Good morning, ladies and gentlemen, and welcome to the Somnigroup Third Quarter 2025 Earnings Call. [Operator Instructions] This call is being recorded on Thursday, November 6, 2025. I would now like to turn the conference over to Aubrey Moore of Investor Relations. Please go ahead.

Thank you, operator. Good morning, 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 statements speak only as of the date from 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 is posted on the company's website at www.somnigroup.com and filed with the SEC. Our comments will supplement the detailed information provided in the press release. As a reminder, year-over-year comparisons are impacted by the acquisition of Mattress Firm in the first quarter of 2025 and the related divestiture of Sleep Outfitters in certain Mattress Firm retail locations in the second quarter. At certain times in the call, to better illustrate underlying business trends, we will focus on like-for-like numbers defined as reported numbers adjusted for the acquisition and divestiture impact. We would also like to mark the calendars for March 4, 2026, as we will be having our Investor Day in New York. That will include various members of executive management from Somnigroup, Tempur Sealy and Mattress Firm. Formal invitations will be sent out closer to the event. And now with that introduction, it's my pleasure to turn the call over to Scott.

Good morning, and thank you for joining us on our third quarter 2025 earnings call. I'm pleased to share with you that Somnigroup International delivered a record quarter across nearly all key operating metrics. These results were driven by the early benefits from the Mattress Firm combination and successful execution of our key operating initiatives. Importantly, we achieved this strong financial performance while the U.S. bedding market remains basically flat from a sales perspective, and it is still at trough levels, while the U.S. housing market is yet to recover and international markets continue to face numerous challenges. Additionally, we have not fully realized all of the benefits from the Mattress Firm combination. This backdrop underscores the potential of our business, the strength of our competitive position and the meaningful opportunity ahead as our markets improve and we continue to deploy capital and optimize our vertical structure. In the third quarter of 2025, we're pleased to achieve record net sales, adjusted EBITDA and adjusted EPS. Net sales were up approximately 63% to $2.1 billion. Adjusted EBITDA was up approximately 52% to $419 million, and adjusted EPS was up approximately 16% and to $0.95 per share. Now turning to some highlights for the third quarter. First highlight. Our aggregate like-for-like sales growth was 5% over the same period last year, led by strong performance in our international operations, which I'll discuss in a minute. Tempur Sealy North America reported 5% like-for-like sales growth which is the strongest quarterly sales trend in 9 quarters. This performance was broad-based across our portfolio and price points as we significantly increased our balance of share at Mattress Firm and experienced growth with our other third-party retailers. Both Tempur-Pedic and Sealy brands reported solid growth in the quarter, driven by our new Sealy Posturepedic products and…

Thank you, Scott. In the third quarter of 2025, consolidated sales were $2.1 billion, and adjusted earnings per share was a record $0.95, up 16% over the prior year. There are approximately $40 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 the combination. We expect pro forma adjustments to decline going forward. As a reminder, we have aligned accounting for store occupancy costs across Somnigroup, which resulted in Tempur Sealy reclassifying our store occupancy costs from operating expense to cost of goods sold. We have adjusted prior year Tempur Sealy financial information included in today's earnings release to reflect this change for ease of comparability. I will be highlighting like-for-like comparisons to normalize for these items in our commentary. Now turning to Mattress Firm results. Net sales through Mattress Firm were approximately $1.1 billion in the third quarter. On a like-for-like basis, Mattress Firm sales grew 3% over the prior year, which includes strong same-store sales growth of 5%. Mattress Firm's adjusted gross margin was 35.6% and adjusted operating margin was 9.4%, in line with our expectations. Now turning to Tempur Sealy North American results. Like-for-like net sales through the wholesale channel grew approximately 10% in the third quarter, normalizing for the previously disclosed foreclosed distribution. Without this normalization, the wholesale channel grew approximately 6%. Like-for-like net sales through our direct channel declined 4% in the third quarter. North American adjusted gross margins increased 1,700 basis points to 58.6%, primarily driven by the elimination of the intercompany sales to Mattress Firm from Tempur Sealy. On a like-for-like basis, North American adjusted gross margins declined 40 basis points versus the prior year, primarily driven by merchandising mix,…

