Tempur Sealy International, Inc. (NYSE:TPX ) Q2 2022 Earnings Conference Call July 27, 2022 8:00 AM ET

Aubrey Moore - Investor Relations

Scott Thompson - Chairman, President and Chief Executive Officer

Bhaskar Rao - Executive Vice President and Chief Financial Officer

Bobby Griffin - Raymond James

Seth Basham - Wedbush Securities

Peter Keith - Piper Sandler

David Malinowski - Bank of America

William Reuter - Bank of America

Laura Champine - Loop Capital

Good day, and thank you for standing by. Welcome to the Tempur Sealy Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [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 with Investor Relations. Please go ahead. Aubrey, your line is now open.

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 include 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 headings, special note regarding forward-looking statements and risk factors.

Any forward-looking statement speaks only as of the date on which it was made. The company undertakes no obligation to update any forward-looking statement. This morning's commentary also includes 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 second quarter earnings call. I'll begin with some commentary on the second quarter, then spend some time discussing how we're continuing to drive our long-term growth initiatives in the current very fluid operating environment. Then Bhaskar will review our second quarter financial performance in more detail and discuss our updated 2022 guidance, which has been revised to reflect the changes in the market. Finally, I'll share a few closing remarks regarding how our business model would operate in a recessionary environment, and then we'll open it up for Q&A.

In the second quarter of 2022, net sales were 1.2 billion and adjusted EPS was $0.58, both slightly below our expectations, primarily due to the U.S. market and a 30 million sales backlog on U.S. Sealy as we brought our new ERP system online. We made significant progress in this backlog and expect to return to normalized lead times by the end of the third quarter.

The second quarter was also impacted by three additional factors: first, whereas flare ups of COVID variances internationally, particularly in our Southeast Asia markets; second, commodity inflation impacting our cost ahead of the timing of our price increases, which went into effect at the end of June and will benefit future quarters; and third, operational investments to secure our supply chain, to retain flavor in order to maintain product quality and customer service.

Our international operation performed in-line with our expectations even as we faced challenges. In North America, the overall operating environment deteriorated during the quarter as the forward outlook for the economy and our sector diminished for all the reasons that have been well reported.

We believe that the overall U.S. mattress industry, our largest market, had its toughest volume decline in 15 years with units down 20% to 25% this quarter compared to last year. This environment again gave us a chance to demonstrate the resilience of our business model as we generated profit, invested in our business, returned capital to our shareholders, and outperformed the market.

The team continues to focus on execution. First, we continue to work on expanding our leading position in domestic U.S. bedding industry. The last few years, our growth initiatives and industry leading products have driven a meaningful outperformance relative to the market. We continue to drive market outperformance with our focused delivery best-in-class product quality and customer service.

Second, we completed our multi-year journey of transitioning more than 50 of our global subsidiaries and using five different ERP systems to using one common system. This investment in consolidating our operations is expected to drive long-term efficiencies across our global operations, enhance cyber security, facilitate customer communications regarding order status and improve our direct-to-consumer capabilities.

We now are truly one company as this completes the merger of Sealy and Tempur. I personally want to thank all of the employees who worked on this critical project. Great job. Third, Stearns & Foster performed very well relative to the market in the second quarter and is currently our fastest growing brand in the domestic market. Additionally, we launched the Stearns & Foster e-commerce website this quarter, although still very small, and is performing ahead of our expectations and ahead of where we were at this time when we launched our successful online [cocooned] [ph] by Sealy.

Consumer research has identified that there is an unmet market need or high-end traditional industry leading products and our Stearns & Foster e-commerce channel is designed to provide additional opportunities to serve this demand. Our approach is similar to our direct Tempur strategy and that we drive meaningful brand awareness to the benefit Stearns & Foster sales across all distribution channels, growing ASP, driving advertising dollars, and profits for all of our partners.

We'll launch our all new collection of Stearns & Foster mattresses in the fourth quarter. The new Stearns & Foster lines designed to further distinguish our high-end traditional innerspring brand with superior technology, clear product step-up stories, and new contemporary look.

Fourth, in addition to Stearns & Foster launch, the other new product launches in our pipeline continue to be on-track and on-plan, furthering our objective to bring industry leading innovation to market. In the second quarter, we completed the rollout of our new premium Sealy products, which offer improved comfort and support technology. We also launched our new Sealy Natural Collection, which was thoughtfully designed with our commitment to sustainability environmental preservation [mark] [ph].

