Good morning ladies and gentlemen. Thank you for standing by and welcome to the Tempur Sealy’s Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker host for today, Lauren Avritt, Investor Relations Manager. Please go ahead.

Thank you, operator. Good morning everyone, and thank you for participating in today's call. My name is Lauren Avritt, the Investor Relations Manager. Before getting started, we want to extend our congratulations and best wishes to Aubrey, who is currently on maternity leave. Joining me today are Scott Thompson, Chairman, President and CEO; and Bhaskar Rao, Executive Vice President and Chief Financial Officer. After prepared remarks, we will open the call for Q&A. This call includes forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve uncertainties and actual results may differ materially, due to a variety of factors that could adversely affect the company's business. These factors are discussed in the company's SEC filings, including its annual reports on Form 10-K and quarterly reports on Form 10-Q under the heading Special Note Regarding Forward-Looking Statements and Risk Factors. Any forward-looking statement speaks only as of the date on which it is made. The company undertakes no obligation to update any forward-looking statements. This morning's commentary will also include non-GAAP financial information. Reconciliations of this non-GAAP financial information can be found in the accompanying press release, which has been posted on the company's investor website at investor.tempursealy.com and filed with the SEC. Our comments will supplement the detailed information provided in the release. And now, with that introduction, it is my pleasure to turn the call over to Scott.

Thank you, Lauren. Good morning, everyone, and thank you for joining us on our 2022 fourth quarter and full earnings call. I'll begin with some highlights from our fourth quarter, and then I will turn to discuss how we delivered on our long-term initiatives. Then Bhaskar will review our fourth quarter financial performance in more detail and discuss our 2022 guidance. Finally, I'll close with a few comments on how we view the current market environment, then we will open the call up for Q&A. In the fourth quarter of 2022, net sales were approximately 1.2 billion and adjusted EPS was $0.54. This represents a 36% growth in sales and a 59% growth in adjusted EPS as compared to the fourth quarter of 2019, a pre-COVID period. Compared to the same period last year, this represents a 13% decline in sales and a 39% decline in adjusted EPS as we navigated a weak overall market and experienced robust inflation. However, we continue to outperform the broader industry by a good bit and enhanced our competitive position. Consistent with our previous quarter, we observed a slight increase in resilience of our premium customers with sales of value focused customers a bit more subdued. I'd like to begin by highlighting some of the key wins for the quarter. First, as we discussed last quarter, we successfully kicked-off the North America launch of our new collection of Stearns & Foster products, which is designed to further distinguish our high-end traditional Innerspring brand from the numerous mid-market Innerspring brands in marketplace. Our third-party retail partners have demonstrated their enthusiasm for both the new Stearns & Foster product portfolio and our commitment to supporting the line-up through compelling national brand marketing. This excitement for the new product is reflected in robust year-over-year order trends. In…

Thank you, Scott. In the fourth quarter of 2022, consolidated sales were approximately $1.2 billion and adjusted earnings per share was $0.54. We had $10 million of pro forma adjustments this quarter, all of which are consistent with the terms of our senior credit facility. Turning to North American results. Net sales decreased 12% in the fourth quarter. On a reported basis, the wholesale channel decreased 13% and the direct channel decreased 5%. Early indications are that we outperformed the market. When looking at our sales growth, please note our fourth quarter of 2021 was significantly benefited by a Tempur-Pedic backlog reduction of $100 million. North American adjusted gross profit margin declined to 37.9%, primarily driven by operational headwinds and mix related to the prior year Tempur-Pedic backlog reduction, partially offset by pricing actions. The backlog reduction in the prior year accounted for approximately half of the margin decline. North American adjusted operating margin declined to 15.1%, driven by the decline in gross margin and operating expense deleverage. Now, turning to international. Net sales decreased 14% on a reported basis. On a constant currency basis, international sales decreased only 2% as we experienced a $36 million headwind in the quarter from unfavorable foreign exchange rates. Foreign currency remains volatile. Though we have seen favorable trends since the fourth quarter, our current expectation for 2023 contemplates a modest FX headwind to both sales and adjusted EBITDA. As compared to the prior year, our international gross margin improved to 55.2%, driven by pricing actions to offset commodity inflation, partially offset by mix. Our international adjusted operating margin improved to 20.7%, driven by the improvement in gross margin and operating expense leverage, partially offset by the impact of COVID on our joint venture operations in Asia. Turning to commodities, which we think about…