Thank you, Bhaskar. Well done. Just a couple of thoughts on capital allocation. First, we are pleased to report our investment in Kingsdown, acquiring 25% passive interest in this leading North America luxury mattress manufacturer and valuable buyer to Mattress Firm. This will allow SGI to participate in expected growth in Kingsdown sales and profits as their presence on Mattress Firm's floor expands and they pursue other growth opportunities. This decision reflects our disciplined capital allocation strategy, which is focused on high-return investments to strengthen our competitive position and drive long-term value for shareholders. Second, we're ahead of our financial plan, and we believe that we've mitigated significant risk over the last few quarters, including those related to the Mattress Firm combination. As a result, in the first quarter of 2026, we intend to begin to allocate approximately 50% of free cash flow to capital returns to shareholders in the form of dividends and share repurchase. At the same time, we will continue to deleverage, targeting our historical range of 2 to 3x adjusted EBITDA. After we are comfortably back within our targeted leverage range, we'll reevaluate this allocation. In closing, this quarter's performance reaffirms our strength of our strategic direction and underscores our momentum we've gained through the combination with Mattress Firm. We've demonstrated our focus on long-term growth and our ability to navigate a complex industry backdrop across our Tempur Sealy, Mattress Firm and Dreams operations. We are positioned as a global industry leader committed to delivering products that provide customers innovative solutions that can change their lives through improved sleep. Our operational agility, strong manufacturing capabilities, trusted brands, retail leadership and exceptional workforce drive Somnigroup's performance and we expect will drive future value creation. That ends our prepared remarks, operator, you can open the call up for questions.

[Operator Instructions] Your first question comes from Susan Maklari from Goldman Sachs.

I want to talk about demand. It's interesting to see how it sounds like the industry is starting to come back a bit and that's really counter to what we've seen in the housing market, but also just what we're hearing in terms of housing and consumer-related categories broadly. Can you talk about what is driving the relative divergence that we're seeing in bedding and how much of it do you think is attributable to the efforts that you've put in over the last several months and years around new products, more recently, some of the ad spend and the initiatives there. And how we should think about the sustainability of it, just given the macro and the environment that we're in?

Thank you for your question, Susan. All 12 of them that you wound into one. First of all, I think we've talked about this before. Look, the housing market can be a headwind or a tailwind for the bedding industry. But we've always thought of it as it's in the top 5 items that we think about, but it's certainly not the first or second. And I think the point you make in your question is exactly right. The bedding industry can be successful without the housing market necessarily be turning around. And we've always thought about in the bedding industry, what drives the bedding industry, of course, is innovation. And clearly, the new Sealy Posturepedic product that came out this summer is helping us, Mattress Firm and the industry. It's also -- the other thing we think that drives the industry is advertising. And you know that we've completely retooled we'll call it the advertising at Mattress Firm, and Mattress Firm is the leading advertiser in the U.S. by a factor of 2 and we've changed their creative and we've changed the placement and some of the strategies there. And we're seeing benefits again for us and for the industry. For the first time in, I think, probably 15 or 20 years, we had direct advertising coming out of Tempur Sealy on the Sealy brand in support of the new Sealy product. That certainly has been incremental. And then the other things we watch obviously are consumer confidence. And it hasn't been robust, but at least it hasn't been negative. So when we look forward, certainly, we're hoping for lower interest rates. And I think if you put a 5 handle, on the 30 year, you might get quite a bit of activity in housing and probably furniture and…

Your next question comes from Bobby Griffin from Raymond James.

Congrats on the momentum here in the quarter. I'm going to hit you with a 2-part question, unfortunately. But when you kind of sit and look at the business today starting to flex and you kind of look at the enterprise as it's set up now, where do you see the most opportunities for growth among the different brands that SGI is pushing into? And on the optimization of the enterprise, is there a big unlock to come? Or is it more little parts that get more optimized over the next kind of 3 to 5 years during the recovery?

Okay. I think I got your question, and Bhaskar, help me out. So when you look at it by brand, okay? Obviously, I think the Sealy posturepedic brand probably has a greater growth potential in the short term, next few quarters. Some of that is new technology, some of that's new advertising. And quite frankly, it's got an easier compare in that the product we're replacing had a little bit of age on it. Then you have Stearns coming out and we've cannibalized a little bit of Stearns with the new Posturepedic product as we moved it upstream from a pricing standpoint. And we'll have new Stearns out, call it, late 2026 with some interesting technology. And that's certainly an opportunity there. And then as you know, I mean, Tempur is just magical, and it continues to take share every quarter a little bit and I would expect it to continue. But I think also when you look at opportunities, if you look at the whole enterprise, you have to say all of the changes we've made in Mattress Firm are really just getting started. I mean we've changed the advertising program. There's certainly a more sophisticated and broad-based looking at the merchandising strategy to really understand what products on the floor are good for customers first and are good for Mattress Firm. And I think that's going to continue to pay benefits. And then you've got the whole bucket of synergy, cost synergies, which, as we've talked about, are going to take -- it's a multiyear project. as you work through logistics, warehousing, delivery, lots of stuff, but there's a good trail there that's going to be -- is going to -- that keeps on giving for a number of years. And I would be remiss if I didn't…

Your next question comes from Rafe Jadrosich from Bank of America.

