Thank you, operator. Good morning, everyone, and thank you for participating in today's call. Joining me in our Lexington headquarters 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 and A. Forward looking statements that we make during this call are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that these forward looking statements, including the company's expectations regarding sales, earnings, net income and adjusted EBITDA and the anticipated performance of 2020 and subsequent periods involve uncertainties. Actual results may differ due to a variety of factors that could adversely affect the company's business. The factors that could cause actual results to differ materially from those identified include economic, regulatory, competitive, operating and other factors discussed in the press release issued today. These factors are also discussed in the company's SEC filings, included but not limited to, annual reports on Form 10 ks and the company's quarterly reports on Form 10 Q under the headings Special Note Regarding Forward Looking Statements and or Risk Factors. Any forward looking statement speaks only as on the date which it is made.
The company undertakes no obligation to update any forward looking statements. This morning's commentary will include non GAAP financial information. The press release contains reconciliations of this non GAAP financial information to the most directly comparable GAAP information, except as otherwise discussed in the press release as well as as information regarding the methodology used in our constant currency presentation. We have posted the press release on the company's investor website at investor. Temperssealy.com and have also filed it with the SEC.
Our comments will supplement the detailed information provided in the press release. And now, without introduction, it's my pleasure to turn the call over to Scott.
Thank you, Aubrey. Good morning, and thank you for joining us on our 20 2Q3 earnings call. Our thoughts continue to be with those around the world whose lives have been impacted by the global health crisis. I'm proud of the team's success in providing employees and customers a safe environment while dealing with and mitigating an array of complex issues caused by the global health crisis. I'll begin the call with an overview of the quarter with some highlights, then Bhaskar will review our record quarterly financial performance in more detail.
Finally, I'll conclude with our thoughts on long term capital allocation. The quarter was very strong. In the Q3, global net sales grew a record 38% year over year despite the material impact of supply chain constraints on our operations. Our results reflect the continuation of a solid broad based industry trends and our worldwide leadership position. The 3rd quarter sales growth of 38% exceeded our internal target, primarily driven by an overperformance of Tempur Pedic in the U.
S. And a quicker than anticipated recovery in our international operations. Sales would have been higher in the quarter if not for the continued supply chain constraints impacting Sealy and Sherwood in North America. Today, the industry, and specifically Tempur Sealy, are squarely in the middle of people rethinking their priorities in life. One impact of COVID-nineteen has been people's increased focus on their health and wellness, while simultaneously spending a greater amount of time at home.
We believe this focus on health, wellness and quality of life is going to remain a priority for consumers in the future and that our products will continue to resonate with those seeking quality sleep as part of their overall wellness plan. COVID-nineteen has caused so many disruptions and noise in our day to day lives, but sometimes it's hard to see some shifts in the market. Let me take a step back. The domestic bedding industry is in the healthiest position I've seen and is now structured for sustained profitable growth. The days of uneconomical retail store expansion is behind us.
The number of retail doors have been rationalized, improving average sales and profit per store. The days of significant unfair dumping of overseas product in the market is also behind the industry. We expect new antidumping actions to reduce the number of mattresses coming in from overseas and benefiting domestic manufacturers. The days of new start ups focused on uneconomical land grabs have been mitigated, and their strategies have moved to becoming profitable entities. At the same time, legacy retailers and manufacturers have become skilled in producing profitable Internet sales.
These dynamics, in addition to worldwide consumers focused on the category, provide an attractive backdrop for our business. It's important to remember that we entered the year in the strongest competitive position in our history, having made significant investments in our brands, products, people and manufacturing operations. As a result, we reported record sales and earnings in the Q4 of 2019 and the Q1 of 2020, the 2 quarters prior to the pandemic. Although we are certainly benefiting from the current market trends, the lion's share of our performance is from our market position, investments and our long term strategies. As we all know, consumers' buying habits and expectations are evolving.
For a brand to be relevant today, consumers expect that the brand will have an integrated omnichannel presence. One of our long term initiatives is to optimize our powerful omnidistribution platform and be wherever consumers want to shop. Our execution on this initiative has positioned us well to meet their expectations. We believe our dedicated network of 3rd party retailers is key to our distribution footprint and will continue to be an area of growth going forward. At the same time, we've been focused on building our own direct to consumer channel.