In the fourth quarter, we expect to launch a Sealy mattress with a best-in-class pressure-relieving gel grid layer at a consumer appealing mid-market price point. This product is designed to target a relatively small category of consumers looking for a non-traditional mattress feel.

In 2023, we expect to begin to roll-out our lineup of all new Tempur mattresses, pillows, and bed bases across both Europe and Asia. This new product line that features exciting customer centered innovation, allows better channel, and customer differentiation and at a wider price point. Retailer's reaction to this new product and price points today has given us confidence that this updated product strategy will enable us to significantly increase our total international addressable market.

In addition to Asia and Europe rollouts, in the first quarter of 2023, we plan to introduce our new line of TEMPUR-breeze products in the U.S. along with a new line of adjustable basis with incremental consumer focused features and benefits. We had made substantial investments in 2021 and 2022 to prepare for these launches, and we're looking forward to bringing these new consumer solutions to market.

Turning to the final highlight. In the first half of 2022, the incremental 10 plants, [diluted] [ph] 100% of manufacturing byproducts from landfills. We continue to be on-track to achieve our goal of zero landfill waste at our wholly-owned Tempur and Sealy manufacturing operators worldwide by the end of the year.

Our focus remains on delivering shareholder value through the execution of our long-term strategies by investing in our brands, products, people, and capacity. We also continue to allocate capital to share repurchase as part of our commitment to returning capital to shareholders. We've repurchased over 8% of our shares outstanding year to date. We plan to repurchase at least 10% in 2022.

Our key initiatives, which have driven growth from a $500 million company at the time of our IPO, to a $5 billion company today are the underpinning of our confidence and our ability to continue to extend our leading position in the global bedding market. These key initiatives include: first, develop the highest quality bedding product in all the markets we serve; second, promote worldwide brands with compelling marketing; third, optimize our powerful omnichannel distribution platform; and fourth, drive increased EPS through operation execution and by prudently deploying capital.

These initiatives have shaped the building blocks to our next stage of growth, which we’re laying the [groundwork] [ph] today. In the U.S. we're investing in new products, compelling brand advertising, expanding channel diversification. In our international operations, we're investing in the 2023 launch of our all new Tempur products in Europe and Asia to increase our international total addressable market.

Our operations are also in investment focus this year as we execute on four key priorities: complete the transition to our new ERP system; two, stand-up third U.S. foam flooring plant; three, strengthen our supply chain worldwide; and four, increase safety stock of imported products, key components and inputs with long lead times.

With that, I'll turn the call over to Bhaskar.

Thank you, Scott. I would like to highlight a few items. Consolidated sales increased 4% to $1.2 billion. Adjusted earnings per share was $0.58 and we repurchased over 4 million shares in the quarter. At the end of the second quarter, we successfully implemented a new round of pricing [actions] [ph]. This follows previous rounds of pricing, all of which were designed to fully offset the headwinds from rising input costs.

Our pricing actions are dilutive to gross margins as sales increased with no meaningful change in gross profit. Since 2019, this dynamic has accounted for 400 basis points of headwind to consolidated gross margin. We believe that designing price increases to cover the dollar impact of inflation is both beneficial for near and long-term retailer advocacy and end consumer demand.

We expect certain input costs may ease beginning in the back half of the year. If this release were to come to pass, we anticipate the unfavorable margin dynamic that we have experienced over the past couple of years will reverse providing a tailwind in 2023. As Scott mentioned, we are leveraging our industry leading balance sheet and cash flow attributes to invest in the business, laying the groundwork for future growth.

We have made investments to diversify our supplier base to fully support our customers while managing through a fragile global supply chain and a tight labor market. We invested an incremental $10 million in our operations in the second quarter to maintain our high standard of product quality and customer service.

We anticipate these incremental investments to continue to a lesser degree in the second half of the year. For 2023, we are set up to drive efficiencies as the global supply chain infrastructure stabilizes, and our new ERP system drive synergies. We have adjusted [$17 million] [ph] of charges during the quarter, all of which are permissible adjustments under the terms of our senior credit facility. $9 million of those adjustments were related to the transition of our new ERP system, which as Scott had noted was completed in the second quarter.

In addition, we had $4 million of organizational restructuring costs and $3 million of operational startup costs relating to expanding our capacity. We expect there may be a similar amount of adjustments related to these items later this year, primarily from further investments in our new foam-pouring facility in Crawfordsville, Indiana.