Thank you, Bhaskar. Nice job. Before opening the call up for Q&A, I take a moment and share some thoughts about our expectations for the macroeconomic backdrop in 2023. In the U.S., we’ve aligned our outlook with a consensus GDP forecast of economists at major banks. And we're assuming that we'll encounter a mild recessionary operating backdrop in 2023. We see growth opportunities in Asia this year, led by less volatile environment in China. In Europe, although we see consumers exhibiting resilience in the phase of the ongoing war in the Ukraine and elevated inflation, we expect a mild recession. Turning specifically to our U.S. bedding industry expectations. Last year, the U.S. bedding industry experienced its [indiscernible] decline in history. We do not have complete information yet, but we would expect U.S. produced units were down an unprecedented 20% to 25%, compared to 2021. Our 2023 guidance is grounded in a stable U.S. bedding environment with units consistent to the prior year with the back half stronger than the first half. We are currently thinking the U.S. bedding industry units will return to growth in 2024. Overall, our 2023 outlook targets growth on both the top and bottom line. This contemplates our continued outperformance across the bedding industry worldwide, driven by our new products, strong brands, and omnichannel initiatives. Our strong competitive position continues to provide us with significant long-term growth opportunities. And with that, I'll open up the call for questions. Operator?

Thank you. [Operator Instructions] And our first question coming from the line of Susan Maklari from Goldman Sachs. Your line is open.

Thank you. Good morning, everyone.

Good morning.

My question is around, you know thinking about the state of the consumer, you gave a lot of good details on how you're thinking about the various product lines and the brands and how they're performing. As you [look out] [ph], how are you thinking about the pushes in the polls on the different income segments and the ways that the consumer may respond this year to the macro?

Sure. Thanks for your question. I'm going to focus on the U.S. That's obviously our biggest segment and to go around the world would take the entire call. So, focusing on the U.S. consumer, couple of observations. One, we're seeing high-end consumer continuing to hang in there. Low-end consumer has been where a lot of the deterioration has been. I think when we look at it, call the units down 20%, 25% this year, that is well down from where we historically have been. And is very close to actually [trough] [ph] unit production in North America. We're probably 5% or 6% off the trough and that would be 2009-ish. [That's right] [ph]. I think – I mean, [Bhaskar] [ph], so, clearly, we've taken a downturn, but store traffic continues to be a little bit soft. I think it’s what the retailers would tell you, but people show up [buy] [ph]. We're seeing, I guess, a little bit fewer people financing it. I think it's, I would say from a consumer standpoint. So, you heard our outlook. We're basically looking for 2023 to be stable, which again is almost a trough unit production in the U.S. And assume that by 2024 the unit growth will come back to the industry.

Thank you. One moment for our next question. And our next question coming from the line of Seth Basham with Wedbush. Your line is open.

Thanks a lot and good morning. Please give us a little bit more color on the bridge to your margin guide for 2023. You talked about a few components, but of those launch costs, advertising, etcetera, can you tell us what you think that the biggest drivers of pressure are? And then, as it relates to commodities, again, how much do you expect to benefit there?

