All right. Good morning, everyone. My name is Peter Keith, senior research analyst at Piper Sandler, covering the hard lines and leisure space. Very pleased to kick off day two of the Piper Sandler Growth Retreat Conference with Tempur Sealy. Joining me from on stage is CEO Scott Thompson. In the front row here, we have Bhaskar Rao, CFO. We have Aubrey Moore, VP, wanna get the title right, VP of Investor Relations, and Lauren Avritt, the Investor Relations Manager. Thank you everyone for coming and supporting our first year at the conference. Thank you, and thank you for having us, Peter. Yep. Most people here probably know Tempur Sealy, but just by way of quick background, they're a global leader in bedding products, known for three key brands, Tempur-Pedic, obviously, Sealy, which is powered by Posturepedic, and then Stearns & Foster. They are a manufacturer, also of private label products. They're an OEM manufacturer for some other products. In my view, I think the company's in one of the best competitive positions in its history. All right, let's kick it off with that, Scott. Let's talk about the competition. There's been a lot of changes over the last couple of years. How do you think the competitive backdrop has evolved for you in the last few years? How do you see the competitive backdrop changing over the next three years? Sure. Working on a three-year back and three-year forward, kind of framework, in your question. Look, I mean, obviously, for everybody, the last three years has been interesting. It's been volatile. I think from a competitive standpoint, if you look at the winners during that period, and that would be. When I think about winners, I'm talking about retail and manufacturers, not just Tempur Sealy. The thing that really jumps out at me is the strong players got a hell of a lot stronger during that three-year period. The other thing that really jumps out at me is that companies that had the ability to be flexible, and identify and change and rapidly change, were the winners. The ones that weren't took a step backwards. If you go and kind of think about three years forward, I think the same kinda attributes are gonna be in the marketplace. The stronger are gonna get stronger, and again, that's both retail and manufacturing. You gotta stay agile because it's a very dynamic environment, and you've gotta be able to change rapidly. The only other thing I would say in a three-year forward look that I think is gonna be really important is gonna be cash flow. In the prior three years, there was still quite a bit of money in the marketplace that was willing to fund unprofitable ventures, or we'll call them speculative ventures, into various industries. It would appear that's changed. I think the ability to raise capital for businesses that are clearly making money or have a very clear path to be profitable looks like, I mean, that's gonna be a lot more difficult. I think that's gonna be a problem for business models that aren't successful today. It's gonna be hard to raise capital in the future. Okay, great. Well, let's kick it off with our second question. Let's talk about maybe some recent trends, 'cause everyone's sort of very curious about Labor Day weekend. By some, that's the biggest selling weekend of the year for the mattress industry. In our view, just based on some preliminary checks, it looked like it was a relatively successful weekend. I think sales were up year- on- year after, you know, a period, like several months of year -on- year declines. How did you guys feel about Tempur Sealy performance over the weekend? First of all, shocking you'd have a current trend question. Thank God we have deep executives. A couple things. First of all, you're right, Labor Day is the largest weekend of the year. From a preliminary standpoint, all the channel checks, both that the street's done, and that we've done and the data that we've seen would indicate that it was a very good to very strong holiday weekend. Obviously that's the most important current read. You're also accurate that, before that weekend, the industry continued to be a little bit challenged. It's basically come in as we expected. We were expecting the back half of the year to be better than the front half of the year from a growth standpoint, and that's what we're seeing. No, there's no question, the retailers did a great job with advertising their new product in the marketplace. It's very good to see a very successful Labor Day. Okay. Any opinion on what drove the performance? People are somewhat skeptical, and other people are optimistic. Yeah. at this point. We're talking about the industry to start with. This is very high level. There's no mathematical way to prove it. My gut feel is that in the first half of the year, retailers had gotten a little bit complacent because business had been so good. They'd pulled back on advertising, promotions and everything. Then the industry kind of slowed down a little bit in the first quarter, second quarter, and the retailers got back on their game and got back into retailing. Much more aggressive in their advertising, more, you know, high energy today kind of promotions as opposed to image kind of advertising. Then the manufacturers have some great new products in the marketplace. As we expected, consumers are in good shape. When we look at what I see in my numbers and what I think I can see so far in the industry is exactly what you would expect. The high-end customers are doing better, and