Now, turning to North American results. Net sales decreased 5% in the second quarter. On a reported basis, both wholesale and direct channels decreased 5%. North American adjusted gross profit margin declined to 38.7%. This decline was driven by operational investments to service our customers and pricing benefit to sales with no gross profit. These factors were partially offset by favorable mix as Stearns & Foster performed well in the quarter.

North American second quarter adjusted operating margin declined to 16.5%. This was driven by the decline in gross margin and advertising investments in Stearns & Foster ahead of the planned fourth quarter launch.

Now, turning to international. Net sales increased 59% on a reported basis, primarily driven by the acquisition of Dreams. On a constant currency basis, international sales increased 68% as we experienced $10 million of headwind this quarter from unfavorable foreign exchange rates.

Foreign exchange continues to fluctuate and we believe that FX will be a larger headwind for us going forward. If current FX rates were to hold, we estimate a year-over-year headwind of at least $80 million to international sales and [$50 million] of profit in the second half of 2022. This has been considered in our revised guidance.

As compared to the prior year, our international gross margin declined to 53.1%. This decline was driven by the acquisition of Dreams, mix, pricing benefit to sales with [no gross profit] [ph]. As a multi-branded retailer, Dreams sells a variety of products across a range of price points. Their margin profile is lower than our historical international margin. This is driving the major change in year-over-year margins internationally.

Our international operating margin declined to 14.5%. This was driven by the decline in gross margin, the impact of COVID-related shutdowns on our joint venture operation and operating expense deleverage.

Now, moving on to the balance sheet and cash flow items. In the second quarter, we had a slight use of operating cash flow. Our inventory days extended throughout the quarter as we reinforced our safety stock of adjustable basis and raw materials to be able to better support our customers across our global operations. We believe our focus on providing our customers with the best service has been the key driver of our outperformance relative to the broader industry.

At the end of the second quarter, consolidated debt, less cash was $2.8 billion and our leverage ratio under our credit facility was 2.7x, within our target rate of 2x to 3x.

Now, turning to our revised 2022 guidance. We have updated our earnings guidance and now expect adjusted EPS to be in the range of $2.60 to $2.80 in 2022. Our guidance contemplates full-year consolidated sales to be consistent with the prior year. North American and international sales to be both down low-single- digits in the second half of 2022 versus prior year.

Gross margin to improve from the second quarter into the back half of the year as our latest pricing actions are now in effect, and our advertising rate in the back half of the year to be consistent with our second quarter advertising rate. Also included in our 2022 outlook is our plan to invest over $250 million in CapEx to support the long-term needs of our business.

In addition to our maintenance CapEx of $100 million, we are making significant non-recurring investments in our U.S. manufacturing capacity, which includes standing up a new foam flooring plant in our expanded chemical tank farm and warehousing. The team is on track for these major capital projects and we anticipate in future years that CapEx will moderate as these investments roll-off.

Lastly, I would like to slide a few modeling items. For the full-year 2022, we expect D&A of about $185 million, interest expense of about $100 million, a tax rate of about 24.5%, and a diluted share count of 180 million shares, which includes our assumption to repurchase at least 10% of our shares outstanding.

With that, I will turn the call over to Scott.

Thank you, Bhaskar. Great, job. Clearly, the risk of an economic slowdown has increased today relative to just a few quarters ago. But before opening the call up for Q&A, I want to take a moment to discuss the resilience of our business model. Our highly variable cost structure, working capital strength, and low leverage profile [insulates] [ph] the business during challenging periods and the pressure to make unhealthy short-term decisions that may hurt the strength of our brands or impede the business from capitalizing on new opportunities.

Our global and geographic diversity mitigates the impact from market specific downturns. The business has faced global sales volume declines in 2017 and 2020. In both periods, the flexibility of the business model allowed us to focus our efforts to come out each situation stronger than we were and started. This is a good reminder of how our business is well-structured to weather challenging periods.

As sales trends change first, approximately 70% to 80% of our cost reflects down to accommodate for declining unit demand. Second, our input costs normally decline as they're normally tied to global economic activity. Third, our working capital means reduced freeing up cash. Fourth, our capital expenditures flexed down to maintenance CapEx.

Note, in the last few years, we've been leaning in to growth investments. Regardless of the market environment, we have a track record of executing and outperforming the industry. We're not in a defensive situation today, but we have cut back on expected hiring, we've elongated some of our capital project time lines. Additionally, our early 2023 planning reflects the change in the operating environment with a greater focus on driving operating efficiencies.