Absolutely. So, when I think about EBITDA margins and as I go into 2023, we are anticipating some improvement on a year-over-year basis. To put together those building blocks, the way I think about it in no particular order, is I would think of operations. We've made some investments in 2022. Our expectation is that as that supply chain continues to stabilize, is that will turn into a tailwind for us in 2023 as the year plays out. In addition to that, as we have pricing actions, the last action we put in place is in June of 2022. We will get the wraparound benefit of that in 2023. As you mentioned, we do have [4 miles] [ph], very excited about what we have going on. We have the Breeze coming out in the second quarter. We're wrapping up Stearns in the first quarter. We have [Cube] [ph] that's happening – sorry, the international launch that's happening all throughout 2023. However, the cost associated with that will be the floor model discount, let's call that principally in the second quarter as Breeze gets out there. And then finally, all throughout the year, we will be investing in advertising as we mentioned on the call over $500 million. You add all those [indiscernible] and then fundamentally is that we have initiatives that are going to grow the top line. So, of our mid-single-digit growth is that half will come from those initiatives and with the balance coming from four models, as well as a bit of the pricing actions.

Thank you. And our next question coming from the line of Curtis Nagle with Bank of America. Your line is open.

Good morning. Thanks very much. Kind of my last question in terms of just breaking out the sales guidance. I think we're a little better than expected, so that's good. Maybe just dig a little more into the U.S., Scott over the past, I don't know, 3 months or 4 months, we've been talking about stabilization, right, in the U.S. which sort of started in 4Q. Through where we are right now has that continued? Could we talk a little bit in terms of just how the U.S. is trending at the moment and how you're feeling about that?

Well, I mean, as of 8:00 A.M., I can tell you how we're doing. Look, it's very stable. I mean, it feels like from a trend standpoint we're getting off, we'll call the COVID trend of people shopping more during the week than they used to and less on the weekend. It's moved back to more traditional shopping with more shopping on the weekend than during the week. One of the other trends that we saw during COVID was that the holiday periods were not quite as robust and the business was steadier through the calendar. And now we're going back to what I think is more of the historical pattern where the trough is a real trough and the peaks are real peaks, i.e. the holiday periods become critical for the industry. But all that would be, what I would call normal, getting back stable. And look, I think our volumes – we haven't seen anything since year-end that would make us think the industry is anything, but at least stable. And I'll add that I haven't seen anything that makes me think that we won't continue to take a reasonable amount of share in 2023.

Thank you. And our next question coming from the line of Bobby Griffin from Raymond James. Your line is open.

Good morning, guys. Thank you for taking my questions. Scott, in your prepared remarks, you talked a little bit about an opportunity to sell some products maybe or some retailers that don't have as much share, I think you guys do have a test going on with Sam's with maybe some potential to launch that in store. So, can you maybe update us on how that initial rollout is going and some of the timing around that? And is anything assumed in the guidance for picking up some new swap placements there?

Yes, we are in Sam's online. You can see us online. And we're working very closely with Sam's and other customers to fill their needs. I don't really have an update for you and we generally don’t talk a lot about specific individual customers, but I would say our relationship with Sam’s is good and expanding. Do we have anything specific in our guidance? No. I would say that we have lots of opportunities and sales team have goals, but we certainly don't start putting that, kind of step in a forecast until we would have a firm deal.

Thank you. And our next question coming from the line of Atul Maheswari from UBS. Your line is open.

Good morning. Thanks a lot for taking my question and thanks for all the great color on the call. Starting, Bhaskar, a question on the sales guidance. So, up 5% or rather up mid-single-digits, if there were a scenario wherein sales were to fall short, say, sales were flattish or low single digits, do you have enough cushion in the P&L to maybe pair back on expenses which still achieve the EPS guidance of [260 to 280] [ph]?

Well, there's really – there's embedded quite a bit in that question. When you know our variable cost structure, which we have, Bhaskar and the variable cost structure…

[70/30] [ph].

[70/30] [ph]. So, we have the ability to call it right-size the organization relatively quickly if there's a downturn. I think the real issue though is, would you pull all those levers, you certainly would pull levers if you thought you were headed towards several quarters of recessionary activity. You may or may not pull the levers though, if you think you've got a very short-term downturn in business because within the organization around is complicated and you might take as an opportunity not to pull those levers. So, I can't guarantee what we would do. I think it might be interesting to know that as an example in 2022, if you look at our advertising expenses, our advertising expenses in North America on a dollar basis is up and obviously as a percentage because our sales are down is up. And you might wonder why didn't we pull that lever? We could have pulled the lever and pulled back on advertising in the latter part of 2022. It had a higher EPS number and maybe make somebody happy on the street. I don't know, but we run the business for the long-term. And we've taken the opportunity to continue to support our brands. So, it's a great business model, so we have the flexibility to deal with those situations. But right now, we're in a pretty strong competitive position. And my guess is, we're talking about short-term little bit of [indiscernible] in the overall macro market. I suspect we'll continue to be aggressive, take share, and support our brands.