high-end products are doing better than the low end—the Tempur brand is stronger than we'll call it the medium priced or lower end, Sealy brand. I think you're gonna see continued winners in the marketplace in the premium section, and maybe a little more softness in the lower end. Okay. You guys do have some premium product launches coming up. Maybe just update us on what's rolling out before. Yeah The end of this year, and then any early that could be rolling out in 2023. First off, we probably have one of the busiest launch periods here over the next six months we've had in the history of the company when you look at the total. Going through it, let's see, probably the most significant one in the marketplace near term would be the Stearns & Foster brand, premium brand innerspring. We've been feeding advertising dollars into the marketplace early for the last two quarters, three quarters or so to prime for it. In fact, Stearns & Foster grew in the second quarter 4% in a market that was down. That's in marketplace this fourth quarter. Should be incremental swaps is what we're seeing, but more importantly, the retailers are really fired up about it. What we're doing is trying to take that brand from, you know, not really kind of a niche brand for us now and taking it into a major national brand. We've got good retailer support for that. We've got a couple of niche products that are in the marketplace. Sealy Naturals is our first step into kind of natural marketplace. It's out. It won't be material to the consolidated financial position, but it's important to certain markets, primarily like on the West Coast, but it's a completely incremental kind of product for us that's in the marketplace. We have the Flex Grid or the Crushable Wafer, whichever you wanna call it, if you're looking for kind of a more of a waterbed kind of feel. Again, that's a different kind of market that we haven't been in. We've got a product coming out by the end of October. That will be a DTC product to start with. If you go to jump over internationally, we've got a very large international launch on Tempur, that's taking. Internationally, Tempur is very premium, more premium than it is in the U.S., and we're bringing down another group of SKUs below the premium Tempur products. They're also new, but the main thing is we're trying to increase the addressable market of Tempur internationally. Worked on that project for like three years. We've delayed the launch due to some conflicts, obviously, over in Europe, but that'll be launching in the first quarter. We think that will open up some growth potential to the international market that we've been driving towards. I think that's all that comes to mind. It's a lot. Yeah. Okay. Of course, we'll freshen up U.S. Tempur Sealy, Tempur in 2023 sometime. Okay. Because you get some more new Tempur product in the U.S. Yeah, now in 2023. Yep. Okay. I mean, really exciting. Some of the launches, like I said, were delayed because of COVID. Incrementally, new technology in just about every brand and strong advertising dollars to support all the launches. Yeah. Okay. Well, that's exciting. A lot coming. You touched on international. I know you pushed back the Tempur launch there by a year. What are you seeing in the international business today? Just to remind the audience, about 20% of sales. Sure Over-indexed to Europe. Yeah. What's going on there? It's more complicated. Through second quarter, internationally it's actually overperformed our expectations, even with the conflict that we have in Europe, and a few lockdowns over in China. Let's go through kind of do it in pieces. Asia, core demand, really good, really strong, feels great long term. Occasional slowdown or blips when China decides to close the market. You know, that's kind of the China issue, and it's relatively controllable and minor from the consolidated standpoint. Places like South Korea and others over there are very robust. When you go over to Europe, it gets a little more complicated. Went through the second quarter feeling really good about their performance. The Dreams acquisition, which, for those who don't know, is the retailer we bought about a year ago or so, has continued to perform over its pro forma acquisition numbers, and quite. They continue to take market share. They've done a great job at Dreams. You do have to say that we've dealt with what I call the war for whatever reason in Europe. We've dealt with that issue very well, and the markets have dealt with that issue very well. The issue that we're watching now is energy prices, and energy prices primarily in Germany and the U.K., and that's an unknown. We're working through that. To date, really good, but we are keeping a watch out for the energy prices, and Germany and the U.K. would be our major markets in Europe. Okay. Great. Energy prices impacting the consumer. Consumer, not us. The consumer and how to deal with their energy price inflation is off the chart from a consumer standpoint. Yeah. Everyone's worried about that. Well, since you brought up energy, let's just pivot that to then input costs. Mm-hmm because there is some hope, I guess, that your key input costs Yeah Could fall over time. Maybe just remind the audience, what are your key inputs, and are you seeing any movement there? Yeah. Good, we got to a good topic. You know, first of all, the business model is such that we have highly variable costs, input costs, variable costs are probably 75%. The major input costs