With that operator, can you please open the call up for Q&A.

Thank you. [Operator Instructions] Our first question comes from the line of Bobby Griffin with Raymond James. Your line is now open.

Good morning, Bobby. Thanks for taking my questions.

Scott and team, I guess first for me, could you maybe help us understand just a little bit more detail, a, how the quarter progressed through the months? And was there any slight improvement here towards the end of June or going into July, was 4 of July? And then second, I'll just go ahead and ask the follow-up now or we can get out there, but to the follow-up side is, within the guidance for the back half, how does that – what does that assume from a unit perspective? Is it roughly the same as what we've seen here to take modest improvement? Just anything that can help us kind of put in the context the back half versus what we've seen on [play] [ph] so far this year?

Sure. Let me take the last question first. So, when you think about just the cadence throughout the year is, as we mentioned, is that the units from an industry standpoint, whether it be the first quarter or the second quarter, were challenged. We performed well and significantly better from an industry standpoint. As we think about the back half, we would expect, I would say, slight to modest improvement in our own units as we go into the back half.

So, when you think about what does that mean is not only do we get a bit of improvement from volume, we would expect some pricing benefit as well. As pricing that we took for the latest round of commodities, we get the full impact of that or the benefit of that in the back half.

As we think about the cadence through the quarter, what I would say is that as we pointed out in first quarter is that the normal seasonality of the business is back and not only is that seasonal across the quarters, but it's also seasonal around let's call it the holiday selling periods. So, again consistent with prior years call it 2019 is that in the non-promo periods we see some, let's call it, base or softness; and then in the promo periods or in the holiday periods, we see nice growth. So, hopefully that helps.

Thank you. [Operator Instructions] Our next question will come from the line of Seth Basham with Wedbush. Your line is now open.

Thanks a lot and good morning. Scott, you’ve referenced how you can flex costs down significantly when the economy and demand turns lower. Your guidance for the back half of the year implies significant pressure on operating margins. Can you talk about when you will decide to reduce your fixed costs and CapEx more aggressively to current demand levels that they persist?

Sure. Great question. First, let me kind of frame it as to what we've done so far. When we looked at this year going into the year, we were expecting a fairly solid year, then we've got certainly some macro issues, whether it be the conflict over in Europe, whether it be inflation, a little bit of COVID still around, China got closed, we got hit with FX, so we ended up with a little bit different operating environment than we expected going into the year. And I think on our prior earnings call, I said we were set from an offensive position.

Obviously, when we got into the second quarter, it became clear that it wasn't going to be as robust a year as we thought, but at the same time, we're in the primary selling period, the second quarter and the third quarter. And it certainly didn't seem like anytime when you're in the busy season to be doing too much, we'll call it cost controls. So, we've trimmed around the edges a little bit.

We're going to play through the third quarter, get more information about the market, and I suspect at the end of the third quarter, we'll have to make a decision as to how we want to position the company for what we'll call late 2022 and really 2023. I would expect that we'll be more conservative in our budgeting next year. So, I'd say we're going to play through the busy season then look at it.

I do have to say though, although we – probably we have spent some extra money to make sure that we are ready in case the market was robust. And remember, we are pretty much a just in time delivery, kind of supplier to our customers. So, it's critical that we have the capabilities to meet the demand. If you look at how we're performing relative to market, those strategies have really worked. And I think when we get the results for the second quarter for the whole industry, I think we'll have continued to take market share and maybe accelerated our market share capture during the second quarter.

So, it's working, but it has been a little bit expensive and we'll work through it, but to answer your question very directly, you should expect at the end of the third quarter that we'll look at that very closely to see that we have the right balance there.

Perhaps just to [double tap] [ph] into that. If you think about our margin performance, one thing to be mindful of is, we would expect the back half EBITDA margins to improve from the second quarter. In the second quarter, there was a bit of a uniqueness happening, whether it be the geopolitical crisis that hit us or whether it be the commodities where we were not able to get in price until let's call it June, early part of July.

So, if you think about that in relation to the back half, that should help bridge on how – why we think margins are going to improve. However, if you think about it versus prior years, just be mindful, we pointed out that the price without incremental gross margin is about 400 basis points when you think about it versus 2019.

