Good day, everyone, and welcome to today's Tempur Sealy International Inc. call. [Operator Instructions] Please note, this call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Aubrey Moore, Investor Relations. Please go ahead.

Thank you, operator. Good morning, everybody, 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 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 on 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, it is my pleasure to turn the call over to Scott.

Thank you, Aubrey. Good morning, everyone, and thank you for joining us on our first quarter 2024 earnings call. I'll begin with some highlights from the quarter and then turn the call over to Bhaskar to review our financial performance in more detail. After that, I'll provide an update on our proposed acquisition of Mattress Firm, which we expect to close by the end of the year. Lastly, I'll open up the call for Q&A. In the first quarter, net sales were approximately $1.2 billion, and adjusted EPS was $0.50. Our adjusted EBITDA was $198 million, consistent with the same period last year. These results are evidence of our strong competitive position in the market. Turning to a few highlights. First, we continue to develop and launch high-quality bedding products in all the markets we serve. We are actively refreshing our U.S. Tempur portfolio with our latest Adapt products. These products are designed to address the fundamental consumer need, alleviating aches and pains. They feature our most innovative Tempur material and are engineered to provide an impressive 20% improvement in pressure relief compared to standard material. When our mattresses are combined with our proven range of smart adjustable basis, the result is a comprehensive advanced sleep system. The rollout of over 60,000 Adapt mattresses to retailers is on schedule and we expect to be substantially rolled out by Memorial Day. Early reports from our third-party retailers and our direct-to-consumer operations are strong. We also, to select national retailers, recently rolled out ActiveBreeze, our most customizable heating and cooling sleep system, priced at approximately $10,000 for queen and base set. This system caters to the discerning ultra-luxury consumer seeking cutting-edge sleep solutions, offering both active climate management and the benefits of Sleeptracker-AI. Our third-party retailers and our company-owned Tempur stores are…

Thank you, Scott. As mentioned, in the first quarter of 2024, consolidated sales were approximately $1.2 billion and adjusted earnings per share was $0.50. There are approximately $18 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. Turning to North American results. Net sales declined 2% in the first quarter. On a reported basis, the wholesale channel declined 3% and the direct channel grew 8%. North American adjusted gross margins improved 160 basis points to 39.5%, driven by commodities and operational efficiencies partially offset by changeover costs to support new OEM distribution and product launch costs. North American adjusted operating margin was consistent to the prior year at 15.3% driven by improvement in gross margin, offset by investments in growth initiatives. Now turning to international. International net sales were consistent year-over-year on a reported basis and declined 2% on a constant currency basis. As compared to the prior year, our International gross margin improved 140 basis points to 55.4%, driven by commodities and operational efficiencies. Our International adjusted operating margin improved 20 basis points to 15.5% driven by the improvement in gross margin, partially offset by investments in growth initiatives. Now moving on to balance sheet and cash flow items. At the end of the first quarter, consolidated debt less cash was $2.5 billion, and our leverage ratio under our credit facility was 2.85x within our historical target range of 2 to 3x. We generated record first quarter operating cash flow of $130 million, an improvement of $30 million year-over-year. We have already started to execute elements of our strategy to finance the Mattress Firm transaction, which is consistent with our…

Nice job. Thank you, Bhaskar. Before opening the call for questions, let me provide a brief update on our pending acquisition of Mattress Firm. As previously announced in the fourth quarter of 2023, we certified substantial completion with the Federal Trade Commission's second request. We continue to work with the FTC to advance the transaction's approval process and anticipate the FTC to complete its review in the second quarter. As previously disclosed, we continue to expect the transaction to close in mid- to late 2024. In connection with and contingent upon this acquisition, we are proactively pursuing a divestiture plan. We are also engaged with numerous mattress firm suppliers on post-merger supply agreements. I'm pleased to share that 6 of the 7 suppliers we've offered post-closing supply agreements have successfully negotiated and executed a win-win agreement with us. Lastly, a brief comment on Mattress Firm's financial performance. Mattress Firm recently made their quarterly results available on their website. We encourage you to review Mattress Firm's website for more information on their financial performance for the most recent quarter, which we believe was consistent to slightly ahead of the U.S. industry trends. In summary, we're making good progress on closing the proposed transaction and we look forward to joining with the Mattress Firm team. And with that, I'll open up the call for questions. Operator?

