Good day, everyone, and welcome to the Tempur Sealy Third Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note today's call will be recorded and we will be standing by if you should need any assistance. It is now my pleasure to turn today's conference over to Aubrey Moore with Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for participating in today's call. Joining me today are Scott Thompson, Chairman, President and CEO; and Bhaskar Rao, Executive Vice President and Chief Financial Officer. 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 report on Form 10-K and quarterly reports on Form 10-Q. Any forward-looking statement speaks only as of on 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 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, I will turn the call over to Scott.

Thank you, Aubrey. Good morning and thank you for joining us on our third quarter 2024 earnings call. I'll begin with some highlights from the quarter and then turn the call over to Bhaskar to review the financial performance in more detail. After that, I'll provide some comments on our proposed acquisition of Mattress Firm and then open up the call for Q&A. In the third quarter, net sales grew 2% to $1.3 billion and adjusted EBITDA grew a solid 6% to $275 million compared to the same period last year. Our GAAP EPS grew 14% to $0.73 per share and our adjusted EPS grew 7% to $0.82 per share compared to the same period last year. The overall bedding industry remain significantly below historical volumes. However, we are pleased with Tempur Sealy's results in the third quarter with an outstanding international performance and a solid domestic results. Our adjusted EBITDA to net debt leverage ratio declined to 2.4 times, which is below our midpoint of our targeted range of two to three times. As we reported previously, we are preparing our financial position for the planned closing of the Mattress Firm transaction. Cash generation in the quarter was very strong despite the soft market and we delivered $240 million in free cash flow, our strongest quarter of free cash flow since the third quarter of 2021. Turning to the third quarter highlights. Our first highlight is our adjusted EBITDA margin of 21.1% in the third quarter, which is the strongest margin in 10 quarters, driven by our consolidated growth coupled with our operating efficiency initiatives and diverse business platform. We continue to invest in brand through advertising and best-in-class service levels, while also remaining agile and responsive to industry conditions. We expect to see significant upside once the market…

Thank you, Scott. In the third quarter of 2024, consolidated sales were $1.3 billion and adjusted earnings per share was $0.82. There are approximately $22 million of pro forma adjustments in the quarter, all of which are consistent with the terms of our senior credit facility. These adjustments are primarily related to costs incurred in connection with our planned acquisition of Mattress Firm and manufacturing footprint optimization initiatives. The manufacturing optimization involves the closing of two small facilities as we transfer their volume into our full service manufacturing plants. This shift will allow us to lower our future cost per manufactured unit while continuing to make product to our industry-leading quality standards. Turning to North American results. Net sales through both our wholesale and direct channel declined approximately 1% in the third quarter. North American adjusted gross margin declined 10 basis points to 43.1%, driven by the mix impact of the new distribution win for our OEM business, partially offset by commodity costs and operational efficiencies. North American adjusted operating margin declined 20 basis points to 20.1%, driven by the decline in gross margin and operating expense deleverage. Now turning to International results. International net sales grew a robust 12% on a reported basis and 11% on a constant currency basis. As compared to the same period last year, our International gross margin improved 70 basis points to 57.3%, driven by operational efficiencies. Our International adjusted operating margin improved 200 basis points to 18.2%, driven by operating expense leverage and the improvement in gross margin, partially offset by the Asia joint venture performance. We're pleased to share that our Asian joint venture recently opened our first manufacturing plant in India. Although not expected to be material to our operations in the near-term, it is further evidence of the long-term vision…