Thank you. And our next question coming from the line of Peter Keith with Piper Sandler. Your line is open.

This is [Matt Edgar] [ph] on for Peter. Thank for taking my question. Sorry, if I missed it, but can you just walk us through the puts and takes of your input costs this year? I know you said it's expected to be down, but just can you go through maybe on, kind of individual basis, how you're expecting [numbers] [ph] 2019 and what's embedded in the guidance? Thanks.

Yes, absolutely. So, when I think about commodities, as I mentioned on the call, I think about everything from ocean cargo to raw material to labor. So, broadly speaking, we've seen unprecedented increases in commodities over the last few years. So, the way I think about 2023 and what we saw in the fourth quarter 2022 a bit, is that they have come off their peaks and the peaks being earlier in the year. But what I would say is that we are expecting, let's call it, a modest tailwind into 2023, however, by no means are they at the pre-pandemic level.

Thank you. One moment for our next question. And our next question coming from the line of Jonathan Matuszewski from Jefferies. Your line is open.

Great. Thanks so much for taking my question. I had a question on the competitive landscape. Your largest competitor recently filed for bankruptcy a couple of weeks ago. Just curious if you could give us a sense of how conversations with your retail partners have looked since this news broke and how are conversations progressing regarding potential slot gains for the TSI brand? Thanks so much.

Yes. Thanks for the question. Look, I don't think that particular news was shocking to the industry, I think it was well telegraphed and expected. So, I don't think it's fundamentally changed the discussions with our retailers. What the retailers care about is quality products, support with advertising and those kind of items. I think our chief competitor has strong brands and is a hard, tough competitor. But we continue to work aggressively with our retailers. So, I don't think the actual filing changed very much in most retailers mines, as long as they provide quality products and service in the marketplace.

Thank you. [Operator Instructions] And our next question coming from the line of Brad Thomas with Keybanc. Your line is open.

Hi, thanks. Scott, I was hoping to ask about the international product changes that are underway. Obviously, the potential will be really, really substantial for the company. I was hoping you could share a little bit more detail on perhaps how much this expands the addressable market for Tempur and how you think about what the financial impact could be once this is rolled out? Thanks.

Yes. I'll start, and I'll let Bhaskar probably clean me up. As you said, look this is a significant launch internationally, bigger than a normal Tempur launch as we're repositioning the brand and we're changing some of the manufacturing procedures as to how we make temper so that we can hit some lower price points and serve our customers better. Early on, we're in the middle of it. Early indications are good. And I'd say, what's the addressable market expansion do you think, is it 20% 30%, 20%, 30% absolutely from an addressable market standpoint, of course, we have to perform. You can't just put that and say, okay, that's going to increase Tempur sales that much, but we're working very hard on the area, but I do think it unlocks a growth potential for the international operations. From a sales standpoint, we should start seeing that in the second quarter of this year. Because of the launch cost and stuff, you'll see the benefits of EBITDA probably starting in 2024 and the full benefit of it. But I think long-term over the next two or three years will be very important from our growth standpoint.

Thank you. And our next question coming from the line of Laura Champine with Loop Capital. Your line is open.

Thanks for taking our question this morning. It's on the, kind of inputs to the guide for mid-single-digit growth this year. Does the industry need to recover in the back half and actually be positive in the back half in your view for you to hit that estimate?

