesale business through existing and third-party partnerships; investing in our operations to position our business for significant growth; expanding our direct-to-consumer business worldwide through growing our e-commerce and company-owned store presence; increasing our international total addressable market through launching all new Tempur products in Europe and Asia; and executing on our capital allocation strategy. With that, I’ll turn the call over to Bhaskar.

Bhaskar Rao, Executive Vice President and Chief Financial Officer

Thank you, Scott. I would like to highlight a couple of items as compared to the prior year. Sales increased 19% to $1.2 billion. And adjusted earnings per share increased 8% to $0.69. As expected, we neutralized the dollar impact of commodities through our pricing actions in the first quarter. This affected our gross margin as sales increased with no change in gross profit dollars. This accounts for 260 basis points of the year-over-year change in consolidated gross margins for the quarter. Turning to North American results. Net sales increased 5% in the first quarter. On a reported basis, the wholesale channel increased 6% and the direct channel increased 2%. The direct channel increased 78% on a two-year stack basis, highlighting its strength in a particularly challenging prior year comp. North American gross profit margin declined 340 basis points to 37.8%. This decline was driven by the pricing benefit to sales without a change in gross profit and operational inefficiencies related to supply chain disruptions. These factors were partially offset by favorable mix. As Scott mentioned, we implemented multiple price increases to offset the highly inflationary environment, and recently announced additional pricing actions across our domestic and international markets. Global inflation has recently surged and we expect approximately $15 million of incremental commodity headwinds in the second quarter. However, we expect that the second quarter impact will be neutralized on a dollar basis for the full year, once the most recent pricing actions take effect in the back half of 2022. North American first quarter operating margin was 16.7%, a decline of 290 basis points as compared to the prior year. This was driven by the decline in gross margin, partially offset by operating expense leverage. Now turning to international. Net sales increased 92% on a reported basis, primarily driven by the acquisition of Dreams. On a constant currency basis, international sales increased 99% as we experienced a $10 million headwind this quarter from unfavorable foreign exchange rates. As compared to the prior year, our international gross margin declined to 55.3%. This decline was driven by the acquisition of Dreams and the pricing benefit to sales without a change in gross profit. As a multi-branded retailer, Dreams sells a variety of product across a range of price points. Their margin profile is lower than our historical international margins. This is driving the major change in year-over-year margins internationally. Excluding Dreams, the underlying margin performance was in line with our expectations across both Europe and Asia Pac. Our international operating margin declined to 21.7%. This was driven by the decline in gross margin and operating expense deleverage as cost in the current year have returned to a more normalized level. Now moving to the balance sheet and cash flow items. We generated first quarter operating cash of $86 million. Our inventory days extended throughout the quarter as we continue to build safety stock to be able to better support our customers across our global operations. At the end of the first quarter, consolidated debt less cash was $2.6 billion and our leverage ratio under our credit facility was 2.2 times. Our leverage ratio is down nearly one turn from where it was two years ago, highlighting the flexibility of the business model. Our highly variable cost structure gives us the ability to swiftly adapt to changing conditions. Our fortified balance sheet and robust cash flow attributes give us the optionality to continue to invest in the business to drive long-term growth even throughout challenging periods. Now turning to 2022 guidance. The company has updated its earnings guidance and now expects adjusted EPS to be in the range of $3.20 to $3.40 in 2022, which includes the impact of the acquisition of Dreams and our share repurchase program. Our EPS expectation contemplates the expected benefit from year-over-year sales growth of at least 10% driven by the pricing actions we have taken to neutralize the commodity cost inflation and the acquisition of Dreams. We expect that 2022 will be a heavy investment year for the business, which will lay the groundwork for future growth. First, we expect to make thoughtful marketing investments to drive long-term brand awareness. Our brands are among the most highly recognized, recommended, and desired in the industry and we plan to make record investments of more than $500 million in advertising this year and will also be up on a rate basis year-over-year as we continue to invest. Second, we expect to continue to invest in our operations to deliver the best service for our customers. Our global supply chain has been improving. Although we are still managing through some plant inefficiencies, as we strive to deliver high quality product to the market, these investments to secure our supply chain and retain our valuable employees are expenses that otherwise would naturally have flexed with sales. They equip us to fully support our customers while managing through supply chain disruptions and a tight labor market. We experienced $10 million of incremental operational inefficiencies in the first quarter and anticipate a similar amount in the second quarter. As Scott mentioned, there are still uncertainties related to the war in Ukraine, rampant inflation, and the resurgence of COVID-19 variants. We expect these factors to challenge our second quarter sales and EPS versus our prior expectations. For the second quarter, we anticipate sales growth of at least 10% with EPS declining year-over-year. Internally, we are targeting that on a two-year basis, second quarter sales will grow nearly 100% and EPS will grow approximately 200% over 2020. We would expect the third and fourth quarters to be up year-on-year for sales and EPS as pricing actions go into effect and the U.S. retail market stabilizes a bit. Lastly, I would like to flag a few modeling items. For the full year 2022, we currently expect total CapEx to be between $250 million and $280 million, which includes maintenance CapEx of $100 million and investments in our U.S. manufacturing capacity, including the new foam flooring plant. D&A of about $200 million, interest expense of $90 million, a tax rate of about 25%, and a diluted share count of 183 million shares, which includes our assumption to repurchase at least 10% of our shares outstanding. With that operator, would you please open up the call for questions?