Tempur Pedic was the original direct to consumer bedding company, and today, we continue to expand both online and with high end brick and mortar retail stores. The trend towards online purchases accelerated during the pandemic, and we believe that consumers will continue to lean in digitally to digital channels. Our direct channel web sales grew over 100% in the quarter while driving higher EBITDA margin in an already very profitable distribution channel. Our robust sales trends include over 200% growth on our compressed bedding offering, which compares favorably with others in the industry. We've also built out our network of high end Tempur Pedic retail stores that offer consumers a differentiated low pressure sales experience and serve as a brand halo in the market they operate, elevating our brand throughout the entire market.
We've opened 6 new stores in the Q3 and expect to have over 75 stores by the end of 2020. Our most recent opening was our Manhattan flagship, our 71st location, and it's located in the Bloomberg building. Turning to the 3rd quarter profitability. Adjusted EBITDA was a record 279,000,000 dollars almost double that of the prior year, making this quarter the most profitable quarter in the company's history. We realized outstanding free cash flow generation, resulting in a record low leverage ratio of 1.9x adjusted EBITDA.
The company has grown trailing 12 month adjusted EBITDA for 7 quarters in a row and achieved trailing 12 month adjusted EBITDA of $694,000,000 this quarter, a 47% increase over prior years. This performance triggered our long term aspirational incentive comp plan, which applies to approximately 150 of the company's leaders. The aspirational plan was put in place 5 years ago to motivate the company's leaders to drive the business towards meaningful growth during a challenging period in the industry. With that, I'll turn it over to Bhaskar to walk you through the financial results in more detail.
Thank you, Scott. Before going into the details, I would like to highlight a few items as compared to the prior year. Adjusted gross margin improved 300 basis points to 46.9%. Adjusted operating margin improved 540 basis points to 20.1%. Adjusted EBITDA increased 86 percent to $279,000,000 which is a record high for any 1 quarter in the company's history.
And adjusted earnings per share more than doubled to $2.94 The increase in adjusted EBITDA was primarily due to higher sales volumes and fixed cost leverage. These benefits were somewhat offset by plant inefficiencies due to the supply chain issues previously mentioned and various virus related items. As a reminder, our business is flexible and our cost structure is highly variable, as evidenced by our ability to quickly reduce cost in order to maintain profitability in the Q2 when we were uncertain of the outlook. Our confidence sequentially improved. And in the Q3, we brought back virtually all of our expenses that we had previously cut.
Those costs we are incurring now reflect the forward looking confidence we have about the business as we make the investments necessary to grow over the long term. Commodities were slightly higher than expected for the Q3 as prices have increased off their record lows over the past year. We now expect to experience headwinds going forward. To offset these commodity headwinds, we recently announced a price increase across all of our U. S.
Brands, including Sealy, Stearns and Foster and Tempur Pedic. We expect this price increase to fully offset the commodity cost inflation are now anticipating in 2021. Turning to North America. Net sales increased 43% in the 3rd quarter. On a reported basis, the wholesale channel increased 44%, driven by broad based demand across existing and new distribution.
The direct channel increased 35%, driven by strong web sales, partially offset by muted performance at our company owned stores, some of which were closed for a time during the Q3. In addition, virtually all of our stores operated below capacity due to reduced hours to comply with local government directives and landlord requirements. The 43% growth in North America is exceptional given that Sealy and Sherwood supplier issues restrain sales growth. The primary driver of the supply chain bottleneck is a spring shortage, primarily an encased innerspring component. We expect the supply constraints on these products to continue the next few quarters.
This quarter, we estimate that there were over $100,000,000 in customer orders that were either canceled or reduced due to allocations. Our orders received outpaced our component supply, which resulted in our U. S. Order bank at the end of the third quarter being quite a bit higher than the end of the second quarter. In fact, we entered the 4th quarter with our largest order bank in the company's history.
North American adjusted gross profit margin improved 2.90 basis points to 45% as compared to the prior year. The improvement was principally driven by fixed cost leverage and productivity on higher unit volumes, brand mix and commodities. North American adjusted operating margin was 23.9%, an improvement of 6 30 basis points as compared to the prior year. This improvement was primarily driven by operating expense leverage and the improvement in gross margin. Turning to international.
