Good day, and thank you for standing by. Welcome to the Tempur Sealy Third Quarter 2022 Earnings. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Aubrey Moore, Vice President of 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. 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 press release. And now with that introduction, it's my pleasure to turn the call over to Scott.

Thank you, Aubrey. Good morning, everyone, and thank you for joining us on our 2022 third quarter earnings call. I'll begin with some highlights for the third quarter, followed by an overview of the current operating environment in our North American and international markets. And Bhaskar will review our third quarter financial performance and update our 2022 guidance. Lastly, I'll share a few closing remarks regarding our competitive advantages and then open the call up for Q&A. In the third quarter of 2022, net sales were approximately $1.3 billion, and adjusted EPS was $0.78 a share. This represents a 56% growth in sales and 140% growth in adjusted EPS as compared to the third quarter of 2019, a pre-COVID period. Compared to the same period last year, this represents a 6% decline in sales and an 11% decline in adjusted EPS as we continue to perform well in a less robust market. Our results were challenged by headwinds from unfavorable foreign currency and overall less robust operating environment. I'd like to begin with highlighting some key wins in the third quarter. First, I'd like to discuss our exciting progress on our Stearns & Foster brand. We are pleased to share that we expect to expand our Stearns & Foster spots by third-party retailers in the U.S. by over 20%, demonstrating retailer support for our expansion strategy. To be clear, we believe the slot gains will be from competitors, not other Tempur Sealy brands. Many of these incremental slots will be filled with our new Stearns & Foster Lux Hybrid and our new Stearns & Foster Reserve Mattress. Importantly, these are 2 of the highest-end mattresses in our new Stearns portfolio with the queen mattress in these lines ranging in price from $3,299 to $6,499. These price points are critical to…

Thank you, Scott. In the third quarter of 2022, consolidated sales were approximately $1.3 billion, and adjusted earnings per share was $0.78. We have adjusted $6 million of charges during the quarter, all of which are permissible adjustments under the terms of our senior credit facility and relate primarily to the transition to our new ERP system. We expect there may be a similar amount of adjustments related to these items in the fourth quarter primarily from further investments in our new foam-pouring facility. Turning to North American results. Net sales decreased 6% in the third quarter. On a reported basis, the wholesale channel decreased 7% and the direct channel increased 8%. North American adjusted gross profit margin improved to 40.2% primarily driven by pricing actions to offset commodity inflation and favorable brand mix. This was partially offset by operational investments to service our customers. North American third quarter adjusted operating margin declined to 19.8%, driven by increased advertising investments and operating expense deleverage, partially offset by the improvement in gross margin. Now turning to International. Net sales decreased 5% on a reported basis. On a constant-currency basis, International sales increased 7% as we experienced a $30 million headwind in the quarter from unfavorable foreign exchange rates. As compared to the prior year, our International gross margin declined to 53.4% driven by the acquisition of Dreams driving unfavorable mix and foreign exchange rate headwind. Our International adjusted operating margin declined to 14.7%, driven by operating expense deleverage, the decline in gross margin and the impact of COVID-related shutdowns on our joint-venture operations in Asia. Turning to commodities, which have been highly inflationary across the global bedding industry for more than 2 years. In North America, prices have generally trended in line with our expectations in the quarter, and we believe…

Thanks, Bhaskar. Great job. Before I open up the call for Q&A, I want to take a moment and share some closing thoughts. We have transformed the business over the last decade to fully hone its competitive advantages in the global marketplace and reinforce its resilience in the face of macroeconomic turbulence. Today, we are one of the largest global bedding companies in the world. We have in-house capabilities across our 70 plants operating in 24 countries to manufacture both branded and non-branded Innerspring hybrid memory foam and latex mattresses. We have products that meet the needs of consumers looking for mattresses at value price points to ultra-premium price points. Our comprehensive product assortment, supported by our leading R&D processes, robust sales force and strategic marketing investments has driven our iconic brands to lead the globe in bedding market. We sell our mattresses adjustable bases, pillows, bedding accessories through over 25,000 brick-and-mortar retail stores and e-commerce channels in more than 100 countries around the world. We access these channels through strategic combination of third-party retailers, our own mono-branded retail stores, our own multi-branded retail stores, our Tempur-Pedic, Stearns & Foster and Sealy e-commerce platforms, our joint-venture operations and our licensing agreements. We've unlocked the omnichannel formula to be where the customer wants to shop, and we continue to aggressively monitor the market to keep pace with customers' evolving needs and preferences. We're keeping the current operating environment in mind as we invest to lay the groundwork for our next stage of long-term growth. Over the last couple of quarters, we've extended some capital project time lines. We've trimmed around the edges, cutting back on expected hiring and advertising. Our preliminary 2023 thinking reflects the execution on our long-term growth initiatives which are to: first, develop the highest quality bedding products in all the markets we serve; second, promote worldwide brands with compelling marketing; third, optimize our diverse omnichannel distribution platform; and fourth, drive increased EPS through operational execution and by prudently deploying capital. We believe this strategy will drive continued market out-performance across a range of macroeconomic environments. The global investments that we're making today in people, product, omnichannel expansion, manufacturing capacity will position us well to deliver top and bottom-line growth. And with that, operator, will you please open up the call for Q&A?

