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 Tepper Sealy. Joining me on today's discussion from Tepper Sealy is CEO, Scott Thompson and CFO, Bhaskar Rao. We've got 25 minutes to run through some Q and 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 as peter. Keithpsc.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 UK 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, as 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 betting 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 last 4 years and on and off have talked about acquiring them. They also manufacture. So they also have, I think, it's the 5th largest manufacturing plant in the UK. 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're a 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 in 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 UK. 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 to 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, 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 a lot of things for us. It makes our direct business worldwide over $1,000,000,000 And I suspect I haven't seen the numbers for sure, but I suspect on an international basis direct to customers probably 70% to 75% now with the Dreams acquisition.
Okay. So, yes, that sounds like a smart and potentially lucrative acquisition, nice price. 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 in 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. 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 $50,000,000,000 with maybe $30,000,000,000 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, Dreams 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, 2020 what's weird, 12 22 for Tempur that's coming in that 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 the super premium in the marketplace, but we're also developing some products that will hit a different price point and that'd 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 2 pronged attack to go after growth internationally.
1, 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 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 going 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 via 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 have become more robust. And the big change in our expectations since we reported to you last, which is why we 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 do I know when we did the Q1 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 stimulus 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 Q1. And look, we thought we needed to tell the market we were wrong. The backlog is not going to get worked off in the Q2.
We're going to probably exit the Q2 with a larger backlog than we had at the end of the Q1. 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 open 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 open 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 want to just ask you about the backlog. And I believe from Q1, really the backlog remains concentrated with 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. It's unnatural in the Tempur product. It's all in Sealy and in Sherwood, our OEM business, it's in those two areas.
Yes. So we know the Ayud commented that the spring manufacturing had largely resolved itself. That's what we hear out in the field as well. So the backlog today, is it just the 3rd party foam manufacturers that you're using that they can't, I guess, produce fast enough? I would assume you're not backlogged at your own facilities.
It sounds like you have plenty of capacity.
Yes. First of all, spring issue is behind us. Our friends at Leggate 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.
1, 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 3rd 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 were in big growth in all sectors, whether it be OEM, whether it be Tempur, whether it be Sealy, whether it be Stearns and 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 our allocations, a large allocation to support the growth. We turned down a significant amount of business in the Q3 because of springs. We turned down a significant amount of business because of springs in the Q4 last year.
And in the Q1, 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 started stop taking new customers until we can get the customers we have serviced correctly.
Okay. All right. And I believe the number that comes to mind was $80,000,000 to $100,000,000 of backlog at the end of Q1. And so that's you're saying it will probably be larger than that coming out of Q2?
Oscar, 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 our terminology right, that $80,000,000 to $100,000,000 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 it's at a all time high, as you mentioned, it's specifically on the Sealy side and it's very it's large.
Okay. And there normally would not be a backlog. You've been in the industry for quite a while, Peter. We'd normally never talk about backlog, because the order to ship is a few days. So this is very unnatural.
Okay. All right. And so you talked about a good consumer backdrop right now. You're seeing strength with Tempur in particular. So we talked to a lot of retailers and our industry discussions continually point to this rising average selling price trend that the industry is seeing.
Do you think COVID has been an unlock for ASP growth and perhaps as a result of your consumers wanting to get better sleep, understand the health and wellness benefits of that? Is this an important moment in time for the industry that's maybe unlocking future growth?
Well, it's the health and wellness trend was already there before COVID. We were already riding that trend hard. As you remember, we were growing, I don't know, 20% or so on top line before COVID. So that trend that you're talking about is something that would already been identified in marketing and we were after it. There's no question that the pandemic has accelerated that trend and that trend will be here post pandemic.
But it's also a lot it's not that simple. I think there's a lot of other things going on. 1, we stepped really hard on advertising on the Tempur brand. And there's no question that our advertising and marketing has been very successful and has helped pull that product. And so I think some of that is coming from the advertising spend.
Now originally, we upped advertising spend to help the industry started in May of last year to try to get the industry back going when it was kind of flat on its back. And quite frankly, we found that it had a good return on investment and we've been stepping on it ever since. So I think some of it is our new investments in advertising. I also have to say that we've had a large retailer in North America that had been financially troubled, Mattress Firm, and they're large enough that they're also stepping on advertising and they're certainly helping drive the market. And I do think this is a sector where strong retailers with strong manufacturers advertise whether it be Ashley's or Room2Go, when everybody is pulling their weight, all that adds up to more than 1 plus 1 equals 2.
And so I think there's been some fundamental changes in some of our distribution partners, the way they think about their business, and what price points they're trying to retail is in the mix. And the last piece, and I'll give all the manufacturers credit for it, is beds are built better now and that includes some of our competition. Everybody is building better beds with technology, with value added, with features. And I think industry wide, I think that is also helping drive ASP up.