Net sales increased 12% on a reported basis. And on a constant currency basis, international net sales increased 10%. We were very pleased with our international performance during the Q3 as it ended the period above our expectations. We remain mindful that certain international markets are now experiencing new restrictions related to COVID that are expected to cause some headwinds in the Q4. As compared to the prior year, our international gross margin improved 570 basis points to 58.8%.
The improvement was primarily driven due to favorable mix, fixed cost leverage and productivity on higher unit volumes and lower commodity cost. International adjusted operating margin was 29%, an improvement of 9 40 basis points as compared to the prior year. This improvement was primarily driven by improved gross margin and operating expense leverage. This includes the cost actions we took last quarter. We have one international transaction to report this quarter and although relatively small, it is very important to our long term plans for Sealy internationally.
We have acquired the Sealy distribution rights and assets to manufacture, market and distribute Sealy and Stearns and Foster branded products in the United Kingdom. We entered into a fifty-fifty joint venture with the objective of developing, repositioning and significantly expanding the sale of Sealy products in one of the largest bedding markets in Europe. We expect the joint venture will report a small operating loss for a year or 2, but I expect we will look back years from now and be thrilled with the results. Now moving on to the balance sheet and cash flow items. We generated a record Q3 operating cash flow of $328,000,000 To put that into context, our operating cash flow for this quarter was greater than any cash flow in any previous full year.
With strong cash flow from operations and liquidity above our target, as part of our capital structure and liquidity management process, we decided to redeem $200,000,000 of the $450,000,000 2023 senior notes. The transaction is expected to be complete in the 4th quarter and will result in annual interest savings of approximately $5,000,000 We continue to monitor the overall bond market and its understanding of our improved financial strength as we consider future refinancing activities. At the end of the Q3, consolidated debt less cash was $1,300,000,000 As Scott pointed out, our leverage ratio under our credit facility is 1.9x, down significantly from 3.2x at the end of the Q3 of 2019 and slightly below our target range of 2 to 3x. We are not issuing official guidance today, but I would like to offer some thoughts on our near term expectations, excluding any material and unforeseen changes in the operating environment. As a reminder, we were shipping large amount of floor models and back stock inventory in the Q4 of 2019 as we expanded into new distribution, which represents a headwind to our Q4 compare.
Our internal target for the Q4 2020 include net sales growth in the low double digits with adjusted EBITDA growing high teens as compared to the prior year. Turning to the aspirational plan. We exceeded the trailing 4 quarters adjusted EBITDA threshold of $650,000,000 by delivering adjusted EBITDA of $694,000,000 a growth rate of 47% compared to the same period last year. Since the high end of the plan was triggered, approximately 825,000 restricted stock units were included in the 3rd quarter share count, resulting in a dilution of about 1.5% of shares outstanding. This will also result in a non cash amortization charge of $50,000,000 for the year, of which $45,000,000 was incurred in the 3rd quarter.
This does not impact EBITDA. Based on our Q4 expectations, our performance will also trigger the maximum payout of our annual variable compensation and stock based compensation programs. We expect to record additional expense related to these compensation plans in the Q4. Our financial results this quarter, including amortization, reflect a true up of these items in line with our improved outlook. We would expect 2021 compensation expense to decline as targets adjust and the aspirational plan expires.
Lastly, I would like to flag a few items for modeling purposes. For the full year of 2020, we currently expect D and A to be about $155,000,000 which excludes $50,000,000 of amortization related to the aspirational plan. We expect total CapEx to be between $110,000,000 $115,000,000 which includes maintenance CapEx of about $70,000,000 interest expense of $75,000,000 to $80,000,000 and a tax rate between 25% 26%. And finally, a diluted share count of 54,000,000 shares or approximately 216,000,000 shares adjusted for the impact of the 4 for 1 stock split that we announced this morning. This is before any potential repurchase activity.
With that, I'll turn the call back over to Scott.
Thank you, Bhaskar. Great job. I'd like to take a moment on behalf of the Board of Directors and the leadership team to thank all of our outstanding employees, third party retailers, suppliers, licensees and joint venture partners for their contributions this quarter. The results reported are due to the hard work and dedication of the entire Tempur Sealy team and our strategic partners all over the world. I'm especially proud of our dedicated global workforce, who have continued to deliver exceptional results each day in spite of supply disruptions, the pandemic and the general health uncertainty in their lives.