Nice job, Bhaskar. I'd like to take a moment to share some updates related to our Mattress Firm acquisition. First, the Federal Court hearing is scheduled to begin next Tuesday, November 12th, 2024, and expected to last about two weeks. We continue to believe a successful litigation process can be completed in the coming months, allowing for a potential transaction close in late 2024 or early 2025 in line with our previous expectations. As previously announced, as part of our engagement with the FTC on the proposed acquisition of Mattress Firm, we conducted a divestiture process, which led to an agreement with Mattress Warehouse, a company with extensive mattress retail experience, a strong capital base and a capable leadership team. The executed purchase agreement provides for the contingent sale of 73 Mattress Firm retail locations and our Sleep Outfitters subsidiary, which includes 103 specialty mattress retail locations and seven distribution centers. We expect the divestiture to close approximately one-quarter after the closing of the Mattress Firm transaction. Turning to our recently filed complaint seeking an injunction against the FTC commission's administrative proceeding, the actions asked the court to prevent the FTC from challenging the Mattress Firm merger through its own separate administrative proceeding in addition to the Federal Court proceeding that starts next week, effectively giving the FTC two shots at us by using two different courts. This is an issue of jurisdiction and constitutional law. As the litigation process is ongoing, our comments are limited and we cannot take questions on pending litigation. Finally, moving to brief comments on Mattress Firm's financial performance, Mattress Firm recently made their quarterly results available on their website and they were consistent with our expectations. We believe they are weathering a difficult US market well. And we encourage you to review Mattress Firm's website for more information on their financial performance in the most recent quarter. Before opening up the call for questions, I'd like to take a minute and reflect on the evolution of Tempur Sealy. Over the last 175 years, we have dedicated our efforts and expertise to continuous innovation for the benefit of customers. We have grown to become a leading global bedding company with highly recognized brands, advanced manufacturing capabilities and a diverse omni-channel platform. Our ongoing investments to strengthen and diversify our business have resulted in nearly 60% expansion in sales since 2019 and 80% expansion in adjusted EBITDA over the same period. While we've made significant strides to grow and fortify the business, we believe that significant opportunities lie ahead. Our continued focus on key growth and cost efficiency initiatives ensure success in a fragmented and evolving marketplace. And that we're also optimally positioned to capitalize on a resurgence in demand when the global industry returns to growth. And with that, I'll open the call up for questions. Operator?

Absolutely. [Operator Instructions] And we'll take our first question from Susan Maklari with Goldman Sachs. Please go ahead. Your line is open.

Thank you. Good morning, everyone.

Good morning, Susan.

My question is, good morning, Scott. I want to talk a little bit about demand. And as we've gotten past the election, we think about the potential for the Fed cutting rates. Can you talk a bit about how you think the consumer may react, thoughts on how we could see demand trending as we get late this year and early next year? And then your ability to respond to that with the utilization rates that you've got across the business and some of the new product introductions that you talked to?

Sure. Thanks for your question, Susan. As you know, look, the bedding industry has really been in recession, maybe even depression. It's been a tough three years. And probably from peak to where we are now, probably down 30%, which is by historical standards a period we've never seen before. So, we do think we're set for recovery or normalization. I think we think it will be led by Sealy Posturepedic, which is the largest launch in Sealy's history and probably the largest bedding launch in history. And if you know Sealy, it's the number one brand in the US. If you look at kind of the consumer, to be frankly honest, we've gotten through the election. And we've gotten through the election very well. We've got a peaceful transition of government, maybe a little more stability. Certainly retailers may be more confident to advertise. We're going to have lower rates, maybe not quite as low as we expected six months ago, but clearly the trends in the right way. And as you know better than most of us, we're going to have some better housing formation. So all-in-all, it looks like we should get to some normalization sometime, we'll call it in 2025. And we think we're perfectly positioned to take advantage of it. As you know, we've taken market share for probably more quarters than I can remember. I don't see any reason why we won't continue to take market share. And in fact, I probably, based on the numbers I see right now, I think we took made a step forward as far as our market share capture in the third quarter as compared to probably the first two quarters of the year. And we've got the capacity to address the market as it expands. Maybe one other little quick call out, because that was all really kind of more US is I think one of the real highlights in the quarter is the international team, both what we call Legacy and in Dreams. Both of them had just a fabulous performance, double-digit growth in what is also a very difficult market globally. And they took a good bit of share in their relative markets and that feels like that's sustainable. It's taken a while to get International rolling, but we think we've got it in a really good place going forward.

