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

All right. Thank you. Good morning, everyone. Welcome to the Piper Sandler Consumer Marketplace Conference. My name is Peter Keith. I'm the senior research analyst covering hardlines and leisure-related companies. We're pleased to kick off this morning with Tempur Sealy. Joining me on today's discussion from Tempur Sealy is CEO, Scott Thompson; and CFO, Bhaskar Rao. And we've got 25 minutes to run through some Q&A. I'm going to leave the last 5 to 7 minutes to take questions from the audience. So if you'd like to ask questions, there's 2 different ways. You can enter in a question at the bottom of the screen or you can also e-mail me directly, and I will read that. It's peter.keith@psc.com. So Scott and Bhaskar, welcome, and thank you for joining us this morning.

Well, certainly, and thank you for having us.

So this is really well timed. I'm excited to have you guys this morning because it's right on the heels of an important press release from last week, in which you announced the acquisition of Dreams, U.K. and you raised your sales guidance for Q2. So I wanted to at least kick off and talk a little bit about Dreams and understand the strategic reason for acquiring the company. So maybe at a high level, Scott, could you just give us an overview of Dreams? What you like about the business? And how this is -- how you see it, I guess, is a good strategic fit for you long term?

Sure, and thank you for your question. For those of you who don't know, Dreams is the largest bedding specialty company in United Kingdom. We announced that we signed a definitive agreement with them last week. They're one of our really good customers internationally. We've been watching the Dreams team for probably about the last 4 years and on and off have talked about acquiring them. They also manufacture. So they also have, I think, it's the fifth largest manufacturing plant in the U.K. So we're picking up a manufacturer and a retailer. We've got the management team coming with us, and we think there's significant synergies when you put the 2 companies together. On the sales side, they are very strong Tempur retailer right now. They don't really retail very much of Sealy. And as you probably know, we reacquired our Sealy licensees rights a few months ago. So we think there's some synergies from a sales standpoint and enhancing our BOS on the Sealy side of the house. On the cost side of the house, as you know, we're the largest bedding manufacturer in the world. And as I mentioned, they have a plant. And so we'll drop in our supply agreements to the extent it makes sense and get some cost synergies from the supply side. They also have a very sophisticated logistics system because they deliver beds and bedding furniture in the U.K., and we'll be able to utilize that in our direct business on our Tempur assets where we sell direct to customers in our Tempur stores, and we'll get some logistics savings and synergies from those organizations over time. But first of all, look, we bought a very well-run company with a very talented retail management team, and we think we paid a very fair price for it. So I think it gives us some long-term capabilities that we didn't have before. We said before from an acquisition standpoint, we don't believe we need to do anything, but if something is for sale in the area of bedding that helps us go vertically integrated, whether it be retail or on the supply side that we certainly want to look at it. And we continue to look at various deals every year. This one just happened to fall in place from a pricing standpoint and a timing standpoint. It does like things for us. It makes our direct business worldwide over $1 billion. And I suspect -- I haven't seen the numbers for sure, but I suspect on an international basis, direct to customer is probably 70% to 75% now with the Dreams acquisition.

Okay. So yes, that sounds like a smart and potentially lucrative acquisition, nice price. Well, I'd like to spend a little bit of time talking about international. I know there's so much focus on North America, but you've been international for a while. We know it's high margin. Maybe you could talk about your market share internationally? And how does Dreams fit into the longer-term view of international growth for you?

Yes. And thank you for your question. Look, when you look at the international business, there are some great attributes. First of all, we have a very high-margin business, but our balance of share internationally is relatively low. Call the total addressable market for our company, something like $50 billion, with maybe $30 billion internationally, okay? And our market share is almost insignificant in total. Now at the high end, Tempur worldwide dominates the high end, but we've been a little bit margin-rich, if you want to say. And we're trying to open up the market to get more of the addressable market internationally. Certainly, Dream is a part of that because it helps us, gives us some capabilities from a distribution standpoint. But the other big news is the launch in 2000 -- and what would that be 2022 for Tempur, that's coming in -- internationally, we're priced very high. Think of us internationally as super premium. And in the U.S., we're like luxury, okay? And we're going to bring down the pricing on another part of our Tempur products to the luxury market. We're still going to have a super premium in the marketplace, but we're also developing some products that will hit a different price point. And that would be for the entire international market, and that's more where the meat of the market is. So think of it as a kind of a two-pronged attack to go after growth internationally. One, acquisitions like this, Dreams acquisition. And before that, you might remember, we did a little SOVA acquisition in Sweden, which was a retailer. We also bought a little manufacturing operation bed factory in Europe. So we've been putting kind of the pieces together. And then you get the right products through these new Tempur products that are coming out next year. And we think international is going to be a really good growth engine for the company, where it's been a little bit stalled the last 3 or 4 years. If you look at it, good EBITDA, cash flows, great business, but from a growth standpoint, we think it's probably underperformed.