Together, we've weathered everything thrown our way by remaining focused on our 4 key long term corporate initiatives. As a reminder, our 4 initiatives are as follows: 1st, develop the highest quality bedding products in all of the markets we serve 2nd, promote worldwide brands with compelling marketing 3rd, optimize our powerful omnichannel distribution platform and 4th, drive increased EBITDA. These long term initiatives are focused on serving all bedding consumers in the marketplace with the highest quality products and services. In further pursuit of our first and fourth objective, about 12 months ago, we began applying our skill set to the bedding OEM market in the United States. This diversification will drive incremental sales and allow us to capture manufacturing profits from bedding brands beyond our own.
Think of this as mining miners kind of strategy. Besides its profitability on a standalone basis, it makes our whole business stronger as we create additional synergies and level the workload in our plants. This strategy is consistent with our willingness to invest in new streams of business over the last few years, such as our expansion of our company owned stores with Tempur Pedic, Sleep Outfitters and SOVA, our highly successful owned webpage and alternate retail partnerships and our expanded private label opportunities via the recent Sherwood acquisition. We're looking forward to sharing more details about the team's expected growth in this category of bedding market in early 2021. Turning to long term capital allocation.
The Board of Directors and the executive management team have been working on optimizing our long term capital allocation plan for years. Our strategy to this point has been focused on 4 areas: investing in operations repurchasing shares repaying debt taken on in the Sealy acquisition and making small tuck in acquisitions. Over the last 5 years, we've allocated approximately $1,500,000,000 of capital pursuant to our strategy, including about $400,000,000 on capital projects, including expanding manufacturing and standing up DTC retail stores, dollars 75,000,000 on strategic tuck in acquisitions, dollars 860,000,000 in the repurchase of 13,200,000 shares of common stock at an average price of $65 a share or about 20 percent of the company and $100,000,000 reduction in net debt, which combined with our robust adjusted EBITDA growth resulted in the leverage ratio reaching a record low. We consulted with financial institutions, studied valuation data, stress tested our cash flows under different market conditions and carefully considered alternatives to develop our new capital allocation plan. I'm pleased to share the following details of our go forward plan, which we feel is balanced and will, over time, drive further shareholder value.
First, we'll continue to spend approximately 7,000,000 dollars 70,000,000 annually on maintenance CapEx, and we'll consider additional capital projects based on expected returns. Investing in people, product and processes will always be our number one priority. 2nd, we plan to initiate a quarterly cash dividend beginning in early 2021 as we believe it's appropriate to return a portion of our cash flow to shareholders in the form of a reliable dividend. We're currently targeting a payout equal to approximately 15% of net income, and we expect to provide additional details on the dividend amount and exact timing in early 2021. 3rd, we'll resume our share repurchase program, targeting annual repurchases of at least 3% of shares outstanding.
The Board has authorized an increase of about $170,000,000 to our share repurchase program, bringing the total share repurchase authorization to $300,000,000 Finally, we'll evaluate acquisition opportunities with a focus on strategic tuck in acquisition similar to those we've completed the last few years. In addition to our new capital allocation program, we also are announcing a 4 for 1 stock split, which will be effective as of November 24, 2020, as we adjust the price of the stock to increase the diversity of our shareholder base. Turning to ESG. It is our belief that as a good corporate citizen, we must serve all of our stakeholders, including our people, our community and our environment. And we are proud of our initiatives to date, and we plan to continue focusing on this area.
Beginning this year, we will source 100 percent renewable energy for our U. S. And European manufacturing operations. We will now utilize energy sources from wind farms across the U. S.
To power our domestic facilities. Additionally, we have committed to achieve 0 landfill waste for our U. S. And European manufacturing operations by the end of 2022. We also expect the installation of solar panel technology at our largest manufacturing facility in Albuquerque, New Mexico to be completed in the first half of twenty twenty one.
The solar panels will generate an incredible amount of clean energy. In fact, the amount of solar energy they are capable of producing is sufficient to power all of the plant's assembly lines. Turning to our social initiatives. Our operating performance has allowed us to increase our workforce by about 20% or approximately 1500 employees since this time last year. And the increase of our stock price has benefited our Tempur Sealy Foundation by driving its assets up over to $4,000,000 As a reminder, the Tempur Sealy Foundation supports charities assisting children in their development.