So, yes, it is – when you think about the math and the rate, that is unfavorable. However, when you think about the strengths and the brands and the products, what that shows is our ability to move on price or sorry, move cost by taking pricing actions.

Thank you. One moment for our next question. Our next question comes from Keith Hughes with Truist. Your line is now open.

Thank you. My question is on pricing. If you could give us some details on the second quarter, how much pricing you got in the quarter and then how much particularly with another round can [all the end] [ph] of the second quarter, how much you expect on the guidance for the second half?

Absolutely. Good question. So, when I think about that, let me answer the full-year question. When we think about all-in pricing versus prior year, plus the pricing actions that we've added, is the way I would think about that is call it low-to-mid single-digits. When I think about specifically in the second quarter, is that last pricing actions that we announced, we did not get that in effect until late in the quarter.

What we did comment on is that that exposure that we had meaning between commodities and price was about $15 million that we recouped in the back half. So, when you put all that together, what that would imply is that we would get a bit more pricing benefit in the back half than we would in the first half or in the second quarter.

Operator, we're ready for another question.

Thank you. Our next question comes from the line of Peter Keith with Piper Sandler. Your line is now open.

Hi, thanks. Good morning, everyone. So, maybe just to follow on a little bit as we look to the back half, Bhaskar, you noted input costs might start to come down a little bit. I was hoping you could provide some specifics on what areas you're seeing potential reduction? And then is the plan to hold price where you would get a gross profit dollar benefit or would you flex the pricing accordingly as some input costs come down?

From an industry standpoint, what I would say is that typically when commodity prices go up, pricing is taken and when commodities come in is that those pricing sticks. That's the general philosophy from an industry standpoint and that would be our strategy as well. When you think about our commodities portfolio broadly speaking is that within the raw material, the commodity profile or portfolio is that there are ups and takes, so whether it be a little [TDI] [ph], whether it be a little – sorry, chemicals, whether it be the ancillary of purchased foam, barrel has come off – sorry oil has come off the high of $125 a barrel, lumber has come in a bit.

So, we're seeing some, you know steel is hanging in, but perhaps there's some opportunity there as well. So, all of that has been considered from an outlook standpoint, but it feels like just given this data play here from a [bias] [ph] standpoint, there is – our bias is that there's more benefit than downside versus where we were, call it last year.

Now, again, as we think about 2023 is that to the extent that that does come to pass is that would be incremental gross profit dollars that will flow through, as well as that rate item that we spoke to, the margin deterioration from price without gross profit is that what turned to be a tailwind as well.

Thank you. Our next question comes from the line of Carla Casella with JPMorgan. Your line is now open.

Hi. Given your comments about raising or building more inventory, more safety stock, can you just talk about how we should think about working capital for the next couple of quarters? Do you see that being a typical benefit like it is in past years in third quarter and or if you can give us any kind of full-year sense of how much build you need in inventory and if there are any other offsets in working capital?

We've probably fully built the working capital needs that we have from strategy standpoint to strengthen the supply chain and ensure safety stock for our customers. If anything, probably you're going to have more favorable working capital trends in the third quarter, I suspect than you did historically, because we built in the second quarter, but there's no more incremental working capital needs to implement the strategy. [Indiscernible] Bhaskar?

No, 100%. I would agree. So, the typical seasonality of the business is that we start spinning working capital are benefiting in the back half of the year that should come to pass. And as Scott mentioned is that we did ramp specifically on Tempur and then raw material as well from a safety stock standpoint and around adjustable’s [Multiple Speakers] this is the lead time and obviously the issue is relative to shipping. So, I suspect the working capital trends from a historical standpoint will be better in the back half than they half been.

But certainly not negative based on what we know today.

Thank you. Our next question comes from the line of David Malinowski with Bank of America. Your line is open.

Hey, thanks. David, on for Curtis Nagle here. Just wanted another couple of quick sentences, if that's alright, on the price increase that was taken in June. Was it across all brands? And then as well, have you kind of observed any demand destruction or trade down from pricing actions that have already been taken?

If I look through the Tempur brand to start with just in total and look at the higher-end products versus the lower-end products within Tempur, the higher-end products have done better than the lower-end products within Tempur. If you look at it from a brand standpoint, I think we called it out in the notes, Stearns & Foster actually grew during the quarter, then Tempur would be the next performing brand and Sealy would be the lowest performing brand.