Okay. All right. Great. Well, that's exciting, certainly for 2022 and go forward. I want to dig into the second press release from last week, which was on the Q2 sales update. So just to recap for viewers, you now expect 2-year sales growth of 60%, which is really quite remarkable. And of course, that would be an acceleration from Q1 where the 2-year growth rate was at 50%. So I guess just to kick off. First, what's the reason for the acceleration? Anything that's changed or that's been a better backdrop for you vis-à-vis Q1?

Yes. Look, it's really -- it's a very strong market worldwide. And what we're talking about is, since our last report, our expectations become more robust. And the big change in our expectations since we reported to you last, which is why I felt like we needed to update the market, was really primarily North America and primarily the Tempur product within North America. I think probably when we did the first quarter earnings call, we had some stimulus checks hitting the marketplace, and it felt really good. And we weren't sure if -- whether or not the stemless checks were driving sales and there would be any slowdown. And interesting, instead, what we've seen is the market has continued to get stronger. We also told the market that we had this big backlog, which is unusual in our business, and we expected to work off the backlog in the first quarter. And look, we thought we needed to tell the market, we were wrong. The backlog is not going to get worked off in the second quarter. We're going to probably exit the second quarter with a larger backlog than we had at the end of the first quarter. And that's not because the chemical industry, we call it, the foam capacity issues in the industry aren't coming back as we expected. They are coming back as we expected. Everybody is doing a great job in the supply chain. It's the demand side of the equation that is accelerated, which is causing us a problem in working off the backlog. What's driving that? Look, I think it's not really the stimulus checks, it's either high -- these are high-dollar products. I think now we've got enough evidence, it's really more about consumer confidence. Clearly, you've got all the research talking mainly about U.S. consumer right now, but you could probably the same worldwide, depending on your market. Look, great consumer confidence. The consumer saved a lot of money during the pandemic. Interest rates are low, financing is available. It looks like just a real goldilocks environment for retail for the foreseeable future from where we sit. If I look at other markets that have been opened longer and look for any kind of slowdown, what I'll call, post-pandemic after people redistribute their wallet, maybe that some people are concerned about redistribution of the wallet away-from-home furnishings is we don't see it. I mean, I can go look in Korea. They've been opened a long time. And let me tell you, it's as good as it's ever been in Korea. I can go look in China. In China, they're not doing international traveling. But within country, they're traveling within country. They're in restaurants, it's back to normal. And China has never been stronger from a furniture and bedding standpoint. So where we see it, it looks like a very robust retail environment for bedding and furniture.

Okay. Great. Well, there's a lot to unpack in that. So maybe first, I wanted to just ask you about the backlog. And I believe from Q1, really, the backlog remains concentrated if we had Sealy, correct, not so much on the Tempur-Pedic side?

Yes. Tempur-Pedic is build to stock, and there's no backlog to speak of that's unnatural in the Tempur product. It's all in Sealy and in Sherwood, our OEM business, it's in those 2 areas.

Yes. So we know the -- you'd commented that the spring manufacturing had largely resolved itself, but -- so we hear out in the field as well. So the backlog today, is it just the third-party foam manufacturers that you're using, that they can't, I guess, produce fast enough? Because I would assume you do not backlog at your own facilities, it sounds like you have plenty of capacity.

Yes. First of all, spring issue is behind us. Our friends at Leggett have done a great job, and we don't expect any component issues related to springs in the foreseeable future. We think that's all cleaned up and make sure I've said that clearly. It has to do with chemicals, and it fits in 2 places. One, you're right, we have sufficient cushion in the Tempur operations with storage tanks to take care of the chemical issue on the Tempur side of the house. And then in beds, and this is primarily -- this is mainly in Sealy, there's other foams that we get from third-party manufacturers. Their chemical problems are such and their demand is such that they're on force majeure, and we're not getting as much of the, what I'll call, base foam as we would like. And occasionally, we make some base foam and we're restricted on chemicals there, too. But again, it's not that they're not making a good number -- a large amount of supply, it's really the demand side of the equation. And if you look at our business, we're in big growth in all sectors, whether it be OEM, whether it be Tempur, whether it be Sealy, whether it be Stearns & Foster, whether it be direct. And so at the same time, there's -- it's a tight market. To be frankly honest, we're asking people to -- for allocations, a large allocation to support the growth. We turned down a significant amount of business in the third quarter because of springs. We turned down a significant amount of business because the springs in the fourth quarter last year. And in the first quarter, we turned down some business because of springs and chemicals. And so now we're in a position where we are aggressively turning down business this quarter through asking customers to reduce their promotions. We have customers on allocation. And we have, for all practical purposes, stopped taking new customers until we can get the customers we have serviced correctly.

Okay. All right. And I believe the number that comes in mind was $80 million to $100 million of backlog at the end of Q1. And so that's you're saying will probably be larger than that coming out of Q2.

Bhaskar, do you want to do any guessing on backlog? You're probably better at that than I am.

Sure, sure. So just to make sure we have a terminology right, that $80 million to $100 million, those were orders that were foregone. When I think of backlog, that is an order that we have in hand that we could have shipped, but because of the demand situation against our supply situation, we're not able to ship. So what I would say there is that is at an all-time high. As you mentioned, it's specifically on the Sealy side, and it's large.