[Operator Instructions] And we will take our first question from Susan Maklari with Goldman Sachs.

Scott, I wanted to talk a little bit about how you're thinking of the year coming together. I think coming into 2024, the expectation was that earnings in the first half would be driven more by margin recovery while the top line was still perhaps a bit soft and then seeing some recovery in the volumes in the second half. I know you mentioned in your prepared remarks, you continue to expect that. I guess, can you talk a bit about what gives you the confidence that we will see that second half improvement in the volume? And any thoughts on the puts and takes to how the earnings may come together as we move through the balance of the year now that we're one quarter in?

Sure. Thank you for that very short and simple question. Look, when we look at it -- the first thing that you asked about the confidence in the back half, quite frankly, the comps get easier. That's probably one of the biggest things is with the comps in the back half are much easier than in the front half. Also, when we look at our products that have been launched, they're resonating in the marketplace, and they should have momentum both from an international and a domestic standpoint. We also obviously had good margin performance this quarter. I expect that we're going to have a positive gross margin performance throughout the year. . I guess the last thing I would kind of throw into your question is if you look at the historical data and where the bedding industry is, I think everyone who had looked at that data, and I'll talk primarily about the U.S. at this point because that's where the data is the easiest to look at, is you'd have to say the bedding industry is in a depression and has been in one for a number of quarters. And so it's got to normalize at some point, whether it's this quarter or whether it's a quarter out or two. There's no reason to believe it wouldn't normalize. There haven't been any products or any changes or any structural changes in the need for mattresses. And we may be building up pent-up demand. I don't know. It's hard to always tell. But certainly, we've been bouncing around the bottom for a long time, and it just seems very reasonable that we should begin to normalize into what I'd call relatively minor growth from an industry standpoint. And then quite frankly, even if the industry doesn't deliver that growth, as you know, we've been a fairly robust market share gainer over a number of quarters. And we don't see any reason why that won't continue going into the back half of the year.

And Susan, as it relates to puts and takes from an earnings standpoint, outside of the volume items that Scott mentioned, again, some new distribution that we have in the U.S., products resonating and whatnot, we do have some margin drivers as well. If you think about gross margin, we had some nice performance in the first quarter. As Scott mentioned, we'd expect margin expansion as we go throughout the year, double tapping in a couple of those items. The operational efficiencies that we've been speaking about for some time now, we saw the green shoots in the back half of last year, and we continue to see that in the first quarter. That should give us a benefit more in the first half, but in the back half as well. And the commodities have been a bit of a tailwind for us that we'd expect throughout the year as well.

And we will take our next question from Bobby Griffin with Raymond James.

I guess I want to follow up there on gross margins, really nice performance during the quarter on a consolidated basis as well on a segment basis. Can you maybe talk a little bit how some of the puts and takes played out? Did the launch costs as well as the new manufacturing facility startup costs play out as expected? Or did any of that cost get shifted maybe into 2Q?

Bobby, it played out as expected. So we did indicate that from a new capacity standpoint, specifically Crawfordsville, is that would be in ramp mode and that, that did happen, very largely consistent with what we had imagined. As we get into the second quarter and beyond, is we will start seeing some revenue from the new distribution, specifically in OEM, that would offset that. Also, 4 models, we did indicate from a phasing standpoint year-over-year, we'd have a little bit more in the first quarter than we did in the prior year, and that played out as expected. In the second quarter, we'll have the continuation of Tempur, but largely in line from an expectation standpoint. So again, when you think about what the expectations for margin as we get throughout the year, those tailwinds will continue, whether it be the things that we have under our control, which is the operations group, again, hitting on all cylinders as it relates to driving productivity. And just as a reminder, once we get what we recoup what we -- from the 2019 levels, then we'll go back to what we've historically had, which is driving productivity out of those addressable COGS from a go-forward standpoint.