Operator, Operator

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

Bobby Griffin, Analyst (Raymond James)

Good morning, buddy. Thanks for taking my questions.

Scott Thompson, Chairman, President and CEO

Hey, Bobby.

Bobby Griffin, Analyst (Raymond James)

Hey, thank you. Scott, Bhaskar, I was just hoping — can we unpack the inventory numbers a little bit? It’s up pretty big year-over-year and on a two-year basis as well. Just a little concerned given that the channel probably has a little extra inventory in it and then you’re passing through another price increase. Does that give you any type of concern? And then can you maybe just unpack what some of the big drivers are of the inventory increase? I know you got product launches coming here in the U.S. too, so.

Scott Thompson, Chairman, President and CEO

I’ll let Bhaskar clean me up a little bit. First off, you have to realize prices have gone up. So each inventory item is going to cost more than it did last year. We certainly are fully stocked for Tempur, because as you remember, we were short on Tempur last year. And so we’ve got more safety stock in Tempur to make sure that we can keep our order-to-delivery times in line with our expectations and our retailers' expectations. And then obviously, there’s some challenges in China. And so we made a very good decision early on to increase our safety stock on adjustable bases by a good bit to protect us from any disruption in China. And that’s ended up being a real good call. I think those are the main items, because obviously Sealy is built-to-order. So what you’re looking for is the price increase on the items, safety stock in Tempur and a lot of safety stock in adjustable bases. I think from our position, I’m not worried about the inventory levels at all at the current level going into the busy season, which has — I should point out.

Operator, Operator

And our next question will come from the line of Peter Keith from Piper Sandler. Your line is open.

Peter Keith, Analyst (Piper Sandler)

Hey, thanks. Good morning, everyone. So with the revised revenue outlook, there’s kind of a lot of moving pieces with some pricing and Dreams. I guess, at this point, just to help frame it up for us, what are you guys expecting from an overall organic demand standpoint that’s baked into that revenue outlook?

Bhaskar Rao, Executive Vice President and Chief Financial Officer

Absolutely. So just to go through the pieces, very good call out as it relates to Dreams, that should be a tailwind for us as well as from a pricing standpoint. Think about that as, let’s call that, mid-single-digits from both of those particular items. As you think about organic, what we would anticipate is that the underlying business, we would see a bit of growth outside of those big drivers.

Scott Thompson, Chairman, President and CEO

And that growth’s going to be driven by price. We would expect the units probably be down in North America 3% to 5%. It would be kind of in a range of a guess. But that’s basically baked in.

Operator, Operator

Our next question comes from the line of Seth Basham from Wedbush Securities. Your line is open.

Seth Basham, Analyst (Wedbush Securities)

Thanks a lot, and good morning. Can you just contextualize the first quarter and how it finished up? You guys beat your updated guidance on the top line pretty handily. I want to understand a little bit better what happened there. And then secondly, as a follow-up question, can you give us a sense of why you’re not going to flex out your costs lower given the demand environment that remains depressed and uncertain?