[Operator Instructions]. And our first question comes from the line of Peter Keith with Piper Sandler.

I just wanted to maybe focus specifically on the reduction of the guidance. It sounds like there's a couple of moving pieces certainly with FX and I think a little bit of a sales downtick for U.S. and International. Could you maybe just break apart what caused that 15% reduction at the midpoint, just so we can understand the different moving pieces better?

Absolutely, Peter. Good question, and you got it. So if you think about it is International, the FX versus what we thought entering the third quarter and where we exited, it was a headwind for us. So the combination of the continued geopolitical matters in the International community, coupled with FX, what I would say would be about half of it. And then you've got the -- our expectations from an industry standpoint, we thought it'd be a bit more robust than what it actually turned out to be. So the combination of those 2 factors resulted in our change.

And it comes from the line of Curtis Nagle with Bank of America.

So just kind of curious on performance in the U.S. and in wholesale. Any notable deviations across -- not necessarily partners, but the some of the major channels you guys have relatively consistent?

Sure. I mean I think the standout performance would be in our direct business for the quarter, and you saw that in the release. If you kind of think about wholesale and kind of go through the retailers, in general, you would see that the entry-level retailers generally suffered more and probably considerably more -- the more of the premium-focused retailers. And you can see that in our brands, the Tempur brand performed better than the other brands. And then maybe even more importantly is when you go inside of the brands and you look at particular SKUs and you look for things like trade-down or those kind of things, we didn't see any of that within the brands, Tempur specifically, the high-end Tempur beds performed much better than what I'll call the entry-level Tempur beds would be from a characteristic standpoint. Anything I see just as a blend from a channel standpoint. But no, I mean, but the big standout performance would probably be direct from our standpoint. But we had some -- we had some wholesale retailers also have strong quarters.

It comes from Bobby Griffin with Raymond James.

Could you maybe talk a little bit about capital allocation in this environment? In your prepared remarks, you called out tightening down a little bit on expenses and things like that, but you still repurchased some shares during the quarter. So just help us walk through or think through capital allocation and the leverage profile going into 2023?

Sure. And let me start with kind of going into '22. We went into '22, I think I used the term in an offensive position, bought quite a few shares back, had the organization in North America, geared for increased volume. So pretty well staffed up. We're doing quite a few things to make sure that we could service the customers in what we saw -- we thought was going to be a more robust market. Clearly, trimming around the edges is what we've been doing, cutting back on hiring. Share repurchases is mitigated and moderated some. So now you go into where are we now. Look, it looks like the industry, we're doing North America right now, stepped down sometime during the year. And if you look at the unit volumes, I guess you could probably call the market down 25% in units. We're certainly not down anywhere close to that number and taking a big bit of share. And it looks like it's stabilized at that point during the third quarter. And so now we're focused, and we're going into '23 as we think about the budgets and how to position the company in a more conservative framework working on optimizing productivity at the plants and thinking about it more as a less offensive approach, although on strategy. So you roll that into kind of more the guess of your question, which is, okay, how does that roll through capital allocation. Rolls through capital allocation is we're looking at acquisitions and stuff, but we're going to probably look at our leverage, make sure we stay between 2 and 3 during 2023 and watching the markets.

And it comes from the line of Seth Basham with Wedbush.

If I could just follow up on some of the cost pressures you're experiencing in the fourth quarter and then into 2023 relative to your prior expectations, including launch costs, the operational investments, FX and then commodities versus price, that would be helpful.