So, I would say on the historical standpoint, we're not seeing any demand destruction from previous pricing actions, nor am I hearing any of that from the retailers. On the pricing that went in June, I think that was across all brands. If I remember correctly, is that right Bhaskar?

Across all brands and as always we're a little thoughtful about how we spread it generally a higher-end consumer and can handle it versus a – let's call it a value product, so we were thoughtful when we spread it.

So, from a pricing standpoint, I don't think we've seen any issues there. I think the issue that you're feeling a little bit in the second quarter is really a traffic issue, and consumers just being a little more conservative in their shopping.

Thank you. Our next question comes from Brad Thomas with KeyBanc. Your line is open.

Hey, yes, it's Brad. Thanks for taking my question. I wanted to ask a little bit more about trends in North America and expectations in the second half with respect to mix and the performance of the Tempur brand. I was wondering if you could just give us a little bit more color, you called out mix is still being a positive for margins in 2Q?

What are you assuming in terms of how mix plays out? How Tempur holds up? And I guess in the first half of the year, it feels like tough comparisons that hurt the middle and lower-end of the market. How are you looking at higher-end luxury and premium-end of the market? Thank you.

Well, I think we're expecting the higher-end to perform better than the overall market. And I think Tempur has continued to take share in the U.S. market. Having said that, we're not expecting a very robust period in the back half. May I have Bhaskar to [indiscernible]?

I think that's right. When you think about it holistically, North America, let's call it low-single-digit decline. Generally what happens during these periods of time that high-end hangs in better than what it otherwise, when it otherwise would versus the low end. Also, we're very excited about what Stearns has already done in the second quarter and prior and we're continuing to support that brand and we got a launch coming up here in the fourth quarter. So, holistically, the way I think about that is the high-end should hang in better than from a low-end standpoint.

And then I think when we look at our Tempur stores, the Tempur store, our flagship stores where we retail in North America, they had a reasonably good second quarter, compared to the market. And I think once we get the final data for the second quarter, I think they probably will look like they performed very well.

Thank you. Our next question comes from Jonathan Matuszewski with Jefferies. Your line is open.

Great. Thanks so much. My question was on assumptions for second half. Historically, the wholesale bedding units and sales have had a pretty good correlation with GDP and consumer confidence over time. So, just curious what your implied second half sales guidance assumes as it relates to some of those macro dynamics? Are you assuming a sequential deterioration in GDP and consumer confidence and other dynamics? Just more color there would be helpful. Thanks.

Yes, I'll start with that and then I'll let Bhaskar clean it up a little bit. Clearly, we're not expecting a very robust back half of the year with units probably declining in the industry. Call it single digits for lack of a better way of saying it. And whether it's – whether you call it a recession or whether it's not a recession, I think our outlook is that at best you're talking about a flattish, kind of world for the next two, three quarters.

No, absolutely. If you look at the macro indicators versus where we were in the first quarter and where we are today, things have turned a little bit and just reiterating what Scott said is, no material improvement from here and no material decrement from here is how we're thinking about the back half.

Thank you. One moment for our next question. It comes from Bob Drbul with Guggenheim Partners. Your line is now open.

Hi, good morning. A couple of questions just on inventories. I guess your own inventories, but more importantly, inventories at retail. Just trying to understand what you're seeing with your retail partners and their patience and or willingness to be promotional around the industry given the weakness? So, just could you give us some insights around that, that would be helpful? Thanks.

Sure. I mean, by its very nature, the bedding industry doesn't have much inventory in the system at the retailers because of the short order delivery time. So, they don't carry up a lot of inventory. Now, the furniture guys do, if you're talking about the furniture side of the business, that's a completely different business and their inventories are long, but it's not about mattresses and bedding. Generally, it's just not much inventory in the system. Because obviously retailers are fixed cost structure kind of business model, sales volumes actually more important to them then to us.

And I think we're seeing retailers being more promotional or you might say getting back to the normal promotional cadence and aggressiveness that the industry was used to before the pandemic. But I think that they're stepping up in advertising and they've been stepping up in promotions. And I think they'll continue to be a little more aggressive than they were certainly during the COVID years, we'll call it. But really more than back to normal promotional cadence.

Thank you. One moment for our next question. Our next question comes from Atul Maheswari with UBS. Your line is open.