Scott Thompson, Chairman, President and CEO

Sure. Let me work on that a little bit. First of all, on the sales, we were strong in the first half of the quarter and got weaker in the second half of the quarter after the Ukrainian invasion. There was a clear change in the marketplace. So we did a pre-release related to sales. Look, the books weren’t closed at the time. So you never know exactly what sales are going to be and I’m sure as hell not going to miss a pre-release. So we’ll call that the majority of the outperformance from that standpoint. And then you talked about whether or not we should flex out our cost structure. The way I would say it is I think on the last earnings call, I said, the company is positioned from an offensive position. And we continue to be on an offensive footing, whether it be in advertising, new product launches, capacity, new ERP system, growing our retail store base. Clearly, the market has decelerated some and we had — March was not particularly strong and April is the toughest comp of the year. And April has not started off very well for the industry. Good news, April is also the smallest part of the quarter. And what’s key really is the holiday period. When we look at the overall trends, whether it be GDP, whether it be unemployment and other things that we look at, it still looks like to us that the world looks pretty good, not as robust as it was, but certainly not on a recessionary footing. If we were to see different trends, we would pivot and you’ve known us for quite a while. You saw how we pivoted when COVID hit. We can pivot pretty fast in a cost structure that’s 70% variable. But currently we are taking what we believe to be a good amount of share both in sales and certainly in profits and we’re continuing to be on an offensive footing.

Operator, Operator

Next question comes to line of Atul Maheswari of UBS. Your line is open.

Atul Maheswari, Analyst (UBS)

Good morning. Thanks a lot for taking my question. Scott and Bhaskar, your guidance implies mid to high single digit revenue growth for the back half of the year. Can you maybe provide some more color on how this breaks out in North America and international outside of Dreams? And then for you to achieve this guidance, are you assuming that the macro materially improves in the back half or you can achieve this outlook if the macro remains where it is?

Bhaskar Rao, Executive Vice President and Chief Financial Officer

Sure. So as we think about it from a growth standpoint — very good call out — as it relates to Dreams, that will be a tailwind, and pricing will also be a tailwind. Think about that as mid-single-digits from those items. As you think about organic, our expectation would be that North America would continue to grow, really driven by price and related actions. From an international standpoint, what’s contemplated is that the Ukraine situation will continue for the balance of the year with the international growth coming primarily from Dreams, specifically, as we get into the back half of the year.

Scott Thompson, Chairman, President and CEO

Yes. I mean, it depends on what country and how you want to look at it, but you just take North America. What we said was we’re thinking 3% to 5% unit decline. That’s not a very good bedding market. If you compare that to like the worst bedding market in history, 2008 was probably 7% to 10% unit decline. So I guess, what I’d tell you is our read is that the retail market was surprised, stunned, shocked by the Ukrainian invasion and resulting increase in oil prices and consumer confidence has certainly fallen. I think we’re like 107 today. I think we were more like 115 at the beginning of the year. Certainly sentiment has come down, but it also doesn’t look like a recession. So we think this is a kind of shock to the system. And as long as you don’t have another shock to the system, which would be the expansion of the Ukrainian war or another round of oil price increases, we think people get used to some of this and it stabilizes. If we go specifically to Europe, which is obviously one of the more challenged areas, as I said in the prepared remarks, we were running up 30% in orders pre-invasion. After invasion, those orders turned negative. As we sit here today, the orders are pretty much back to flat to up 1% or 2%. I am pointing out the rebound once things semi-normalize in a different world. Not different than what we’ve seen in the COVID situation. COVID hits, it’s pretty bad for a little while. Then people deal with their environment and things begin to normalize. So I would say to hit our guidance, we’re expecting no more surprises of the type that we’ve had. And we’re also not expecting anything to get a whole lot better than where we’re sitting today.

Operator, Operator

Our next question is comes from the line of Keith Hughes from Truist.

Keith Hughes, Analyst (Truist)

Thank you. Just to dig in the quarter a little bit more. Can you give us some more detail on how much drag was in the quarter and what overall worldwide pricing was up year-over-year?