Yes, probably so. I mean, you're talking about crystal ball stuff. So, give me a little bit of heads words on this. But look, I suspect – let's say, as we said in the fourth quarter, units were down 20%, 25%. We think we don't have all the final data yet, but that's probably certainly in the ZIP code. So, I think going into the first quarter, I suspect that units will be down in the first quarter. That is a very tough compare for the industry. It is the last pre-war compare. So, in the first quarter, we'll call it projected to be down, and I feel pretty confident that the units would be down in the first quarter. By definition, you've got to have some units go the other way. And so, you'd end 2023 with growth in, call it, the third and fourth quarter.

Thank you. One moment for our next question. And our next question coming from the line of Carla Casella with JPMorgan. Your line is open.

Hi, thank you. I just want to ask, given kind of the turbulence in the market, that you guys seem to be navigating very well. Is it opening up more M&A opportunities or is there – are there thoughts set for you to continue to grow your OEM and expand the business that you need M&A, as well as organic growth?

Yes. It's interesting. As we've always said, it's something in the world is in the bedding industry, and there's an opportunity we want to look at it. And we do when we look at quite a few opportunities every year. Historically, we've done one or two transactions a year. I think we've done like nine since I've been here. But the whole strategy is really based on purely opportunistic purchases and where we can find a win-win. And so, having said all that, what that means is, look, we look at stuff, sometimes we price stuff. Sometimes the price works and something happens. Sometimes, the price – we're miles apart and nothing happens. And then sometimes the price is pretty close, and we stay close to that particular company for a number of years using the example of Dreams as it is probably the classic one, is, I think we effectively negotiated with them for five years until we both felt like we had a win-win transaction, which I think actually was a win-win transaction for both companies now that we've had them for a year. Some transactions happen very quickly, and the one that comes to mind is Sherwood. I think from start to finish, that might have been more like 30 days, if we were aligned very quickly with that team to what the future look like. So that was a very quick transaction. So, with the market, it had some – it was a difficult year, you know when you look back at it, whether you talk about the unexpected war in Europe, the inflation, the rapid unit decline, FX, COVID over in Asia. So, yes, it's certainly a colorful year. So, are there more opportunities? There probably are. I mean there are more opportunities. Whether or not we ever get aligned on anything, I don't know. But we continue to talk to people and really look for transactions that are good for both parties, good for our customers, good for the industry, and we'll continue to talk to people.

Thank you. And we have one last question in queue coming from the line of Atul Maheswari with UBS. Your line is open.

Hi, thanks for sliding me in, again. I just had a quick question, Bhaskar, on the first quarter guidance. It seems like you're guiding to a 20% to 25% EPS decline. Could you provide some incremental color on the building blocks that gets you there in terms of revenues, gross margin, and cost?

Yes. Before he does that, let me – we felt like we needed to give you a little more color on the first quarter. We normally wouldn't give that much, kind of color on a quarter, but we really want to make sure everybody realizes that's the last tough comp for the bedding industry and not be surprised if it last pre-war.

Atul, that's a good question. Let me answer it this way. Year-over-year, when you look at Q1 to Q1, there is a lot of things that are happening, whether it be FX, whether it be the war, the macro, the inflation, et cetera. So, let me do it this way. Let me go from Q4 to Q1. I think it's a much more straightforward way to think about it. So, what we've implied for Q1 off of Q4 is that we would expect some slight revenue growth, from a seasonal standpoint, that would make sense. Then what you – obviously, from that incremental revenue, we'd expect some flow-through associated with that. And then what we have is that we have two items that are unique to the quarter when you think about it versus Q4. And that is the launch of our international products, as well as the ramp-up of our Stearns & Foster. So, the way I think about that is – and brand advertising to support those launches. So again, relative to Q4 to Q1, what I would expect is a bit of revenue and the investments associated with those products, let's call that brand advertising, as well as the investments for the launch in OpEx.

Thank you. I will now turn the call back over to Mr. Scott Thompson for any closing remarks.

Thank you, operator. To over our 12,000 employees around the world, thank you for what you do every day to make the company successful. To our retail partners, thank you for your outstanding representation of our brands. To our shareholders and lenders, thank you for your confidence in Tempur Sealy’s leadership team and Board of Directors. That ends our call today, operator. Thank you.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.