Somnigroup International Inc. (SGI) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to the Somnigroup Second Quarter 2026 Earnings Call. [Operator Instructions] I'll now hand the conference over to Lauren Avritt, Director of Investor Relations. Lauren, 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 reports on Form 10-K and quarterly reports on Form 10-Q. Any forward-looking statement speaks only as of the date on which it is made. The company undertakes no obligation to update any forward-looking statements. This morning's commentary will also include non-GAAP financial information. Reconciliations of this non-GAAP financial information can be found in the accompanying press release, which has been 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. And with that, it's my pleasure to turn the call over to Scott.

Good morning, and thank you for joining us on our second quarter 2026 earnings call. I'll begin with a review of our quarterly highlights before turning the call over to Bhaskar, who'll discuss our financial results and 2026 earnings outlook in greater detail. I'll then provide you with a brief update on a proposed Leggett & Platt combination and then open the call up for questions. We are pleased to deliver a record second quarter in adjusted earnings per share. Against a cautious consumer background and ongoing macroeconomic uncertainty, we generated net sales of $1.8 billion, adjusted EBITDA of $297 million and adjusted EPS of $0.58, a 9% increase from the prior year. These results reflect our brand strength, a diversified global business model and consistent disciplined execution across our operations, this in a market that we believe to be down mid- to high single digits over prior years. Turning to our first highlight. Mattress Firm delivered results ahead of the broader U.S. market, supported by its industry-leading scale, effective marketing strategy and broad product assortment that's designed to meet the wide range of consumer needs. We continue to refine our merchandising assortment at Mattress Firm to better align it with customers' preferences. Following very encouraging results from a 3-month pilot program of Kingsdown's products in 200 Mattress Firm stores, which demonstrated improved performance versus certain other products, we have expanded our relationship with Kingsdown and expect to meaningfully increase the brand's presence across the floor over the next 6 months. The collection is expected to be available in nearly 800 stores nationwide and brings customers' luxury, traditional innerspring options focused on elevated comfort, premium craftsmanship and lasting support. Our differentiated sleep expert model, supported by ongoing technology investments and a highly trained sales organization, continues to resonate with customers. Also, we've made steady progress on our store refresh program, on track to be completed in 2027, and on our brand wall program expected to wrap up this year. Both programs are designed to elevate the in-store shopping experience. The improved store environment, combined with enhanced product training and new technology are supporting an improved store experience for customers, which we believe, over time, will drive future sales. Our second highlight is the continued success of our international growth strategy. While the operating environment remains volatile, our International business once again delivered solid results and gained share across many of our key markets. Our legacy Tempur International business again outperformed the broader industry, benefiting from the strength of the Tempur brand, ongoing marketing investments and strong local execution. Dreams continued to strengthen its brand assortment, customer engagement and its best-in-class operating model while managing through a difficult macro backdrop, a highly promotional competitive landscape and an ERP implementation that is going well, but has created some transitory challenges. Over the past several years, we've advanced our global vertical integration strategy by expanding company-owned retail footprint through expansion of our own Tempur retail stores, combined with targeted acquisitions such as Dreams in the U.K., SOVA in Sweden and our recently announced acquisition of Danish retailer, SENG. Each acquisition deepens our ability to connect directly with consumers, showcase our brands and strengthen our market position. Our third highlight is the execution of our new Stearns & Foster product launch, which remains on track and is expected to strengthen our price architecture across the portfolio and drive higher average selling price. Refreshed collection features and upgraded the cooling system, a more robust micro-coil support layer and a new approach to a hybrid technology, this redesign positions the brand more distinctly in the premium segment and is designed to expand our footprint. To optimize pricing across our portfolio, we are increasing the entry-level price of Stearns & Foster so that it minimizes the overlap with the high end of our ceiling [indiscernible], and we are focusing on the higher-end products of Stearns & Foster. We have increased the number of high-end models by over 50% in the new collection. Our planned national advertising campaign will highlight the craftsmanship and heritage for Stearns & Foster brand as the longest tenured mattress brand in America, while also reinforcing the connection between our advanced materials, quality sleep and the overall health and wellness. Our marketing strategy balances investments in broad reach channels with highly targeted digital media. The launch will begin at the end of the third quarter and continue to roll out through the early 2027. Most of the expected financial benefit will materialize in 2027 and beyond. Our fourth highlight is the continued resilience of Tempur Sealy North America's business despite softness in the broader bedding market and supply chain disruptions. Our investments in high-quality advertising, disciplined cost management and increased balance of share at Mattress Firm each contributed to another quarter of solid performance. We also benefited from the strength of our manufacturing and supply chain operations, which effectively navigated a dynamic global environment. The operational discipline remains an important differentiator of our business and supports our ability to execute during complicated market conditions. With that, I'll turn the call over to Bhaskar.