Okay. That's very helpful color. Thank you. Good luck with everything.

Thank you.

We'll take our next question from Bobby Griffin with Raymond James. Please go ahead. Your line is open.

Good morning, everybody. Thanks for taking the questions. And Scott, I appreciate the details there on the pending acquisition.

Thank you.

I guess, so for my question, Bhaskar, I think it's probably more centered on the numbers towards you. But can we talk a little bit about the contribution margin of the business today? There's been a lot of changes. You called out manufacturing optimization, new distribution, some growth in the OEM, and then, obviously, so far, a very successful launch internationally. So can you maybe just unpack kind of what your view is on International and North Americas go-forward contribution margin? And is there anything in 2024 results that we should be mindful of when we think about kind of level setting our model on that going forward, either good guys or bad guys against the P&L?

Absolutely. Let me start with the latter one first. As I think about from a go-forward standpoint, let's just assume status quo, which is the existing new distribution that continues in the mix of the brands. Those continue as well as International perform. So there isn't any transitory items that I would specifically call out, one-time good guys or one-time bad guys. We're confident, we're proud of the performance that the business has produced in the third quarter. As it relates to the contribution profit from a go-forward standpoint, how I would think about it is, again, assuming status quo and I'll define what I mean by that. International business is doing extremely well. That new addressable market that we've been going after for a number of years, we've seen the green shoots. Now we're seeing the grass grow. And internationally, we're growing low double-digits. So and as you know, historically, that the contribution profit on that side of the pond is a little bit richer than the US, just given the price points they historically play at. So when I think about the fleet being about 35% from a contribution standpoint, the international should come in a bit higher than that. As I think about from a US standpoint, North America is, let's think about it as, again, assuming that status quo is, as I think about it, in and around fleet. Let's call it 30% to 35% from an incremental dollar standpoint. Now, the item to come back to is that we do believe that low-end consumer that's been sitting on their hands, they are going to come back. And as Scott pointed out, we've got an exciting new product launch coming in next year right at that value consumer. So as that mixes in, it will be incremental EBITDA dollars. However, it would be something to be mindful of as that mixes in from a contribution standpoint.

Yeah, so you basically have a product mix issue that you have to keep an eye on. But as Bhaskar pointed out, incremental EBITDA into the meat of the market. But as we looked in the third quarter, as I mentioned in the prepared remarks, I mean, Tempur grew and actually Stearns & Foster was the best performing brand. So clearly the weakness has been in that lower price point.

And we'll take our next question from Rafe Jadrosich with Bank of America. Please go ahead. Your line is open.

Hi. Good morning. It's Rafe. Thanks for taking my questions.

Good morning.

I was just heading into sort of '25. I was wondering if you could just sort of give a state-of-the industry. Like we've had, as you mentioned, you had three years of declines, mattress industry is depressed, 30% below peak. But we're also, if you're looking at some of the housing indicators, existing home sales that haven't turned yet, still feels like it's under pressure. Just sort of where do you think we are kind of broadly in the market heading into 2025?