The foundation also benefited this quarter from over $500,000 in cash contributions from employees and the company's payments funded by our directors' waiver of their board fees. Our progress on sustainability initiatives, job creation, community service and maximizing shareholder returns is our game plan going forward. The combination of strong operations, a healthy tailwind of consumers eager to spend on their homes and a balanced and disciplined capital allocation strategy has positioned Tempur Sealy to meet these objectives of our stakeholders for years to come. I said this 5 years ago and I believe it is more today, execution is where most value creation takes place. Lastly, a comment or 2 about 2021.
Clearly, 2020 is going to go down as one of the strangest years in most of our lives. Until we get this COVID-nineteen issue behind us, it is difficult to give guidance. However, we are committed to providing you with timely updates and additional comments on the general trajectory of the business as they become available. Robust sales trends that we've experienced recently have exceeded our expectations, which has resulted in significant earnings. But we believe that the earnings potential was, at the same time, muted by operational inefficiencies from COVID-nineteen related measures and supply constraints.
When I look at the totality of the picture in 2020, my belief and that of the executive team is that while 2020 is going to be a record year in sales and adjusted EBITDA, 2021 will be another solid growth year for Tempur Sealy. With that, operator, please open the call up for questions.
Our first question or comment comes from the line of Peter Keith from Piper Sandler. Your line is open.
Great results and nice execution. Maybe I'll just ask a question around the price increases that you highlighted. There's been some chatter in the industry that the price increases by you and even others are a bit bigger than normal. I was wondering if you could comment on that and is there potential that some of the increase is exceeding that of the commodity cost inflation?
Thank you for the kind words. When you look at the price increase, obviously, most of it is commodity based. But I'm sure if we benchmark it against other Sealy and probably Sealy, Tempur Sealy price increases, it's probably the largest price increase in the company's history in total. Whether or not it more than covers commodities, hard to tell because obviously commodities is an estimate. I think what I'd call out is, 1, it demonstrates that the industry manufacturing still has pricing power, and we are the business model is to pass on commodity increases.
The other thing to call out that might be a little bit different in this price increase is the normal track is we incur the commodity expenses and have a negative in our operations for a quarter or 2 before it gets passed on through to retail and the customer. This particular situation is the price increase is coming in with what possibly 1 quarter lag. So it's considerably faster into the marketplace than previous price increases. And I guess the other thing I'd point out is it's heavily loaded towards entry level pricing, which will as you probably know, the lower value bedding has lower margins in it, should be healthier for the entire industry.
Thank you. Our next question or comment comes from the line of Keith Hughes from Truist Securities. Your line is open.
My congratulations as well on some outstanding numbers. On the Q4, there's clearly going to be a gap here between the price increase and the raw material inflation. Can you give us any sort of feel for how much that's going to impact the EBITDA in the Q4?
Sure. Great question. If you think about it on a year over year basis is we do expect some headwinds from commodity. A way to think about it would be in and around $5,000,000 on a year over year, perhaps slightly ahead
of that.
Thank you. Our next question or comment comes from the line of Curtis Nagle from Bank of America. Your line is open. Mr. Nagel, you may need to unmute your phone.
Guys, good morning. How are you doing?
Good morning.
So just a quick one on, I guess, it's not officially guidance, but the comments for high teens EBITDA growth relative to low double digits sales growth. I don't know, it just looks a little light. I'm assuming it's pretty conservative, just considering the terrific results you guys are putting up, the leverage, the product mix, all that sort of stuff. So maybe you could contextualize that a little bit?
Well, let me talk about in general, and then I'll let Bhaskar probably really answer your question as I dodge it. Look, when we look around the world, Asia is doing very well. The Asian market has dealt with the health crisis very well. Business feels normal, growing double digits, very impressive operations from an Asian perspective. If you go over into Europe, Northern Europe, orders look good.
And then Southern Europe has been a little choppy, and we've recently got some information on some closures. So we've baked all that into, I don't know what I'll call it, it's not guidance, we'll call it our targets. And then North America has been certainly solid. I think the reason we call it targets or whatever is with the virus around, you're just not sure what's going to hit you next. But in general, we feel very good about the Q4 and the trends going into the Q4.
And as I think, Bascome, you called out in Europe area, we went into the quarter with the largest backlog in the company's history. So we go into the Q4 very strong. On the other side, tough compare or tougher compare, I would say, because we were loading in new distribution. And so, got a little bit of got a little tougher compare because we did have a load in from last year. Bhaskar, did I miss anything?