Thank you, Scott. In the second quarter of 2026, consolidated sales were a solid $1.8 billion, and adjusted earnings per share was $0.58, up 9% over prior year. There are approximately $16 million of pro forma adjustments in the quarter, all of which are consistent with the terms of our senior credit facility. As a reminder, we have now fully lapped the Mattress Firm acquisition in the first quarter of this year, and we have lapped the related divestitures of Sleep Outfitters and certain Mattress Firm retail locations in May. We will present like-for-like commentary for Tempur Sealy North America on a stand-alone basis, which will include the intercompany sales to Mattress Firm and adjust for the divestitures. Now turning to Mattress Firm results. Net sales through Mattress Firm were approximately $922 million in the second quarter and same-store sales grew slightly. Mattress Firm adjusted gross margin decreased 240 basis points to 33.3%, driven by product mix, consumer financing costs, investments in Mattress Firm stores and deleverage. The impact of product mix on gross margin percentage was primarily driven by the increased balance of share of Tempur Sealy products as Tempur Sealy's supply contract is structured to provide a portion of Mattress Firm economics in the form of cooperative advertising credits. This reduces Mattress Firm's operating expenses, but delivers a lower product gross margin percentage versus other products. When looked at on a conforming basis, there is no material impact on operating margin from the product mix change. It is just landscaping within the income statement. Mattress Firm adjusted operating margin declined 130 basis points to 6.5%, driven by consumer financing costs, the investments in store and deleverage I mentioned a moment ago. Turning to Tempur Sealy North America. Sales were flat on a like-for-like basis, with like-for-like net sales to the wholesale channel also flat. Our sales with third-party retailers decreased 5% after normalizing floor model, representing continued outperformance relative to an industry we believe was down mid- to high single digits. Like-for-like net sales for the direct channel decreased 1% in the second quarter. North American adjusted gross margins increased a robust 680 basis points to 61.8%, driven by the achievement of synergies, operational efficiencies and mix, partially offset by commodity cost inflation before pricing actions. We achieved $30 million of net benefit from sales and cost synergies in the second quarter. North American adjusted operating margin improved 400 basis points to 26.7% in the quarter, driven by the improvement in gross margin, partially offset by investments in cooperative advertising as noted a moment ago. Turning to Tempur Sealy International results. International net sales grew 2% on a reported basis and 1% on a constant currency basis. Our legacy International business delivered another strong quarter, supported by the continued execution as we broaden our consumer reach. Our Dreams business, as noted by Scott, continue to navigate a difficult environment given a very tough U.K. market and the recent ERP implementation. Our International gross margins declined 80 basis points to 47.4%, driven by commodity cost inflation before pricing actions, partially offset by operational efficiencies. Our International operating margin declined 120 basis points to 12.4%, primarily driven by the decline in gross margin. Now I'd like to give a brief update on commodity inflation and related pricing actions. We implemented modest pricing actions following the July 4 promotional period to offset higher input and freight