Sure. First of all, let me just talk a little bit about the housing market. We've never really thought the housing market was the primary driver for bedding. We've always described it as a slight headwind or a slight tailwind. And it's been a slight headwind, obviously, for a little while. So we expect it to be maybe a slight tailwind. Really, we think more of advertising, innovation, consumer confidence as the bigger drivers. And, look, I think if you think about all the stuff that went on, we'll call it, third quarter and into the fourth quarter, particularly in the United States, the US consumer has held up very well. So if we can get to some more normal, we'll call it politics, a little more normal housing. When I look at the bedding industry specifically, the product innovation is very strong. And, of course, I'm talking my own book of business, but I mean -- but from an industry standpoint, I would tell you that products that all our competitors are making are also innovative. So the products are really good. Everybody has been very conservative on their advertising. And as I've talked about on previous calls, I probably think we ought to spend more money on the top of the funnel driving customers into stores and thinking about bedding less on the bottom of the funnel chasing the last three customers with search ads. But it looks like it's set up pretty well. And we're not going to do 2025 guidance today. But clearly there's some green shoots out there. And as Bhaskar talked about a second ago, International is really doing well. Again, as I mentioned also a little while ago, this Posturepedic launch, I mean it is -- I mean it is the entire Sealy Posturepedic brand. It is the reimagining of the brand for the first time in for, I don't know, a decade plus, we're going to put national advertising behind it. It is in the meat of the market that has had problems. And we think we've got something here as far as something that will help turn the industry back to normalization, which is call it a 5% or 6% growth rate. And maybe you don't get that in 2025, but you get on the path to getting back to, I'll call it, normal industry. When you look at population growth and everything else, the number of units we're selling today is extremely low. And I'm not a big person on believing in pent-up demand, but you can't stay at these levels based on any stat that you would look at, better sold per person in the country or anything else. So when I look at it, we've been in this decline, not only is it deep, we've been in it for a long time. And so we're looking forward to getting back to a normal market.

And just leveraging off, Scott, one of your comments about volumes and what the industry is doing is as this does come back, and as Scott mentioned, we're not doing 2025, is the leverage component is going to be extremely powerful from a business standpoint as that goes through its gross margin. So when you think about the mix that I talked about previously, as well as the leverage that will go through those plants combined with the productivity initiatives that we continue to drive margin expansion in the third quarter, we think all of those items have legs that will be very constructive as it relates to EBITDA margins and profitability.

And we will take our next question from Michael Lasser with UBS. Please go ahead. Your line is open.

Good morning. Thank you so much for taking my question. It's a two-parter. First, how does the North American gross margin performance in the third quarter inform how we should think about the gross margin into next year given the mix shift to the Sealy products? And two, how does the prospect of tariffs impact the outlook for Tempur Sealy into 2025 and beyond? Thank you so much.

Great questions. I'll take the easy one and may give Bhaskar the hard one. And the easy one is the last part of the question. We don't think the tariffs impact us much. We don't really buy anything from China directly anymore. So any additional tariffs on China really don't impact us. As far as overseas, about the only thing we import are adjustable basis. They come in through Mexico and Vietnam. Maybe there's a little nick there if there's some tariffs related to those countries. The history of the industry is we pass those tariffs on. If they put some tariffs in, maybe it helps a little bit. But that would be on the low-end bedding and I wouldn't expect it to be material, really one way or the other is the way we think about what we call the new tariff environment. And then you get the complex question about the mix into gross margin.

Pretty straightforward. So when I think about North America 3Q margins and how it informs the outlook is, again, we saw, on a consolidated basis, we saw a nice gross margin expansion. We did see productivity driving gross margin expansion in the quarter, offset by mix. As you get into the fourth quarter and beyond, that mix will start lapping itself a little bit in the fourth quarter and will start being grandfathered as we get more into 2025. So as a tail or as a headwind, I wouldn't think about that on a go forward standpoint. Again, incremental EBITDA, but it is something to think about as it relates to margins. However, when I do think about the productivity, we feel like we feel good about what we've accomplished so far and we do feel like that has legs from a go-forward standpoint. And then overall is Tempur continues. We have a new product launch in Tempur as relative to the fleet that will be constructive in Stearns & Foster, as Scott pointed out, it was the leading growth driver of the overall business, which will be constructive to the fleet. So when I think about tailwinds to the North America margins is there's nice tailwind. Again, the item to be mindful of is as this low-end consumer comes back is that we'll mix in incremental EBITDA, but it is something to be mindful of from a rate standpoint.

And we'll take our next question from Peter Keith with Piper Sandler. Please go ahead. Your line is open.