Okay. All right, good. And hopefully that's a longer term trend. Yes. So I think a concern for investors with Tempur Sealy is this really strong growth you're seeing right now and then what happens with 2022.
So in some ways you've already sort of answered my question, but I'm just going to ask it directly. 60% 2 year growth here, let's just say this isn't a big demand pull forward and these create really tough compares and therefore it's going to be difficult to grow next year. I'm not asking it to guide next year, but how can you grow next year?
Sure. Fair question. First of all, we see next year's growth, okay? Is the growth rate going to go down? No question, the growth rate is going to go down.
But let's just kind of go around and think about it. Look, we've got the Dreams acquisition that's going to layer in. There's a lot of stock repurchase in the numbers. You're going to get some EPS growth there. There's Lord knows there's a lot of inflation and price increases that are going in the market.
You're going to get that as that layers on. At least what I see in Washington is nothing but people who want to give money to the economy to keep the retail customer going. I don't see anything that looks like a recession. So all that plays to growth and we got new initiatives and new product, which I've told you about, Tempur internationally. And we'll, of course, we'll also be coming out with some new product here in the U.
S. In Sealy and Stearns. But underlying all of that is I don't see any way we're pulling we've pulled forward demand. I think this is kind of the crux of the question. And we're going to have to prove it, but there's no indication we're pulling forward business.
Everything I see, the industry is pushing business off because we're going to it's not just Tempur Sealy's capacity constraint, the entire industry is. And so those people that wanted sales, they're getting pushed off. I mean, you do channel checks, people having to wait 6, 7 weeks for the beds. We're pushing demand off. It has to do with housing formation, consumer confidence.
And so that's what it feels like to me. It doesn't feel like a pull forward. I've talked about this slide before and I always have to get it in front of me when I start talking. But in trying to address this and trying to think through this from an analytical standpoint, we did get a slide from another firm that shows U. S.
Expenditures on home as a percentage of disposable income, okay? Because I kept hearing all this about, oh, the shift of the wallet is all going over here to home. And so I wanted to get the actual numbers and I was expecting to see this chart where it looks like just as unrealistic, unsustainable number going into Home and Furnish. And when you get the chart, you really look at the number, it's almost comical. And if you look at 2020, the percentage of disposable income that was spent in Home was 3.79%, okay?
Okay, it's up from 3.6% the year before. It's just not very much. And then if you go back and look 15 years history to see if this percentage looks unrealistic, Okay, in 2,006, 2007, 2008, the percentage of disposable income in home was over 4%. So the point is in 2020, we didn't even get back to what we used to spend as a percentage of disposable income. What really happens after the Great Recession, it didn't really come back, okay?
It got crushed in the Great Recession and then it just has been trickling up and it's been up 8 years in a row a couple of percentage, but it never really came back from the big fall it took. So I think you can argue it is possible we're getting back to the new normal as opposed to any pull forward. That's our current thinking. We're going to have to play through the Q3 to prove it to The Street. But we wouldn't be making the large investments we're making.
You know we're making a huge investment in new Tempur facility that we've announced. We stood up a new plant in Dallas in the Q4. We've announced a new plant in for Sherwood on the OEM side of the business. I think you can look at our CapEx and you can look at our share repurchases. And I would say, we're putting our money where our mouth is on what we call the sugar high issue.
We think this is a great opportunity. And if we're right, we've really made the right investments at the right time. So we just have a
couple of minutes left here. There's at least one question that came in from the audience that I wanted to ask. And so it's regarding the Q2 sales growth guidance of 60% on a 2 year basis. Anything that you embedded for Memorial Day weekend into that outlook? It was obviously came out a couple of days before the weekend started.
That's a great question that I'm going to dodge and talk, but not really answer. Look, we well, I guess, we're on an FD protected call. So I guess, I'd say I wanted to say, look, we are because obviously we know what retailers' plans are, they've got orders in, we know kind of how the industry is wired going into the weekend. And I can tell you that the industry was very optimistic about the holiday. And all early indications for the holiday period is it was a very robust holiday.
We are hearing significant chatter of some of the best sales some of the retailers have ever had. And we don't have all the detail yet, but I suspect that the Tempur product will be the winner over the holiday from the early results. And Sealy is continuing to be supply constrained.
Yes. Well, that's some early similar feedback that we're hearing as well. Of course, we'll have quantitative results out next week as we complete our survey work. But yes, early reads from the world that we can do look very favorable.
Thank you.
So, well, maybe we'll end it on that note. We've just got 1 minute left. So we'll cut off here. But, Scott, Bhaskar, always great to see you. Thanks so much for taking some time to talk about your story.
We remain very optimistic about your growth potential going forward and I agree with a lot of your comments today.
Thank you and thank you for your interest and thank you all the participants on the call today.