And Bhaskar, I mean to highlight it, if I'm not mistaken, I mean, Crawfordsville was a little bit of a headwind. That's gross margin in the first quarter. And even with that very strategic headwind, we still were able to step over it and deliver a solid gross margin performance.

And we will take our next question from Rafe Jadrosich with Bank of America.

I wanted to ask on the share gains that you've been driving, how do you think you performed versus the industry in the first quarter? And then along with that, just the shelf space gains that you've made, can you just talk about the timing there? And if there's additional white space in some of those retailers?

Sure. And let me start out by saying, the information is not perfect when you're working in this industry and market share and kind of guessing how everybody performs. So this is kind of what I'll call our best thinking is -- and we're talking about the U.S. market primarily when we talk about this. So if you look at like information you get about springs and if you look at other data, you would perceive that the industry was down, what do you think Bhaskar, double digits from a sales standpoint, call it, 10% for rounding?

Yes, Scott.

So round it to 10%, okay, for the first quarter. And then you know we're a pretty good size of the market. And you can see we're down, call it, 2% to 3%. So you can do a little bit of math and say, what was everybody else down. And you should probably come up with everybody else, excluding us, would have been down probably close to 15% in the first quarter. So as a preliminary look and based on the data we have today, I would say, call us 3%, call the rest of the industry 15% down would be kind of how we would quantify the share gains. Then you asked specifically white space, shelf space, our gains come in two pieces. And the most important piece is slot velocity for what we'll call it the installed base how fast do we get sales from the installed base. And that's where the lion's share of share gains come from because we're fairly well distributed. But yes, there is still some white space. And there's at least a couple that come online in the second quarter, which would be new space, we'll call it, and they were not in the first quarter and they'll come in the second quarter. Then you asked about, okay, after that, there's some more. Yes, there's still several other white spaces to work on. But really, the secret to, we'll call it, share gains and future success is slot velocity and making what we've got in the marketplace, more productive, both for us and for the retailers. That's a win-win. When we're talking about the U.S. If you talk about internationally, there's a lot more white space in the international market where we're not as well distributed across the world and every country is different.

And we will take our next question from Peter Keith with Piper Sandler.

Just regarding the FTC decision, I guess I was curious on what gives you confidence on predicting the timing of that by the end of the second quarter?

Yes. If you look at -- and this goes back to the original disclosure of the transaction. And first of all, let me say, we're on our original time line that we originally disclosed when we started this journey or gauntlet ever how you'd like to describe it. And it's based on -- we've always said, look, if we need to go through litigation, we'll go through litigation. And we've always kind of put that in the budget from a timing standpoint because we're very comfortable if that's the road that we need to take. We clearly have given the FTC additional time because those conversations have been constructive and productive. We're dealing with high-quality people who are taking their job very seriously and learning more and more about the industry. And we think the more they learn about the industry that's more likely that we'll have the meeting of the minds. But there's certainly no guarantees, and we're certainly not finished yet. But the timing framework has always been we assumed that we would have litigation and win through litigation. But I think the most important thing when we started the process was, it was important to do this, what I'll call, right and get the right answer as opposed to just maybe do it fast. And we're using that principle as we work through with the FTC in all areas.

And we will take our next question from Seth Basham with Wedbush.

Two-part question if you don't mind. First, a follow-up on your response regarding the FTC. If we do need to litigate this, do you still expect to be able to close the transaction this year? And then secondly, regarding your sales trends in the quarter, can you give us a little bit of perspective on the cadence and then how the second quarter has started off?