you talked about earlier are chemicals, lumber, steel, those kind of things. It's clear, at least what we see today, and we're talking about commodities, so it could change tomorrow. But what we see today is that we think we've seen the peak. We've managed to pass on all of the commodity dollar cost to the end user, which is great. I just told you about holiday sales, so we're able to pass the cost into the retail market and not destroy volume, 'cause I just told you we had a very good holiday. It does affect our margin because we pass costs, not margin through the system. I would expect you would hate to forecast any of the chemicals, but at least with what we see today, if you look at the forward curves, you would expect commodities to be favorable to us in 2023. The way our contracts work, there's a three- to six-month delay on what we'll call the spot price before it shows up in our contracts. We've been fighting the commodity inflation for three years now. I'm expecting 2023 looks like it could be a tailwind, maybe at worst it's even. Compared to where we've been the last three years, it's gonna feel pretty good. We've passed on over $400 million of cost to the end user successfully into the business model and been fully reimbursed for it starting in the second quarter this year. Okay. Another topic I wanna ask about was your direct-to-consumer efforts. That's grown nicely in recent years. Mm-hmm. -in the U.S. I think about 12% of sales now. Mm-hmm. Update us on how that's going, both with online. Yeah. your store build out. Is there any, you know,% of sales you think is an ideal goal for that direct-to-consumer side? Yeah. Look, one of the things that's changed the business over the last 3 or 4 years is we've moved from, you know, almost 100% manufacturer to kind of a more vertical model. On a run rate basis, we're running about $1 billion of DTC from almost nothing worldwide. We have 650 stores worldwide that we own, and obviously we've got some internet operations. If I go directly to your question, which is the U.S., we're probably on a run rate north of $500 million here in the U.S., and would be one of the top five retailers in bedding in the U.S. if we reported that way, which we don't report that way, but if you report it that way. If you break down that DTC strategy, you know, by channel, we have a very active webpage, the tempur.com, that's been very successful, high margin. We recently launched sealy.com and stearnsandfoster.com, minor businesses, at this point. Again, highly profitable operations. We have our Tempur flagship stores owned by us, sell Tempur-Pedic only products. Think about them in high-end shopping areas. We have about 100 stores. Good growth there. We think that potential is probably to 150 stores, 'cause it's a niche strategy. But the interesting thing about that is when we put the Tempur stores in the marketplace, they're incremental, 'cause what we're not trying to do is take business from our other customers. That's not the strategy. Raise the brand awareness, and we've been able to prove to ourselves and our other retail customers that when we add a store, 'cause we're only doing one or two in major markets, it's actually accretive to the Tempur brand. Then we have Sleep Outfitters, which is a separate retail concept, about 100 stores. It's more of a middle market strategy, and we're expanding it slowly, and working on that model. That one long term would have the much larger potential for more stores. We're just not sure yet how we're gonna use it. Again, it's about 100 stores. You kinda add all that together and it's going well. As you said, I think it's 20% globally, direct-to-consumer. In the U.S., 12% sounds right on point. What's ideal? Well, first of all, I think the customer's gonna decide 'cause we don't try to direct a customer to a channel. That's the only way really to run the business model. I think the fairest way to run it. The customer's gonna decide, and whoever treats the customer best, I think is where the customer's gonna show up. I expect, you know, probably 20% North America would probably be what I would expect, we would get to with DTC probably growing maybe, you know, if you ballpark it, maybe twice what the wholesale market grows 'cause we've got some greenfields that we can do. Our research shows us that if you ask the customer, you know, "Where do you wanna buy your bed? Do you wanna buy your bed from a third party, or do you wanna buy it directly from the manufacturer?" It runs in North America at 20%-ish or so, maybe a little more up to 20% is what the customer tells us they wanna do. That's kind of a long answer to your question. That's a good answer. The stores, the Tempur-Pedic stores are a great experience. They are. Try to set up a different shopping environment. They are. It's really interesting. If you go to competitors, you know, wholesalers around it, their business is up too. It's not like we're taking their business. I think that concept is a home run. We just have to make sure that it's a niche and about 150-ish stores sound right. We'll look at it, and if we feel like we can go further, we will. We're good for 150 stores. Okay. I wanna pivot over to adding manufacturing capacity. Mm-hmm. As you guys have added some capacity. Mm-hmm. This year, in the process of adding some. Mm-hmm. Industry-wide, I think there's been a lot of capacity added, and we're sort of in this inflection point now. Capacity is ramping up and then unit demand