Sure. Let me -- I'll start with that, and then Bhaskar can clean it up. But from a commodity standpoint, stuff goes up and down. If you're talking about near term, it's probably in line with what we thought. And if you're looking at 2023, based on what we know today, you would think commodities would be a net good guy in '23. But as you know, that's highly volatile. When you go to -- we'll call it, pressures on inflation in production, you got to step back a little bit because one of the big numbers that are in the 2022 numbers is productivity at the plants. And that's been challenged. And to be fair to operations, we had a spring shortage, when COVID started, then we had a chemical shortage, when we had the hurricane, then we had all the COVID stuff at the plants. Then hiring has been a little more difficult and turnover has been a little bit more difficult. Then we drew in an AX conversion into our Sealy plants that we desperately needed to get done and we got done successfully. So during all of that -- and in the last part, strategically had the organization set up for expansion, expansion in units and ended up having a severe industry contraction. So we kind of whipsawed the plants. And so it wouldn't be inflation, it would be productivity. And that will be one of the major initiatives in '23 is to get back from plant standpoint back to our historical productivity metrics. With any other cost pressures or anything, FX, you want to...

I want just to disaggregate that a bit, some of the items that were mentioned is when you do think about FX, it's been quite interesting, principally euro, principally pound. And on a year-over-year basis, from a bottom-line standpoint or an EBITDA standpoint, it's costing us about $15 million on the bottom with $65 million on the top. Also, as always, is that we want to invest in the future. So we are very excited about what we're doing with Stearns and we have that launch coming out. From a launch-cost standpoint, that's costing us about $25 million. And that $25 million, think about $15 million going through 4 models and about $10 million going through sales and marketing lines. And then what I would close with is, again, supporting our brands is advertising a bit down on a year-over-year, but consistent with the third quarter, we want to make sure that we're supporting those brands, especially Stearns & Foster in period of a launch.

Yes. And I think that's a good point, Bhaskar. I mean we're going to get a big return on those investments. It will be primarily next year. But a 20% increase in incremental slots on Stearns & Foster is material. And I think clear evidence that the launch is going well and is being well received by third-party retailers.

It comes from the line of Keith Hughes with Truist.

There was a comment in the prepared statement about north -- in the guidance, North America being down high single digits. So I guess my question is, is that fourth quarter? And that seems like a step down from what you've seen in the last couple of periods. If you could give any details on what's going on there?

Good question, Keith. And yes, it does refer to the fourth quarter. When one thinks about the North American segment, just to be mindful that or one should be mindful that in prior year, we did have a backlog coming out of the third quarter into the fourth quarter. So when you think about the comp, it is a bit more difficult of a comp versus what we had in the third quarter. So if you were to normalize for that, it's really steady as she goes with our updated expectations from an industry standpoint.

Yes. And another way to say that on a GAAP basis, it is a step down because of the backlog last year. But if you look at it on an order basis, between the third quarter and the fourth quarter and what we've experienced, we're not seeing a step down going into the fourth quarter. I would say that it's stable and it stabilized, maybe it's a cat-up, but I call it stable between the third and fourth quarter from an order basis, which is probably a better way to look at it.

And it comes from the line of Atul Maheswari with UBS.

I know you're not providing too much color on '23, but really base case expectation for many at this point is that there could be a recession at some point next year. So my question to you, Scott, is how is the category position to react to such a downturn, the industry has already declined 20%, 25% this year, as you pointed out in the call, especially on a unit basis? So does that really mean that the declines could potentially be moderate from here even if there is a recession? Or would you expect industry declines to intensify in such an economic backdrop?

Yes. I think you hit a great question, and it's really something that we spent a lot of time looking at. Look, I'm happy. I'm looking at a sheet of 26 years of bedding history as we speak and looking at unit volumes over a 26-year period. And the first thing that jumps out at you, and let's just call this year down 25% in units, give or take, but 25%, you can't find another year anywhere in the last 26 years, that is anywhere close to a 25% downdraft in units. And even if you go back to the Great Recession, which I think all of us would say was maybe a great depression. And you look at, call it, a 3-year period there and you aggregate up that downturn. That downturn in total over the 3-year period was about 25%. So it took 3 years to go down 25% during the great depression, I'll call it, and we managed on doing it in 1 year. So it's very strange. And if you correlate that to consumer sentiment, it's very interesting because you also, as you know, consumer sentiment is about as bad as it's ever been, even though employment's good. So the guts of the question to me is really when did the bedding industry go into recession. The question is maybe the overall U.S. industry hasn't been in recession yet or . But I would argue that if you look at the data, it would look like the bedding industry went into recession maybe the end of last year and certainly by the first quarter and has been experiencing a bedding recession currently. So then you go to the question like, okay, well, could it take another step down? It wouldn't look like looking at the historical…

And it comes from Susan Maklari with Goldman Sachs.