costs. As we discussed last quarter, the timing of the cost increases preceded the implementation of our pricing actions, creating an approximately $10 million onetime headwind to Tempur Sealy profits in the second quarter. We expect those impacts to be offset by pricing actions in the second half of the year. I want to point out, we grew earnings in the quarter almost 10%, while fully absorbing the inflationary environment. Now moving to Somnigroup's balance sheet and cash flow items. At the end of the second quarter, consolidated debt less cash was $4.3 billion, and our leverage ratio under our senior credit facility was 2.99x, returning to our target leverage range of 2 to 3x, demonstrating our strong cash flow generation and disciplined capital allocation approach. We also further strengthened our capital structure through the refinancing and upsizing of our credit facility. The amended facility extends maturities to 2031, increases liquidity and allowed us to reduce higher cost debt, lowering future interest expense. Turning to our cash flow performance. In a muted market, we delivered record operating cash flow of $236 million and free cash flow of $182 million. We have reduced our net debt by more than $500 million over the trailing 12 months, while fully supporting growth initiatives and returning over $160 million to shareholders in the form of dividends and buybacks. Now turning to 2026 guidance. As a reminder, our guidance considers the elimination of intercompany sales between Tempur Sealy and Mattress Firm, which we expect to represent approximately 24% of global Tempur Sealy 2026 sales. Intercompany eliminations in accordance with GAAP will reduce Timber Sealy sales, but will be margin accretive and neutral to dollars of operating profit. We expect adjusted earnings per share to be between $2.85 and $3.15 for the full year. This guidance range contemplates a sales at the midpoint of approximately $7.6 billion after intercompany eliminations. Our annual guidance also reflects our expectation that the global bedding industry will be down mid-single digits year-over-year, Tempur Sealy North America like-for-like sales growing low single digits, International business growing low single digits and like-for-like Mattress Firm sales down slightly. We also expect reported gross margin slightly above 45%, driven by 100 basis points of net margin expansion from operational efficiencies, including synergies and operating leverage, partially offset by the impact of Tempur Sealy's pricing actions, which are intended to neutralize commodity inflation, but are margin dilutive. Our 2026 outlook also contemplates our assumption for Tempur Sealy brands and private labels to be in the mid-60s percent of Mattress Firm total sales. This represents an incremental $65 million of adjusted EBITDA benefit for 2026 versus 2025, and approximately $690 million of advertising investments. This all results in an estimated adjusted EBITDA for 2026 of approximately $1.39 billion at the midpoint of our guidance. Regarding capital expenditures, we expect 2026 CapEx of approximately $225 million, including CapEx of $75 million under our Mattress Firm store refreshes and brand wall program. We expect our CapEx to normalize to $200 million in future years, and for at least 50% of our free cash flow in 2026 to go toward quarterly dividend and share repurchases. Now I'd like to flag a few modeling items. For the full year 2026, we expect D&A of approximately $310 million, interest expense of approximately $230 million and a tax rate of 25% with diluted share count of 213 million shares. With that, I'll turn the call back over to Scott.