The answer to your first question is yes. We still would expect to be able to close it within this calendar year. On cadence, I'm going to break up the cadence question in kind of two buckets, which I don't normally do. But this time, I think the two buckets kind of differed a little bit. There is a cadence of sales at retail, okay, call those end user sales. And then there's a cadence of sales wholesale on how we get orders. And as I think if you go back and listen to the fourth quarter earnings call when we disclosed it last time, we were getting mixed messages. So -- if you look at it from a retail perspective, end user, there's no question that January was a tough market in the U.S. One, because January was tough; and two, because of weather. Then February was positive. And I think probably comped positive February over February and was obviously a holiday period. And then I think March was down at retail. Then moving to the beginning of the second quarter, I would say that retail sales were flattish is what it feels like. Again, information is not too precise. If you're talking about our orders and our sales, we'll call it wholesale, we were actually up in January and started the quarter slightly positive as I think probably retailers were stocking up in anticipation of President's Day, then our orders kind of flattened out, we'll call it, in February as they kind of were working through the stock and then were slightly down in March and then have picked up and are flattish in April. Again, in a non-promotional period. And although flat is not a word I particularly like, I like it better than down. I like things that are different than flat to go up. Actually flat in our orders in a non-promotional period would be better than we've experienced over the last, call it, 3 or 4 quarters. Generally, the trends have been during nonpromotional periods, orders have been slightly negative and then they've been positive during promotional periods. So I don't know if it's a green shoot or not, but that's the best information we have as of today.

We will take our next question from Michael Lasser with UBS.

If your sales instead of being up low- to mid-single digits this year are down low- to mid-single digits, what would that mean for your profitability? And also, if the transaction does not go through, can you give us a sense of how aggressively you would be in buying back your stock?

Sure. Bhaskar and I have both worked on that a little bit. I think, first, on the sales standpoint, it matters where the sales are. If the decline is in, we'll call it, starter beds, entry-level product, that margin is not very high and probably is not too significant. If that decline is in high-end beds, primarily Tempur, it would be very noticeable. Why don't you -- you want to give them a little bit more around that, Bhaskar, then I'll take the capital allocation.

Absolutely. So generally, the way I thought about the business within certain confines, meaning within a certain band, as I thought about our incremental or decremental being somewhere around 30% to 35%. So as Scott mentioned, if it comes from the value, let's call it, the value price points. it would be, let's call it, something lower than the 30% to 35%. If it's coming from the luxury brands, whether it be Stearns & Foster or Tempur, it is going to be something north of that. So let's call it 40-ish above if it was in the -- those luxuries. And if it was in the same kind of quantum if you get in those value price points.

And I think the second part of your question, because you squeeze 2 in, in 1, was what will we do in the unfortunate case of the Mattress Firm transaction were not to close. We clearly would be overcapitalized and we always do, which we would look to deploy that capital in a way that has a high return on invested capital, probably because of the size of the amount of money we will have accumulated the vast majority would end up probably in share repurchase, but that would be dependent on opportunities and stock price. . But probably if you ask me today, that would -- that's going to end up in share repurchase would be my guess. It will be a Board decision. And the velocity of that will depend on the price of the stock and it will probably depend on the outlook and the uncertainty in the economy. But under a fairly reasonable period of time, we would want to get back in line with our -- what we think is more of our leverage target, which is 2 to 3x. So we would probably be pretty quick -- but again, it would be dependent on factors like stock price and economic outlook.

And we will take our next question from Brad Thomas with KeyBanc Capital Markets.

I wanted to ask about advertising. And Scott, as we're out talking to retailers, we continue to hear that Tempur is the most successful with its advertising and its share of voice. And so I was just wondering if you could comment, number one, do you think there could be any changes on the horizon from a competitive standpoint in terms of your competitors trying to lean in and be more effective with advertising this year? And then just as you think about the upcoming election, are there any nuances that we should think about in terms of your ad plans for this year?

We would be thrilled with our competition upping their advertising. I would -- I think that actually would be a net positive, certainly to the industry and to us because I think the biggest problem, and I've talked about it before on open mics is getting people in the funnel. And I think that's why the unit decline is so drastic this time in what is a minor downturn in the U.S. industry in the U.S. economy. So I hope so. I would love to see all the manufacturers do more top of the funnel advertising and pull their weight to help retailers, biggest problem retailers have, which is floor traffic. And I think that's part of our responsibility as manufacturers to help drive traffic into the store. So I haven't seen anything, but I think some retailers are putting pressure on other manufacturers to kind of "get in the game." So we're hoping there's a change there. As far as the advertising market and the elections, there will be certain markets where it will be a complete mess. Pricing at times gets a little bit weird. We've accounted for that in our thinking on our guidance, but it's always a little bit weird when there's an election. But we -- hopefully, we've got that covered. Certainly, we've been planning for it for more than a year.