There are a lot of moving pieces here just on the guidance. In terms of the kind of guide to guide changes, can you just walk us through what assumptions have changed from the prior guidance. It sounds like a lot of that is just better synergies on the revenue side. And then what's embedded in terms of like-for-like and underlying industry growth in the fourth quarter?

Absolutely, absolutely. And if I were to just think about it high level, there's only been a couple of items that we've refreshed on as it relates to our expectations. The first one is around the industry. We expected the industry to be, let's call it, down mid-single digits. That's for the full year. Sitting here today, our expectation is that it's going to be down low to mid-single digits. So an improvement from an industry environment standpoint. Then what I would go to is the balance of share. Previously, where we were at is thinking about it as low 50% from a balance of share of the family brands into Mattress Firm. Now we're at the mid-50s. So as it relates to a high level, those are the 2 moving pieces that impacted how we performed in the third quarter and then our expectations for the full year. As it relates to the fourth quarter specifically, let me just aggregate that a bit. So given our sales guide of in and around $7.5 billion for the full year, think about the fourth quarter somewhere a little north of $1.9 billion. If you ratchet that down, what that would get you is from a Tempur Sealy, let's call it, like-for-like legacy standpoint, that would put the growth rate in Tempur Sealy somewhere between mid- to high-single digits. Going to North America on a like-for-like basis, that would imply a mid-single digits. And then turning to Mattress Firm, we called that out specifically, but think about that as low-single digits from a growth standpoint in the fourth quarter. As you go below the line, just call out for gross profit. Naturally, what happens is, is that you get the seasonality of the business, the third quarter being the highest on a consolidated and on a business unit perspective and the natural step down that you'd expect going from the third into the fourth.

Your next question comes from Peter Keith from Piper Sandler.

Great results, guys. Bhaskar, if I could just follow up on that. There's a little bit of short-term investor anxiety around the fourth quarter just because following last year's election, the industry did improve. So we'll just say kind of high-level compares get a little bit tougher. It seems like the outlook you just gave on the like-for-like is basically a continuation from Q3, I guess, slightly tougher compares. So if you break out your crystal ball, I guess how do you think about the fourth quarter as this, I don't know, coming off the bottom, but still a little bit more challenge compares year-on-year?

Great question. I'm going to jump in and let Bhaskar clean me up because I also thought that there was, I'm going to call it, a pretty good-sized bump in the fourth quarter last year when we had a peaceful transition of government is what we call it. And so we studied that. And because we now own Mattress Firm, we have more data. Before, when we talked about that, we had to look at our wholesale orders, which can kind of be lumpy and sometimes they don't totally track retail sales from a timing standpoint. So getting that kind of data was difficult. But now that we had -- have Mattress Firm, and if we could go back and look at last year's fourth quarter on a day-by-day basis and week by week and then look at our data, I would tell you that I do not believe that we had a bump in our business in bedding, in Mattress Firm or Tempur Sealy from a peaceful transition of government, which was different than my thinking going into preparing for the quarter. Fair Bhaskar? Look through that data. But they basically had to pull that data to get me off of that same anxiety that you're mentioning.

Your next question comes from Daniel Silvertstein from UBS.

Given the strong progress you're making in gaining the balance of share at Mattress Firm, what penetration level is reasonable at this point in 2026 or 2027, what's the upper bound we should think about from that standpoint? And then maybe just 1 quick follow-up. Where will Kingsdown fit in the assortment at Mattress Firm?