Thank you and good morning and thanks a lot for taking my questions. Bhaskar first a quick clarification. If I heard you right, I think you mentioned that you were expecting your own units to improve slightly in the back half relative to year to date, if that is right, why do you expect any improvement given the potential for [macro turn] [ph] for the [indiscernible] later this year? So that's my first question. And then my second question is, Scott you mentioned, industry units down maybe in the 20% to 25% range in this quarter, do you believe the industry is at a point where it's shaken off some of the excess demand that it saw during the pandemic or in other words, like have units returned back to 2019 levels for the industry or will it need few more quarters of decline before we get to that point? Thank you.

I'll start, I'll answer your second first just to confuse Bhaskar. When your talk about the second quarter and the unit client call it 20% to 25% for the industry in the U.S., I mean the key there first of all is it's a terribly hard compare from last year because last year units were up 20% plus. It is by far the hardest comp in the year on a quarterly basis. And although we don't think there was any pull forward in sales during the COVID period, if you look at it from a quarterly standpoint, there's no question in the second quarter last year.

We probably pulled forward from sales. And then if you look at it, then the third and fourth quarter from last year was rather stable, I would say. So, it would look like to me when stimulus checks hit last year, second quarter boomed, we probably pulled forward within the year some sales, but again, if you look at the full-year 2021, units were not far off what I'll call historical trend. What was the second part…

And that really addresses the question about units first half versus back half. If you think about what was happening from an industry standpoint last year, whether it be stimulus or not, and as Scott mentioned, second quarter was extremely hard comp. When we think about the back half, it's – that's how we're thinking about it, which is like the modest improvement versus the first half.

I think the other thing I would point out is if you take kind of step back and just look at the competitive analysis, and look at all the players in the industry and how they're performing and what their competitive position is, it looks like to me we're in a stronger competitive position at the end of the second quarter than we were this time last year, whether it be some companies, it's a little more difficult to raise capital.

Certainly, the online business has become a little more challenging. Some of the changes that Google and Apple made. And then our products have done very well in the marketplace. So, I think our competitive position is considerably, quite frankly, considerably stronger than it was this time last year. You blend that together with a relatively robust – not robust back half, we think we can knock out some positive units.

Thank you. And our next question comes from William Reuter with Bank of America. Your line is now open.

Hi. My question is on capital allocation. So, you're slowing down your share repurchases in the second half of the year. You guys are above the mid-point of your leverage target, given an environment that's more uncertain and as you think about next year, I guess, do you think about trying to allocate more capital to keeping your leverage towards the bottom end of the range or do you feel comfortable within the range regardless?

Great question. And the challenge in answering the question is it can change based on the current facts and circumstances that we learn every week or every month. I think what we said is, look, we plan to buy at least 10% and we'll continue to look at what the economy looks like and kind of manage our balance sheet. I think we are about [2.7] [ph] right now. Whether we're [2.7, 2.4] [ph], or something like that, but I imagine assuming that we don't see any change in our perspective of the future, that we'll run somewhere around, we'll call it, [2.5] [ph], give or take, a couple of, a little bit 20 bps forward or backwards.

If something looks a little more challenging, we would do kind of what you're insinuating is we would begin to move closer more towards 2x leverage. And if things got a little bit brighter, we might move a little closer to three, but I think we'll hover around the midpoint of our leverage would be our current expectations.

Thank you. And our next question comes from Laura Champine with Loop Capital. Your line is now open.

Thanks for taking my question. It's more of a clarification. So, if industry units were down 20% to 25% in Q2, what were TPX's units?

Ours were not down that much.

I think we took considerable share, but I don't have all the data. I'm not trying to be smart. I don't have all the data yet from all the sources to nail it down. And I don't want to give our number out specifically for competitive reasons, but we were down significantly less than that.

Thank you. One moment for our next question. I have a question from Carla Casella with JPMorgan. Your line is open.

Great. Just a follow-on on my last question with the working capital gains in the back half. Do you expect to be able to be fully out of the revolver this year or to chip away at some of that revolver draw from the quarter?

No, we would expect to from, just a utilization standpoint and efficient utilization of our debt structure is we would expect to still be in the revolver at the end of the year. And what that would – yes, absolutely. And what that would imply is leverage is [2.7] [ph] we expect, as Scott mentioned, is that it should come down from here slightly.

Thank you. One moment for our next question. Our next question comes from Peter Keith with Piper Sandler. Your line is open. Peter, are you muted?

I am muted. Sorry about that. Thanks again. A big picture question for you on housing. I've always thought that housing turnover drives maybe about 20% of unit volumes, we're obviously going into a pretty challenged market for home buying and second home purchases, do you have any updated views on how that impacts your business either as a percent of units or high-end versus low-end?