Perhaps building on your comments, Scott, can you talk a little bit about the health of the consumer overall? What is the actual effectiveness of the promotions on the ground that we're seeing? Because you noted in your commentary that the higher end continues to stay intact while the lower end feels like it's what's moving away in there. And so as we think about that, can you also talk to pricing as we think about '23 and the ability to sustain the pricing that's been put through over the last 2 years and especially maybe as you think about it across the different brands and price points?

Great. Great job getting 5 questions in on one, and I wrote it down as fast as I could. Bhaskar will try to help me cover off on some of those questions that you slipped in. Do you want to feed them to me now that she's got 5 of them? Promotional environment is normalizing during the pandemic. It became less promotional. Those are generally -- those are expenses of the retailer. And so retailer margins were abnormally high during some of the COVID period. From a manufacturing standpoint, we didn't pull back on incentives or advertising or anything. So as they come back, it's normalizing. And I would expect it's going to continue to normalize. What's the second one?

Pricing over.

Yes. Yes, we took -- we've taken a lot of pricing. As you know, we did -- we don't have margin in our pricing. We're just passing on cost. We're not seeing that as an issue. As I mentioned before, the higher end actually did better. We're not seeing any pushback from the consumer from a pricing standpoint. What you do see is the lower-end segment of the volumes are way down. Some people might point to that as saying that's due to pricing. My personal opinion is that is just comparing to an overstimulated market where we had too much incentive in the system. And I don't think it's a pricing issue. I think it's -- we were overstimulated. So our compares are tough. Closing rates, in general, when customers come in for bedding are high and the general complaint you'll hear is floor traffic. But you don't hear like, oh, the customer came in and then looked at pricing and then walked away. So I think pricing is sustainable. And I think what you really need is consumer confidence, and that appears to be a big issue that you see. And again, like closing rates are -- closing rates are fine. So I'm not seeing an issue from a pricing standpoint but the traffic is an issue.

And it comes from the line of Brad Thomas with KeyBanc Capital Markets.

I was hoping we could just talk about your longer-term outlook for margins. And if those have changed at all, obviously, a question we get regularly is what normalized margins look like for Tempur Sealy? So hoping you could give us any updated thoughts on that? And then just maybe as a quick one. Historically, there have been periods where the retail community experiences some stress. Just any insights you have on the financial health of your retail partners, particularly in the U.S.?

Are you talking about gross margin or operating margin, just to be clear, for both?

More so around the operating margin and overall profitability.

Okay. So Brad, when I think about our operating margins flowing through from gross margins, is it feels like to me there's a fair amount of tailwind. So if you think about our growth initiatives that we have, let's talk about DTC. DTC, we think it's got lagged. It's going to grow faster than the fleet. Our DTC business, whether it's in international or whether it's in the U.S., the margins come in higher than the fleet. So that should help us from a go-forward standpoint. Also is that we believe that Stearns & Foster, we're putting our money where our mouth is around Stearns & Foster in that launch, and we believe that can be the next $1 billion brand. And when you think about Stearns & Foster, it's the more premium end of our portfolio. So that should help from a margin standpoint as well. A couple of other items that I would call out is we think about the SKU, our international product launch. International is though it will be hitting new price points, however, those price points are not that dramatically different than what the U.S. has historically done. And typically, International margins are more constructive than our North America. Therefore, that should be a tailwind for us as well. And then finally, I'll close down with a couple of things as commodities, we've experienced unprecedented commodity inflation over the last little bit, let's call it, 400 basis points of pressure and the power of our brands and from an industry standpoint is we've been able to offset dollar for dollar, the commodity inflation that we've seen through pricing. However, with that -- so that's very constructive from a business model standpoint. However, on the margin line because there's no gross profit that falls through from that, it does create an accounting or a mathematical item. Now it feels like that from a commodity standpoint, depending on what side of the pond that you're on, is that it does feel like that the commodities are coming off their '22 peaks more so in North America, which fully contemplated how we're thinking about the current year and international a little bit of stress. So you put all those items together, it does feel like we have more tailwinds than we do headwinds.

And the only thing I'd add to that, Bhaskar, because if you look at our competitive position in the marketplace, whether it be internationally or domestically, during this downturn, there's no question we're taking significant share. There's no question that some of our competitors are stressed. And there's no question that some capacity is being taken out of the industry, which I think is going to put us in a better position. And I would probably highlight our launches. I mean, normally, when Tempur launches new product, it is powerful enough to help drive the entire industry. And we've got high-end Breeze going first quarter-ish and then after that following with the rest of the Breeze products. So normally in a year, where Tempur launching is usually a good year, not just for Tempur-Pedic usually a good year for the industry.