Bhaskar Rao, Executive Vice President and Chief Financial Officer

Absolutely. So when you think about Dreams, initially, when we came out, we indicated it was about $400 million on an annual run-rate basis. And what I would — and the way that we think about that is that it has performed ahead of our expectations. So a bit ahead of the $450 million. When you think about global pricing, we did call out that it was about, let’s call it, 250 to 260 basis points impact on gross margin. When you reverse engineer that math, that would imply about $70 million from a price standpoint globally.

Scott Thompson, Chairman, President and CEO

And I think what I’d add in there is, look, our capital allocation program has certainly enhanced EPS this quarter. And that’s part of our core business: allocating capital. Because we’re allocating generally operating cash flow, we think of that as kind of core operations.

Operator, Operator

Our next question comes from the line of Brad Thomas at KeyBanc Capital Markets. Your line is open.

Brad Thomas, Analyst (KeyBanc Capital Markets)

Hi, thanks. Scott, I was wondering if you could talk a little bit more about what you’re seeing in terms of the promotional landscape and how you’re thinking about promotions and advertising as we go through the year. Do you get more aggressive? Do you need to get more aggressive because of the backdrop? And then Bhaskar, if I could just ask the question on the second quarter guidance, I think the math, if I’m doing it right, implies earnings around the $0.50 level. Just any help on making sure I’ve done that math right and how the margins may play out in 2Q. Thanks.

Scott Thompson, Chairman, President and CEO

Yes, I’ll talk about promotions and let Bhaskar go through the second part of the question. First of all, you remember from previous calls, we didn’t pull back on promotions, even though demand was robust. And so from a manufacturing standpoint, we plan to be on the same promotional calendar as we had last year, and don’t expect any change there. We advertised last year. This year, we’re going to advertise. Now there’s other promotions, which I’ll call retailer promotions. I do think the environment at the retail level was less promotional last year than maybe in previous years. The retailers are getting back in the game from a promotion standpoint and from an advertising standpoint; some retailers last year pulled back on their advertising and, in fact, some retailers didn’t earn their full co-op because they pulled back on the advertising. I think one of the things a slower first quarter has taught the retailers is they’ve got to get back in the game. They’ve got to be a little bit more promotional. They’ve got to spend the advertising dollars. That’s what we’re seeing them doing. That’s what they’re working on and what the holiday period coming up will be critical to understanding the full year. But we’ve seen so far this year that during holiday periods, there is good growth year-over-year. And during the valleys, when you’re not in a holiday period, you see negative same-store growth.

Bhaskar Rao, Executive Vice President and Chief Financial Officer

Brad, good call-out on the quarter. So the way that we were thinking about that from a math standpoint, it was closer to $0.60. Let’s call it a bit in and around $0.60. When you think about that specifically, we do expect that to be the most challenging quarter on a full-year EPS basis. The big drivers there are that we did announce another price increase; however, that does not go into effect until the back half of the year. So we will be exposed on commodities by about $15 million in the second quarter. In addition, we’ve got the challenges happening specifically over in China with the COVID variant. So there’s a headwind resulting from that as well. Then as Scott mentioned, we’re going to continue to invest and come out of this stronger than our competition. So we have the advertising investments that will happen throughout the year, including in the second quarter as well.

Operator, Operator

Our next question comes from the line of Curtis Nagle from Bank of America. You may begin.

Curtis Nagle, Analyst (Bank of America)

Good morning. Just a quick one on 1Q. Scott, Bhaskar, could you talk to March performance relative to the other two months in the quarter? What was it down or could you say how much at least directionally and just a quick follow-up on the Stearns & Foster website launch, really interesting. Just curious how that’s trending so far and should we expect a Sealy transactional website launch as well later this year?

Scott Thompson, Chairman, President and CEO

Sure. In the first quarter business was solid in January and February. Post-invasion, business was very soft is the way I would tone it. Early April is soft with Europe having some recovery here recently. Stearns & Foster is certainly a highlight; Stearns & Foster’s growth rate in the first quarter was the highest of any of the brands as I recall and we did just launch the Stearns & Foster direct program website. It’s too early to have any real report, but I think our early investments in Stearns & Foster are showing progress and we feel really good about it and we’re going to continue to lean in. What I’m hearing from retailers is we’ve got good support from them, so there could be more to report throughout the year on Stearns & Foster.