Hey, good morning, guys. I'm going to sneak in a two-parter here, but just on the advertising spend, we know the importance. It seems like you pulled back on ad spend in Q3 because you saw nice sales and marketing leverage. Could you talk about kind of the ad strategy going from Q3 into Q4? And then on a related basis, just maybe the domestic versus international sales dynamics implied for Q4. Do you think International is going to slow from the strong growth? Does domestic get a little worse? How should we think about those two?

Yeah. Let me see if I can get. It's about a five-point question, but I think I'll, tell me Bhaskar, if I missed any of it.

Sure.

First of all, from an advertising spend, that naturally flexes up and down based on what's going on in the market. If you're talking about the D2C spend, it literally changes daily depending on its performance marketing. Just in general, we were relatively conservative in the fourth quarter considering the election and the noise around the election. So I would say we've been a little conservative, but we pretty much spent the same percentage of sales. So I would say it's consistent. I would expect we'll be a little more aggressive next year with the advertising. As far as momentum internationally, we would expect them to continue to have significant momentum. We don't think this is a one-quarter thing. Whether it's double-digits or high-singles, I don't know. But in what is a market that's clearly down, I expect the international groups continue to have very good performance both in total numbers, but relatively speaking, outstanding performance. What else was in that question, Bhaskar?

I think that's fair. Just to cover that, let's call it about 9.2%, 9.3% advertising versus so consistent on a prior year basis. I think specifically, you had a question about growth rates.

Yeah, one of the thing in advertising, which may be noteworthy. As other people have pulled back in advertising, quite frankly, we found our advertising to be much more effective because it's not quite as noisy out there. So that's been a good guide too from an effectiveness standpoint.

So as Scott mentioned, consistent on a rate basis and in total dollars about $119 million in the third quarter for total advertising. As I think about profiling in the fourth quarter, what we've assumed and we read it into the prepared material, the US industry is kind of chugging along where it is, call it, down mid-single-digits from a dollar standpoint. We've assumed that same in the fourth quarter. So when you think about sales from this side of the pond or the other, consistent profile, as Scott said, whether it's high, high-single, low-double internationally and from a North America standpoint, let's call it consistent, perhaps slightly down a little bit. So similar profiling.

We'll take our next question from Seth Basham with Wedbush Securities. Please go ahead. Your line is open.

Thanks a lot and good morning. My question is regarding the third quarter. Can you just give us some color on the shape of sales through the quarter, how Labor Day performed and your promotional strategy during and after Labor Day? How did that shake out and what did the competition do to react? Thanks.

Sure. Consistent with what we've seen in previous quarters, the trough is deeper and the peak is higher. So in holiday periods, we would have actual growth and a good bit of growth. And in the troughs, we would be negative. And then you blend it all together. And that's the trend we've seen for, I don't know, four or five quarters post pandemic. So that's kind of the shape. I don't think our promotional activity was significantly different year-over-year. Bhaskar, do you --

Yeah, that's correct.

I fine-tuned it here, here and there. We did work a little bit on it to match some promotions that we talked about last quarter. That was what I call nickel and dime kind of stuff. And then I would say more recently, I would say, the promotional environment in general has gotten less in the marketplace as it looks like others are being a little less promotional and trying to squeeze out some dollars to advertise, which I would consider to be a net positive for them and the industry.

We will take our next question from Brad Thomas with KeyBanc Capital Markets. Please go ahead. Your line is open.

Thanks for taking my question. Scott, you talked a bunch about your industry outlook. We get a lot of questions about how the luxury part of the market is performing. Could you talk a bit more about that and how you think about the luxury in terms of how much it's declined from peak and how you think about it going forward specifically? Thanks.