Yes. Look, there's no question housing starts impact the business. I actually don't think it's in the top two or three drivers, but obviously housing slowing down is what I'll call a minor headwind. For me, the most key statistic that I guess I always watch is really consumer sentiment and consumer confidence. And I think those track better to the performance of our sales, but yes, housing affordability is certainly higher, and we're watching it. But I'd spend more time on consumer sentiment and confidence.

Thank you. And our next question comes from Bobby Griffin with Raymond James. Your line is open.

Hey, guys. Thanks for letting back in the queue for the follow-up. Bhaskar, just quickly, I think you mentioned second half ad expense relatively in-line with 2Q, but I don't think we have 2Q as the base. So, can you tell us from a percent of sales what second quarter ad spending was?

Yes, let’s call it 9.2%.

Okay. I appreciate that. And then [Technical Difficulty]

Bobby Apologies. Bad math, 9.8. [You need a calculator] [ph].

Our next question comes from the line of Atul Maheswari with UBS. Your line is open.

Thank you so much for taking my follow-up. To start, it looks like some of your competitors and some other brands are ramping up their promotions as they're probably seeing some sales pressure. So, at what level of sales decline would TPX decide to raise its own promotions be it price discounts or otherwise as you look to stimulate customer interest?

I think our promotional cadence will be relatively consistent with last year with maybe a little tweak that we were constrained with Sealy at times. So, we’d pulled back a little bit on Sealy because we couldn't deliver on Sealy because of some issues there. But I think we're very comfortable with the strength of our brand that we won't have to change, or I'll call our historical promotional cadence.

On the manufacturing side, for manufacturers that are trying to drive volume with price and we've seen that, I guess, the last few quarters, I think it's probably two or three quarters we've bumped into that a couple of times. That has not been successful as my perspective when we've studied that, they've lowered price, but they really haven't made much of a move. So, I don't think that's the way to probably drive success as a manufacturer. I think probably spending money in advertising and quality of products, quality of sales force are probably better drivers if you're trying to drive sales as a manufacturer. I think the pricing thing doesn't really work that well.

Thank you. And our next question comes from the line of Brad Thomas with KeyBanc. Your line is open.

Hi, Brad Thomas again. Thanks for letting me back in. Scott, I was wondering if you could just talk a little bit more about the potential acquisition landscape? You also have done a great job over the years of finding [strategic entities] [ph] to invest in? And is that changing and how might your appetite be changing at all given what's happening from a macro perspective? Thanks.

Sure. Thank you for the question. I mean, first of all, just a quick update. The recent acquisitions are performing very well, whether it be Sherwood or whether it be Dreams, the two first come to mind. And so, I would say in total, our acquisition strategy over the last few years has done better than proforma and we're certainly proud of it. It's made us stronger. Obviously multiples have come down in the industry and certainly come down on our stock and that makes it a challenge to do anything because we're not going to do anything that we don't think is accretive or drives value.

There are lots of candidates. I will tell you that over the last four or five months, the number of candidates, certainly worldwide has certainly perked up and we continue to talk to people to see whether or not it makes sense for us and for them, but again, it's a little bit challenging. We have made relatively small investment in a company called [Bright] [ph] that have some very interesting technology. And the way we think about technology is, we want best-in-class technology and we generate some of that technology internally through our teams very – whether it be in Springs, Foam, and other areas.

We have some great internal people that help us from a technology standpoint, but we also don't mind getting technology, we'll call it outsourced technology and we got a great relationship with full power and you've seen the impact of that on our adjustable basis. And today, we – I think Bright announced that we put some money in Bright. They've got some interesting technology. It's not commercial yet, but they've got 90 rebalancers in a [bed] [ph] that self-adjust that are very quiet and we're very bullish on their technology.

So, we've made a small investment there, but we'll continue to look at acquisitions, but the pricing environment because of the multiple compression is difficult and in coming up with normalized earnings is difficult because of COVID and other things. So, we'll be cautious, but we've got some great people we continue to talk to worldwide.

Thank you. And I would now like to turn the conference back to Mr. Scott Thompson for any closing 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 confidence in Tempur Sealy’s leadership team and its Board of Directors. This ends our call today. Thank you.

This concludes today's conference call. You may now disconnect. Everyone have a wonderful day.