Operator, Operator

Our next question comes from the line of Laura Champine from Loop Capital. Your line is open.

Laura Champine, Analyst (Loop Capital)

Thanks for taking my question. It’s on the outlook for at least 10% growth this year. How much of that do you contemplate coming from price and mix?

Scott Thompson, Chairman, President and CEO

A lot. A lot. If you look at the price increases, that’s nearly double digits itself for like-for-like. And then because you’re also getting a bit more higher end rather than lower end, you’re getting some mix benefit. Then you’ve got some Dreams contribution, certainly going in there. So if you were to strip out price increases and strip out acquisitions and capital allocation impacts, you’d see a pretty different underlying picture. But we’re not ashamed of that. That’s part of the strength of the business: the broad diversity and capital allocation program and the free cash flow the business generates allows you to continue to stay on your business plan and plow right through these softer periods.

Bhaskar Rao, Executive Vice President and Chief Financial Officer

Right. And Laura, the way to think about that from a pricing standpoint when you put it all together globally is think about price being mid-single-digits and Dreams being mid-single-digits. We still have other growth drivers as Scott said, investing in the business from a DTC standpoint, OEM, et cetera.

Scott Thompson, Chairman, President and CEO

And although we don’t have other people’s numbers yet, all indications are that in the fourth quarter we took a good bit of share. I suspect when we see first quarter numbers broadly, we took even more share in the first quarter. From a competitiveness and strategic standpoint, we really like where we’re positioned and think we can continue to get stronger competitively.

Operator, Operator

Our next question comes from the line of Robert Drbul from Guggenheim. Your line is open.

Robert Drbul, Analyst (Guggenheim)

Hi, good morning. Just a couple of quick questions. First, Scott, on the industry at retail inventory levels, can you just give us a little more color around any sequential changes or improvement that you saw sort of Q4, Q1 and into Q2? And then Bhaskar, on the marketing side, I think you had said previously $550 million in marketing, and I think you said this morning at least $500 — is the $50 million that’s different sort of a bit more discretionary as you think about the rest of the year?

Bhaskar Rao, Executive Vice President and Chief Financial Officer

Scott, if it’s okay, I’ll deal with the advertising. One of the attributes of our business and the strength of the business model is the natural flex of it. So as you think about advertising, there’s a couple of components. One is the cooperative advertising where we provide dollars to our retailers to advertise on our behalf. So as the revenue flexes, what you’re going to see is that the cooperative advertising flexes as well. In addition to that is the direct advertising, national advertising. We believe that’s a good driver from a growth standpoint over the long-term. So what you’re seeing is $550 million is what we were previously thinking about. Now given our latest expectations, advertising is flexing primarily from co-op and a bit through our direct advertising.

Scott Thompson, Chairman, President and CEO

Got it. Look, we had some unusual activity last year in inventory and we called that out on some calls. I would say that we think it got normalized by the end of January. I don’t think we really have a lot to talk about going forward on inventory. Other than what I can tell you, look, it’s been a little slower, so the retailers do have a little bit more inventory, but it’s not the same kind of activity we had last year. I don’t think it’s significant to the numbers. We are feeling some pressure from furniture stores where warehouse space is getting challenged as they have a lot of furniture product that was on the water headed to North America and it needs a place because furniture sales have slowed down significantly. That’s squeezing some retailers' warehouse space, which is causing some pressure to lower their bedding inventory. But again, I would consider those almost normal business hiccups — a little bit of a hiccup here, but not significant to the level you’re thinking of when you’re thinking about earnings guidance and those kinds of things.

Operator, Operator

Our next question comes from the line of William Reuter from Bank of America. Your line is open.

William Reuter, Analyst (Bank of America)

Hi, my question’s on M&A. Given that the environment’s pretty uncertain, does this leave you more cautious on potential transactions or are there smaller targets that may be having more challenges contending with inflation so there may be better valuations and as a result there could be more transactions?