And we will take our next question from Keith Hughes with Truist.

The question is on international. If you could talk about how the year is shaping up in terms of the guidance, the comps there just to be a bit harder than what you have in North America?

You want to take that, Bhaskar?

Absolutely.

Is it harder? I don't think it's harder, is it?

Well, what I would say is -- you can answer that 2 different ways. One way is I would think about in the first half, we did have 4 models that we have to comp over. However, when you think about the back half of 2020 -- 2023, those 4 models weren't there. However, we did see some growth. So what does all that mean? As I think about the international and let's call it, outside of Dreams, is the products have resonated with the consumers and we have effectively wrapped up that launch in the United Kingdom. And our expectation is, is that the growth rate that we saw exiting in 2023 is that would continue as we get into 2024. So call that mid- to high-single digit from a growth rate standpoint. When I just -- when I pan across international, just from a geo standpoint, the international market is as from a macro standpoint is as interesting as the U.S. And however, with all that is that our business continues to outperform the competitive set.

Yes. I think the way I think the international business, we've got some great products in the marketplace that we've got a lot better slot velocity and there's a lot more white space. So that feels good. The only call out would be, and you mentioned it a little bit was Dreams. Dreams does have tougher comps. And in the U.K. retail market is worse than it was last year in the bedding section. So that one's a little bit choppy, but the traditional Tempur business around the world feels like it's got some really good momentum.

And we will take our next question from Phillip Blee with William Blair.

I wanted to piggyback on an earlier question here. Can you talk about your sales assumptions for brand mix for the remainder of the year? Should we expect this mix to remain relatively consistent? And then how did that compare to performance in the first quarter? And then how should we think about mix shift impact on gross margin throughout the remainder of the year under those assumptions?

Okay. I'll start the top and then detail, so you can have time to think through that. Look, if you look at the first quarter, the higher ASP beds did better than the lower ASP beds. And the brand that obviously did the best is Tempur and grew and then Stearns would be in the middle. And then Sealy had some pressure on it and was negative in the first quarter, and that's been kind of the trend. Going forward, that's where I'll look at Bhaskar and let him go. What do you want to talk about?

Absolutely. So when you think about the first quarter, the uniqueness of it is that we have new distribution that we're very excited about and really that begins in the second quarter and beyond. And just as a reminder, that new distribution is through our OEM channel. So when you think about what's going to be different from the rest of the year versus the first quarter is I would think about that OEM mix. Again, what we've said, we've highlighted on open mics is, on an annualized basis, that's about $100 million of revenue. We're not going to get all that in the current period. Think of that happening from Q2 through the end of the year. However, when you think about mix overall and being a gross margin driver is that's not going to show up in a bridge. And the way I think about that is when you think about that revenue mixing in, as Scott said, with the Tempur and the Stearns & Foster business, it's not a big needle mover. Also what that OEM does for us is it's more units through a plant which makes every other unit cheaper.

[Operator Instructions] We will take our next question from Laura Champine with Loop Capital.

It's a follow-up on the international business, which did decelerate sequentially. It seemed like that deceleration was worse in the direct business. I'm wondering if that might have to do with higher price points in that segment of your business. But just any color you can give us about the decel on the international side would be helpful.

Laura, great double tap. So here's the way I would answer that. If you think of the, let's call it, the legacy international business, which is everything outside of Dreams. If you go from 4Q to 1Q and you were to remove the impact of the floor model comp, the growth that we saw in the fourth quarter, that momentum continued in the first quarter. So no deceleration there. The one -- the item I would call out is, as Scott mentioned, is the U.K. market. The market is when you think about the totality of the world and what geos are more than the others is the U.K. market is going through something. And we still continue -- Dreams continues to perform well and performed outsized from an outperformance standpoint versus the competitive set. However, it's a highly competitive market.