Scott, Brad I had a question about the retail community and...

Sure. Look, I mean, look, the retail communities had a very healthy run here. They feel like they're well capitalized relative to where they've been in previous years. And I think we're -- the retailers from what we see today, look like they're in very good shape, and I think receivables are in good shape. So -- and I think during this period, a multiyear period, a lot of the retailers closed some stores over the last few years and got more rational from a store perspective and it certainly become much better retailers as we have to, from an online standpoint and pushed back some of the new entries, and we're seeing our historical retailers, traditional retailers become much more agile in Internet marketing and sales and become much stronger entities.

And it comes from the line of Laura Champine with Loop Capital.

I wanted to drill back to some of your earliest comments today, Scott, about the Stearns & Foster business taking slots not from TPX brands, but from competitors. Is there one particular competitor that you're taking share from? And maybe you can -- can you talk about why your wholesale customers are choosing Stearns & Foster instead of that competitor -- set of competitors?

No. Look, when you look at it, we're taking those particular slots are coming from various competitors, not just from one. And we're talking about retailers with a national brand that's supported with a good bit of advertising. And I think they see the wisdom in that as opposed to, I'll call it, third-party brands and others. So I wouldn't say there's just one. And if you go historically, I think maybe the only thing I would call out on kind of market share changes in the third quarter. And again, it's early, and we don't have all the information, but my perception and early data, I think, would show maybe during the second and third quarter, our market share accelerated as far as taking share from the bed-and-the-box guys and the online guys and the new players. It feels like we've made more progress there over the last couple of quarters, maybe than historically, and less against the traditional competitors.

And it comes from the line of William Reuter with Bank of America.

My question is a little bit of a follow-up to a previous one. But when asked about capital allocation, you talked about maintaining a focus on a 2 to 3x leverage ratio. You did say the word acquisition. I couldn't tell whether that was saying that you would be more cautious around acquisitions or whether you are continuing to see some opportunities? And if you are continuing to see them you've bought a breadth of things, whether it's retail in the past or manufacturing capacity, what types of opportunities are most attractive?

Yes. Maybe a little bit clear. Look, in these kind of markets, you actually get more opportunities of people wanting to sell. Of course, at the same time, as a buyer, you're more conservative. And certainly, multiples have come down in all things and especially in our sector. So you become more choosy from a pricing standpoint. So we continue to be active in looking whether or not we make a transaction or not, I don't know. You never know. But it's certainly a dynamic market. But you're also right, at the same time, we're watching our own cash flows. We're watching the market and watching our financial resources. So I wouldn't say we're less aggressive or more aggressive. I would say we're basically doing the same thing. So probably the tone of the conversations have changed a little bit because most people in the sector, numbers are going backwards, some and have gone down. But we're still -- from a strategy standpoint, looking for long-term investments that will make us stronger competitively for the long term. And the right deal comes along, we certainly would be in the marketplace.

And it comes from the line of Carla Casella with JPMorgan.

I have a cash flow-related question with all of the launches coming, and you talked about some supply -- still supply chain disruption. What's your kind of view for how much inventory you need to be carrying? I know this is typically more of a just-in-time industry, but as we look into the launch process, do you expect working capital to be a bigger use of cash in the first half of next year than typically?

That's a very good question. So if I just take you back in a little bit of history, in 2021, we were very challenged from a supply chain standpoint and the industry was and the world was as well. So we got ourselves into -- and the industry got ourselves into a situation where inventory was in a very challenged state. So when you think about where we are and in order to be able to service our customers better is that we've made the decision to carry some safety stock in the form of finished goods as well as some raw material to take us through these disruptions that happen from time to time. However, with all that said, what we've been able to do is we've been able to take our days down or inventory days from the second quarter, down about 6 days. And as I anticipate that from a going forward in '23 is that as the supply chain continues to stabilize, is that our days would come down incrementally from where they are currently.

And I'm not showing any further questions. With that, I will turn it back to Scott Thompson for his final remarks.

Thank you, operator. To our over 12,000 employees around the world, thank you for what you do every day to make the company successful. To our retail partners, thank you for your outstanding representation of our brands, to our shareholders and lenders, thank you for your confident leadership and its Board of Directors. This ends our call today. Thank you, operator.

You're welcome and everyone, thank you for participating in today's conference. You may disconnect at this time. Good day.