Scott Thompson, Chairman, President and CEO

Well, there have certainly been valuation changes both in the public markets and versus risk-free rates. Pricing for acquisitions has generally moved down; it’s become a little bit more challenging. Especially for companies tied to online customer acquisition, the changes from Apple and Google have been a game changer for cost of customer acquisition. Their growth rates and cost structures have had to change quite a bit. The market changes up and down. From our perspective, nothing’s really changed. We continue to look at deals and price deals. We’re in the market. Everybody knows that if it’s in the bedding industry, anywhere in the world, we want to look at it. If we think that company can be bought at a reasonable price and can make us stronger and more competitive, we’re not hesitant to transact. One reason we’ve kept leverage low and our cash flows are very strong is so that if we don’t invest in other companies, we’ll buy back more stock. We continue to do that trade-off. What has more impact on the acquisition market is our stock is trading at a lower multiple than normal; when you do an acquisition, you have to consider your alternative use of capital and buybacks at a low multiple are a tough comp when you’re looking at acquisitions.

Operator, Operator

Our next question comes from the line of Jonathan Matuszewski from Jefferies. Your line is open.

Jonathan Matuszewski, Analyst (Jefferies)

Great. Thanks for taking my question. Is there a way for you to think about the impact of the delayed Tempur International product launch on the guide moving from 15% to 20% down to 10%?

Scott Thompson, Chairman, President and CEO

Sure. From my perspective, the Tempur International launch was going to cost us quite a bit of money and it was going to be a drag on this year’s EBITDA. So moving it to 2023 normally would be a benefit to this year. At the same time, we have the Ukrainian war going on and that’s a big negative, which takes a lot of the benefit or almost all of the benefit away from what would have otherwise been a positive for this year’s EBITDA and earnings guidance. We kicked the launch to next year where we’ll have some of those costs and we’ll also have the increased sales in 2023.

Bhaskar Rao, Executive Vice President and Chief Financial Officer

That’s exactly fair in that.

Operator, Operator

Our next question will come from the line of Bobby Griffin from Raymond James. Your line is open.

Bobby Griffin, Analyst (Raymond James)

Hey guys, thanks for letting me give one more in here. I just wanted to, Scott and Bhaskar, talk about the second half. You guys called out for earnings to be up year-over-year. I think some of that would be share count — probably be worth $0.20 or so versus last year, maybe a month of Dreams — but that would kind of put you still on an apples-to-apples basis of $2 this half versus $2 last half last year. What’s some of the other drivers that give you confidence in that? I mean the inflationary environment’s worse this year, the underlying macro environment probably is arguably worse for retail. What are you guys assuming when you unpack 2H versus 2H?

Scott Thompson, Chairman, President and CEO

Well, one is easier comps to start with. That’s part of it. Part of the numbers you have is that the first half comps are really extraordinary comps that you’re trying to comp off of. We’re going to have some additional retail stores, you’ll have the pricing increases in, we had negative commodity expense we were picking up last year because we hadn’t gotten prices in, and we’ve got new product coming out — the Sealy product that’s coming out — and we continue to take share in the marketplace.

Bhaskar Rao, Executive Vice President and Chief Financial Officer

Right. So Bobby, the way that I think about that is in the second quarter there’s a confluence of events: what’s happening in China with basically Shanghai being shut down is going to be about a $10 million drag from an EBITDA standpoint, and that’s not exclusively China but broader Asia. As we go into the back half I don’t think we’re contemplating that Shanghai situation or China situation will persist. So that should be a help for us as we get into the back half. In addition, the lapping of price in the back half should be a tailwind as well. We’re not anticipating a significant improvement, as Scott mentioned, but some stabilization in consumer behavior should be a help for us as well.

Scott Thompson, Chairman, President and CEO

Yes. And I would highlight that we are assuming China will be open for business by the third quarter, so we’ve got effectively one quarter of China in lockdown, and that’s certainly helpful in the back half.

Operator, Operator

Thank you. And I’m not showing any further questions in the queue. I’ll turn the call back over to Scott Thompson for any closing remarks.

Scott Thompson, Chairman, President and CEO

Thank you, operator. For our over 12,000 employees around the world, thank you for what you do every day to make the company successful. 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. Thank you.

Operator, Operator

This concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.