And we will take our next question from William Reuter with Bank of America.

I just have one. In terms of the weakness you're seeing or that the U.S. is seeing in existing home sales when you've looked at existing home sales historically, what do you think that the correlation is between that data and your sales? And do you think we really need that to pick up to see a little bit of a rebound?

Yes and no. The way we think about housing is it's either a little bit of a headwind or a little bit of a tailwind. It would be helpful if there were more housing formation. I don't have an exact percentage or correlation number. But it's probably -- housing starts are probably in the top -- sure top 5 maybe top 3 things we look at. But really, consumer confidence is -- would be number one. And number two would be things like innovation, quality of advertising that stimulates demand. And then you'd probably bump into housing, maybe number 3 or number 4. What I'll call a slight uptick in housing or a slight downtick in housing isn't something that we feel a lot of, but we would rather more housing formation than not. So I don't think we have to have it, especially considering the low level we're working from. But it would certainly be helpful.

And we will take our next question from Bobby Griffin with Raymond James.

Just wanted to quickly ask on 2Q. Anything you want to call out as we think about the model, I know we still have some carryover in the new product launch costs. And then with the new distribution wins, is the timing of those pretty clean for the quarter where -- I mean, I think that would imply North America revenue could flip positive if the industry stays about the same. Is that fair? Or am I thinking about it wrong?

No, great question, Bobby. So the way I would think about that is, let's call our expectation for the second quarter on a consolidated basis would be, let's call it, flattish. The call out there, you're exactly right, from an OEM standpoint, we dosed that new distribution. That will start in the second quarter and then from the back half of the year, continue to gain momentum. When you think about the uniqueness of the second quarter on a year-over-year basis is there was a fair amount of floor models that flowed in 2Q of 2023. And think about that as about a 3% headwind. . So when you think about on a consolidated basis, what would our growth be without those four models? Absolutely reasonable that we would see some growth. However, all in, the expectation is, is that we would be flattish. If I just do a little bit more landscaping from a P&L standpoint, the gross margin is that we would continue to, on a year-over-year basis is we would continue to expand in the normal seasonality that you'd see from going from Q1 to Q2. And then as you think about the advertising, it's a big period. We've got Memorial Day and the timing of the 4th, some of that spend gets pulled into Q2. So advertising, as we called out, is we're going to make some investments in there, not only to support our retailers in this very important period, but also the new products that we have, the Adapt in the U.S. as well as what we're doing internationally.

And we will take our last question from Brad Thomas with KeyBanc Capital Markets.

Two quick follow-ups here. Maybe Scott, wondering if you could talk a little bit about -- once the Mattress Firm deal closes, assuming it goes as planned, a little bit what year 1 looks like for you? And then Bhaskar, in case I missed it, did you give us an update on commodity and raw material inputs in the year?

I think that's a great question that I'm not going to answer. Look, we have -- we're not going to roll out too much detail on the first year business plan until things are a little more settled and set. Other than to say, we believe that, that business unit would run separately and decentralized. But we're going to keep the plans and the forecast and the accretion detail and all that until we finish this little exercise we're doing in D.C.

And Brad, as it relates to commodities and raw material assumptions, largely speaking, they're consistent with how we entered the quarter. Just a reminder, what we're thinking is on a consolidated basis, gross margins would be up for the full year, call it, about 150-ish basis points and about, let's call it, 50 or so basis points would come from that from commodities. When you think about what happened -- and that remains as we sit here today. As you think about commodities overall, and when I think about commodities, it's everything from logistics to ocean cargo to traditional lumber, oil and whatnot or the oil derivatives, there's been some puts and takes in that portfolio. However, largely speaking, it remains consistent when you think about it at the aggregate level.

It appears that we have no further questions at this time. I will now turn the program over to Scott Thompson for closing remarks.

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

Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at any time.