Yeah, luxury is holding up well at Tempur Sealy. As I mentioned in the prepared remarks, actually, Stearns & Foster was the best performing brand. And then Tempur after that and both those brands had growth in the third quarter. And for talking terms, no one's numbers are perfect when you're talking about the industry and I'm talking US. I would guess the US industry was probably down maybe 9% to 10% in sales. And like I said, both those brands were in growth. I've seen other reports of some other public companies that they were down significantly. So, it's hard for me to make a general call on the high-end customer, but from what we're seeing on our products, the high-end is holding up very well.

We'll take our next question from Judy Merrick with Truist. Please go ahead. Your line is open.

Thank you. This is Judy on for Keith Hughes. I was wondering if you could give us a sense of how much the new Sealy Posturepedic launch would be a drag on earnings in the first half of next year, either from the advertising you talked about or the channel load?

Yeah, great question. From a year-over-year standpoint, there really won't be any incremental launch cost when you compare the Sealy Posturepedic launch in 2025 to what we did in 2024. So there won't be an incremental launch cost. When you go to advertising, advertising would be incremental cost, but we expect to be able to self-fund it through cost reductions initiatives that we're working through. So the way we're thinking about that incremental advertising is it will not be an incremental expense as we offset other cost reductions.

And we'll take our next question from Laura Champine with Loop Capital. Please go ahead. Your line is open.

Thanks for taking my question. And I thought the international growth was impressive. And I hear you, Scott, that you view that as sustainable. Can you put a little more meat on those bones and tell us why growth in international markets should be that sustainable and a pretty tough macro there too?

Yeah. And I know you follow us closely, if you remember, we worked on new products at Tempur for four years before we launched this new Tempur product. And it was expensive, it was painful, took us a long-time, but we finally got it where we needed to. So the first big driver is the new Tempur product. We got the product right and the market has been receptive and we backed it up with new creative advertising. So all of that would be execution in a very difficult market. On the Tempur side, we've also had a strategy to bring the Tempur product a little closer to, we'll call it, the high-end of the market, but not the super-premium, bring it down just a little bit and we're working through that. And as I mentioned in the prepared remarks, we've had some expansion in distribution. And I don't think we're true from that standpoint. If you go to the Dream side of the ledger, the Dreams team has executed very well in the UK, taking significant share and being very crisp from an execution standpoint. And the UK economy, although not robust, it at least has stabilized and it feels like it's beginning to perk up a little bit as if they cut interest rates and stuff. So it's product on the Tempur side and its execution on both the Dream side and the Tempur side.

And we'll take our last question today from Bobby Griffin with Raymond James. Please go ahead. Your line is open.

Hey, guys. Thanks for letting me back in real quick. Scott, I just wanted to actually dive in a little bit more on Stearns & Foster. You called it out strongest brand during the quarter. I think that's a reversal in maybe some of the prior trends in the past couple of quarters. So can you maybe just unpack that a little? Did you step -- did you push a little bit more on advertising? Anything to help us understand the turnaround there because that's pretty encouraging given the opportunity on Stearns over a multi-year basis?

Yeah, I don't have all the numbers in front of me, Bobby. My perception is Stearns was really hot for a little while. Last couple of quarters, it's done okay, but it certainly had cooled down a little bit. I think it was still in growth. And then in the third quarter had a very strong third quarter. I think that I'd give credit first of all to the sales group because we noticed that it slowed down a little bit and the sales group made it a focus. We also had one SKU one or two SKUs or two or one. One or two SKUs in Stearns that weren't as productive as we would have would have liked them to have been and we tweaked them and brought in new SKUs to replace them and got those floored where we had a couple of underperforming SKUs. And with that, it had a very strong quarter. So no additional promotions and speak of no additional advertising. In fact, I think, advertising is a little bit down on Stearns actually.

And there are no further questions on the line at this time. I will turn the call to Scott for any additional or closing remarks.

Thank you, operator. To 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 the company's leadership and its Board of Directors. This ends the call today, operator. Thank you very much.

Thank you and thank you everyone for your participation today. You may now disconnect.