for now is depressed. Kinda. Yeah. Let me push back on it 'cause if you're talking about have we added capacity, yes. I don't think the industry has. I mean, if you look through the industry, there are others who have been closing plants. Yeah. Quite a bit. I'm not sure. I don't think the industry's actually added capacity. Well, I guess some of them have opened plants and then shut them down very quickly. Right. Maybe we're neutral. I think they got another plant to shut. Yes. Okay. Fair enough. Yeah, go ahead. Let's talk about your business specifically. Update us on what you've added this year, and then, you know, as we look to 2023, is there any risk of fixed-cost deleverage because you're adding some more fixed costs, demand is down a little bit. How should we think about that? I mean, First of all, let me kind of frame it. We've been investing heavily in the business really over the last three years, and CapEx has been running above maintenance CapEx, as we've been putting capacity and taking significant market share in North America. Okay? We positioned the company to continue to take significant market share in North America, which should tell you how we feel about our competitive position. I would expect after this year, maybe a little next year, CapEx will move back down to more normalized maintenance CapEx and, I don't know, possibly $150 million-ish for talking terms. First of all, when you think about free cash flow, you should think about that. On point to your question, we're building a new Tempur facility. The way that Tempur manufacturing works, you have to make step changes. This is a big step change to add capacity. 'Cause think of these as big, automated, plants, with computers and stuff, kind of make the bed. Not very many people. They're really kind of neat, to be frankly honest. We needed more capacity, and we also wanted to lower our logistics costs, so we wanted to plant a little closer up to the Northeast. I don't know, $200 million-$300 million kind of expenditure. We'll bring it on in phases, starting in the first quarter of next year. It will take 12 months to 18 months to probably get it to full capacity. We'll have a little bit of a drag, but not. I don't think it'll be significant, one, because we see the demand, okay? Two, we were purchasing some foam from others for our current demand. We'll just in-source some of that, which takes some of that risk off. You might have some minor fixed cost you leverage. I don't think it's gonna be a significant issue unless you're very bearish on, you know, the U.S. economy. The way we think about the U.S. economy, not that we know anything, is I really don't care if it's a recession or not a recession. Whatever it is gonna be is gonna be 1% down GDP or 1% up. It's flat. It's just not gonna be robust. The way we think about it is it's just not gonna be very robust, and that's the way we planned. Now, we went into 2022 positioned fairly aggressively for the marketplace before the commodity blip, and we'll call it the war and other things. We're beginning to trim around the edges and be a little less aggressive as far as positioning the company. Still, from a growth standpoint, because of our competitive advantage and taking share in the marketplace, you know, we're feeling pretty good about the capacity we're putting in. Okay, great. We have time for one, maybe two questions. We'll see. I did wanna touch on capital allocation. Mm-hmm. How are you changing or shifting your capital allocation this year in light of, you know, this kind of industry depressed demand overall? How do you feel about that leverage target, goal that you have? Mm-hmm. Are you seeing any interesting acquisition opportunities? Sure. To be clear, we have a debt guidance of about two to three times. I think we'll stay within our two to three times, you know, leverage target. Look, if the business needs money, it goes to the business first, growth capital, and that's what we've been doing lately over the last three years. A little heavy into operations. We see that coming down. After that, if we don't do something, we'll de-leverage below our target. We need to spend some money. High-class problem to have, but still a problem. You benchmark stock buyback versus acquisition opportunities. Acquisition opportunities have become robust. In a little slower market, our phone rings more. Doesn't really change our appetite much. We work off normalized earnings. You benchmark in the stock, and stock's multiple's obviously been depressed, so it becomes more advantageous to buy stock. We've targeted, you know, at least 10% this year in stock buyback. I think we'll hit that target. We'll continue to talk to people. If something comes up, we may do something. With the lower priced stock, that, you know, that hurdle rate becomes a lot higher. The good news is we, you know, are a company that produces a lot of free cash flow and will continue to invest. I would guess it means we're gonna be buying stock back, you know, every year, 'cause I don't think the acquisition opportunities are so great that you're gonna use all your free cash flow for that. I'd expect to be buying stock back in the marketplace probably every quarter. Okay. Well, I think that's a great note to end on, with a cheap stock and a very dominant competitive position. Thanks for spending some time with us today, Scott, and the rest of the Tempur team. Thanks for coming to Nashville. Thanks. Thank you for having us. Great conference.