Thank you, Bhaskar. Well done. In closing, our second quarter results reflect the strength and resilience of our business model, the dedication of our teams and the benefit of a disciplined long-term strategy. We continue to execute well across our global operations, driving growth and creating long-term shareholder value. Lastly, I'd like to give a brief update on our proposed combination of Leggett & Platt, a leading diversified component manufacturer and long-standing supplier to Somnigroup. We have made significant progress towards finalizing the combination. We have received nearly all regulatory approvals required to consummate the transaction and the required Leggett & Platt shareholder vote is scheduled for August 20. We're expecting to close the transaction before the end of the third quarter. This timing is considerably ahead of our original expectations. Leggett & Platt will be incorporated into our guidance post closing. We believe the combination will further strengthen our vertical integration framework and enhance consumer-centric innovation. It is expected to expand our addressable market in bedding and into non-bedding industries. It's going to reduce our financial leverage, drive operating cash flow and deliver immediate adjusted EPS accretion before synergies, with opportunities for future shareholder value driving synergies across the combined organization. We look forward to welcoming Leggett & Platt into our portfolio of industry-leading businesses. Operator, that concludes our call. Open the call up for questions.

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

Scott, I wanted to talk about the revision to the guide. Coming out of the first quarter, it felt like you could still hit the higher end of the range that you had set for earnings. Can you talk about what changed in the quarter that drove the decision to take the numbers down? And how you thought about setting the current range of that $285 million to $315 million? What's implied in there, and how you got to that?

Sure, Susan. Thank you for the question. I mean, like anything, you start with an estimate, and there were puts and takes during the quarter. Some were favorable, some were unfavorable. If I had to just like point at 2 things that were the largest probably unexpected negatives, if we're going to focus on the negatives for a second, obviously, the industry trends in the second quarter were not as strong as we expected. We were expecting what, Bhaskar...

Mid-single digits.

Up, down?

Down.

Down. And what you get?

Mid- to high from an industry standpoint.

So your first thing would be industry, and that's generally the U.S. is what we're talking about there. The other thing, the U.K. operation, Dreams, their ERP system was a little rougher than we expected, and the U.K. market was a little more competitive. Those 2 were the big ones that I would call out, although there were certainly others, some positive, some negative. The other thing probably that weighed on us was the Middle East activity and that we went back in for Round 2, which has created some additional uncertainty, probably from where we were thinking. Those would be the things that I think of, Bhaskar. Now she asked about in setting the guidance, why don't you talk a little bit about that?

Absolutely. So just to put a -- just to recap again, is that going into the quarter, we had an expectation from an industry standpoint. On a full year basis, our expectation is that the industry will be down low single digits. As we sit here now, our expectation is that the industry will be down mid-single digits. And what that effectively implies for the rest of the year is -- with the inclusion of pricing is that what we saw in the second quarter continues. So at the midpoint of guide, it's really how we thought about it is that the current trends or current industry trends continue, and as it relates to the initiatives that we have in place, we continue to execute. The other item that we did tweak a bit is our assumption around sales synergies. We did take up our expectation based on the performance in the first half.

Yes. I think the other thing I'd probably -- since you're talking about guide, that influenced us as I think about it, as you were speaking, Bhaskar, is if you look at the second quarter, the first couple of months were solid and looking well. And then we ran into the July 4 holiday period. And I think it's been well documented. But the July 4 holiday period in the U.S. was not robust and was weak. And that was certainly not expected. The good news is, since that holiday period is over and it ended, call it, July 15 or so, the market has kind of rebounded back to the trend line that it was before. The thing that we look at, we think is probably the best way to look at the U.S. market is Mattress Firm same-store sales because it takes out the inventory fluctuations and order timing that we get over on the Tempur Sealy side. And if you look at Mattress Firm same-store sales post the holiday period, it's running, give or take, flat, where, during the holiday period, it was challenged. But it's good it rebounded, but it's certainly that holiday period was also notable towards the end of the quarter.

Your next question comes from Pedro Gil with Morgan Stanley.

Nice job managing through a difficult environment. I'd like to focus on profitability for a moment. You have remarkable margin expansion in Tempur Sealy North America. Could you expand a little bit on what's driving that in terms of manufacturing efficiencies, synergies? And how you're thinking about that in your guidance for the second half with the additional pricing coming into the mix?