Sure. Let me answer it this way. The way we think about Mattress Firm is that a reasonable balance of share for the strength of our brands and they're running a multi-branded retailer. When we look across all of our customers and everything is to think about it in the low 60s, 62% of the business would probably land in the family brands, okay? And I think we'll be there. There's still some merchandising changes that will go on in the fourth quarter. So -- but we'll be there probably, give or take, at that run rate by the end of the year. Now after that, that's going to bounce around a bit. And it will bounce around based on the strength of the innovation of each brand, whether it be family brand or outside brand and the strength of their sales force and their advertising that supports that. And so if it 1 day gets 60%, that's not being the world, someday it might be 64%. But there'll be a reasonable bandwidth around that 62%. Again, based on strength of innovation, strength of advertising is the way we think about the business model, consistent with that. And we ran into the Kingsdown brand and the merchandising team at Mattress Firm, which is in charge of their floor to optimize what the customer wants and to drive their business. It became apparent that Kingsdown was underrepresented at Mattress Firm compared to what we think the customers want, what the RSAs want and bring some more differentiated product to the floor. And then when we looked at that, it was clear that they were going to be expanded, some in the store. And when we thought through the financial impact of that, it appeared to us to be the best way to participate in that economics was with a passive equity investment so that we could win in that success, and they could win. And so they'll be at the high end and they concentrate primarily in spring area, high profile and have good brand strength in Canada and the Northeast. So they're good people, and we're glad to be a passive investor.

[Operator Instructions] Your next question comes from Brad Thomas from Capital Markets.

Congrats on the great quarter here. My question was going to be around any thoughts -- my question was going to be around 2026. And any early thoughts you might be willing to share particularly in light of a longer-term target that you have for earnings by 2028, which does imply sort of a mid-20s growth rate. How should we think about the shape of earnings in any particular high-level comments on 2026 that you might want to share?

That I want to share that will, of course, be no comments, what I will share will be some comments Okay. A couple of observations. I mean this quarter, you can see with just what I'll call minimum sales growth, the flow-through is really the first quarter we've printed that you can see. So you can see some of the dynamics of the business model. So you don't need much from the top line to get to the bottom line numbers that you're talking about. And I think you're referencing what we call -- we're calling a prospectus, but now we're just going to go ahead and just call it a target because now we've done enough at Mattress Firm, integrated enough, have enough confidence in the plan that I think we can call that 3-year glide path on EPS more of a target than a perspective. I think the only other call out I would give is probably new to me that I probably haven't talked much about is the impact of interest rates on the consolidated Somnigroup because there's a couple of items there. I mean you can obviously see from a debt standpoint, obviously, interest rates go down. We got some variable debt. That's good, blah, blah, blah. Of course, then as you pay down your debt, you get into a lower spread grid, blah, blah, blah, that's good, too. The one that sometimes I don't think people would fully appreciated because I know I didn't fully appreciate is the cost of the promotion when Mattress Firm or the Tempur stores offer a 60 months, 0% financing or 72 months. That is a retailer's expense. But that is -- that's grid-priced based on short-term rates. So as short-term rates come down, the cost of that financing comes down. And that's kind of -- you don't see that in the balance sheet when you're looking for the impact of 100 basis points. So I'm going to give you the number that for me was a little surprising, which is a 100 basis point change in interest rates on our cost, okay, equates to $0.18 to $0.20 per share or about a 7% lift of EPS based on our midpoint, okay? That's more leverage to falling interest rates probably than people were thinking. And that does not include the benefit that we would get from falling interest rates from a recovery in housing market. So the way I think about it, and maybe the big -- the newest news for '26, although we're certainly not doing any guidance or anything or prospectus is really the benefits of the falling interest rates are, I think, more robust than the market is perceiving.

Your next question comes from Keith Hughes from Truist.

You've given us kind of cash flow uses next year, shifting back to cash flow to shareholders because you're going to delever this thing pretty fast. I guess at what point would you consider instead of doing these passive investment in brands, would you consider a purchase of another retailer or another manufacturing brand? Is that something on the horizon?

Yes. The way we think about utilization of capital is it really hasn't changed. I mean, obviously, we've got to keep being disciplined and keep our balance sheet properly leveraged, not overleveraged, okay? And then we are constantly looking at opportunities to do exactly what you just said, other manufacturers, other adjacents, other retailers and we are constantly in discussions around the world and have been for years that nothing changes. And we're constantly considering it. And we basically look at that and said, we'd rather do that or buy stock back. So I do think that it's likely that we will do some more acquisitions over the next few years, but that will be dependent on finding the right acquisition at the right price. If we don't do another acquisition, that would be fine with me. We never do one. We don't budget them. We don't target them. But I think the nature of the market, the competitive advantages we bring to a company when they join us are such that it's probably likely that we will do something in the future. And that may slow down a little bit on the glide path on deleveraging or it might slow down the actual ending ratio. But we continue to be active and looking at various companies.

There are no further questions at this time. I will now turn the call over to Scott Thompson for closing remarks. Please go ahead.

Thank you, operator. To our 20,000 associates 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, ladies and gentlemen. This concludes today's conference call. Thank you all for your participation. You may now disconnect.