Absolutely. And what we -- our performance in the second quarter was adversely impacted by the commodities ahead of pricing. So we are pleased with our margin performance. So when I think about the key drivers of margin within the second quarter, a couple of things really come through. We continued to execute against our cost synergy target. We realized about $15 million largely as anticipated for the second quarter. And as it relates to the full year is that our expectations remain that we'll continue to drive those cost synergies. On the sales synergy side, that is where our balance of sales at Mattress Firm what percentage that is relative to what they sell is that we exceeded our expectations, and we have revised our expectations for the full year based on that performance. And how you see that from -- and therefore, from a gross margin expansion perspective, that is also a key driver related to the North America business performance. And then finally, I would close with is that the productivity. So productivity is those things outside of Mattress Firm is just doing more with less. And our operations group, the rest -- as well as the rest of the organization continues to perform very well. So from a margin standpoint is that we had a nice -- very nice expansion. And then when I think about that on the operating line is that we continue to make those investments that are going to drive future growth, whether it be in the form of advertising or supporting the new Stearns line that we have coming out in the back half.

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

Can you talk about just the cadence for the back half for EPS? Like what should we be thinking for 3Q versus 4Q sort of in light of the 3Q to date comments on July 4?

100%. Good question. So just to get us grounded is that at the midpoint, that would imply about a 10% year-on-year EPS increase. What we've seen in the first half of the year is about a 10% increase. So therefore, in the back half, that expectation continues. The one thing to be mindful of, as you think about phasing between Q3 and Q4, a couple of things, yes, Rafe, one should be mindful of what we saw on the 4th of July. However, as Scott pointed out, things have stabilized since then. But just as a reminder in the prior year is that the third quarter of 2025, it was -- on a relative basis, it was strong. So when you think about the phasing between Q3 and Q4, we'd expect growth in EPS in both quarters, but more of that in Q4 versus in Q3.

Your next question comes from Bobby Griffin with Raymond James.

Congrats on getting the [indiscernible] look like Leggett deal is getting done ahead of schedule. I guess, Scott, I wanted to double-click inside the U.S. industry and kind of get more of your view of what do you think is going on from a demand perspective? I mean you guys are calling the quarter actually a little slower than 1Q. You compare that to some of the residential furniture reports we've seen recently, which is admittedly not the same product, but correlated and it looks like it's getting a little bit better. So do you think there's a distribution shift that's taking place here that's negative between the marketplaces or outside Mattress Firm? Or just any other color on kind of what you think is going on with the demand environment and the fact that it's actually getting worse and we're seeing it stabilize in some other areas of related products?

Yes. Great question, Bobby. I mean if you just kind of talk about the industry in general in the U.S., I think I think Leggett's out today with their numbers, and I think they were calling, call it, springs down...

Low double.

Low double digits. So between that and what we see in other things. So I think we've got a pretty good read on the industry numbers. Obviously, we've had some of our key advertisers have had some restructuring during the period. That's probably not helpful to the industry because their advertising has been limited. But as far as relative to furniture, and I'm not an expert in the furniture side of the house. But at least it's been my experience that we have these periods where, for a quarter or 2, furniture does better than bedding and bedding does better than furniture. And I think that, that's all we're experiencing. I don't think there's anything systemic or different going on in bedding process or bedding sales. We're probably creating more pent-up demand than we really want to create. But now, I mean -- and I think the other thing, other trend that is very evident every quarter and continues to get probably larger every quarter is that the large retailers are clearly taking share from the smaller retailers. We see that in our orders, and there is a shift from distribution from that standpoint. Our own Tempur stores are certainly doing better. They're comping up. They were up almost 3% in the second quarter. When we look at online, and our online business was much improved from the first quarter, but still slightly negative, if I remember correctly, Bhaskar.

That's correct.

And then when we do our channel checks to, call it, web-based sellers, it is clearly the web side of the industry has been challenged. And I think the brick-and-mortar side of the house has done better. And that would include throwing in the big online companies, too. So we're not seeing -- we're seeing more of a move, I think the brick-and-mortar and a little bit away from web compared to like 3 years ago. Those would be the primary trends that I can think of from a distribution standpoint.

Your next question comes from Keith Hughes with Truist.

Keith, if you're speaking, we can't hear you.

Might be the easiest question I've gotten all day.

Can you hear me now?

We can hear you now.