Not much to say incremental to that. The only thing I would call out is we do remain capacity constrained from
a Springs perspective,
and we have that contemplated in how we're thinking about the Q4.
Yes. And that's something we're not in control of, which always makes it difficult to do a forecast.
Our next question or comment comes from the line of Bobby Griffin from Raymond James.
Quickly, I just want to see, Scott, I understand you don't want to give detail by account, but can you help us maybe put in context the 43% North America growth on an organic basis, and then including your new distribution wins and maybe help separate that out where we can get a good feel of maybe what the industry was doing in the Q3? I can work around that a little bit. Obviously, we're benefiting from some large distribution gains from last year. But I got to tell you, we have growth, obviously, very strong growth online, which we called out specifically, with our compressed bedding growing over 200%, our online business over 100%, A little bit of headwind from our stores because we were very conservative on the reopening of the stores. And certainly, the industry grew, ex any distribution gains.
We saw good growth in the non new distribution gains. So
I don't
know if you if we look at our numbers, obviously, we study the competitors' numbers. Obviously, we get some information from the component manufacturers. I don't know, Vas, we probably haven't aligned on a number, but I'm going to say industry up 10%, maybe 10%, 12%, maybe something in that area. That's obviously an imprecise guess. And we need some more public companies to report.
And I needed a little more information on the imports, which I expect will start coming down very rapidly. But up in the Q3, I'm sure there was a lot of imports that were pushed ahead in front of the tariff. But that'd be a guess, Bobby, if that helps. Yes. That's helpful.
And then you would think you outperformed that 10 to 12 guess from without ex new distribution? I think if you look at the whole industry, it kind of depends on how you cut the industry. Clearly, the online segment grew probably faster than the brick and mortar, and we have probably more business in brick and mortar than the online. So depending on how you cut the industry, yes, we grew faster. That's why we put out that, I call that 200% number from a compressed bedding market because I think that market grew very rapidly.
So I'm expecting people who have concentrations in that smaller segment might have higher growth rates. But when you look at total, I don't think there's any question that we outgrew the industry in total. Okay. Thank you, Scott. Thank you, Bhaskar.
Thank you. Our next question or comment comes from the line of Atul Maheshwari from UBS. Your line is open.
How confident are you that sales growth will be solid as you lap these big numbers, especially in the back half of next year? If I ask this question in another way, do you think the current strength is pulling forward demand from future periods, which would simply make it harder for you to grow sales meaningfully as you lap these numbers? Thank you.
Okay. Great question. We would I said solid because we really feel strongly about it. If I use the words that we feel solid, it means we have a high degree of confidence just in general. The only caveat I would kind of put around that is, we're assuming there's not a global recession, okay?
And we're assuming a positive trend in the health crisis. If you take those 2 off the table, we would I would tell you that we feel very confident that we'll be able to comp the current performance. And it doesn't feel to us that we're pulling forward demand. And the best market, I guess, I can point to is the China market. When markets reopen, we're not it just doesn't feel like we pull forward demand.
It just clicks and comes on. So, it may be housing formations. It may be just a permanent or semi permanent change in disposable income and the share of the wallet that we're going to get. But in a prior life, I was in the car business where we did pull forward demand occasionally because of high incentives from the manufacturer or something. And you get this spike, then it comes off.
That is not what we're seeing in any of the markets around the world.
Hey, man. I'm on the tempered call.
Yes. Okay. You may want to mute your phone, others on the call.
I'll publish their follow-up notes to the call with They want
to meet your call. I'm not sure who's on the phone, but we might learn something we're not supposed to.
Okay.
Anyway, that's the answer to that question. Operator, are we still on? Hello?
Yes, sir. Next question or comment comes from the line of Brad Thomas from KeyBanc. I'm working on the interference. Go ahead, sir.
Thank you.
Hi, thanks for taking the question. Congrats on the great execution momentum here.
Thank you.
I just want
to follow-up on that question about thinking about 2021. Obviously, there's easy comparisons in some quarters from a sales perspective and tougher in other quarters. So I was hoping we could just step back and I'd be curious, Scott, your thoughts on elements of difficulty in comparisons and challenges in comparisons and puts and takes as we fine tune our models for 2021? Thanks. Sure.
Look, I mean, we've got, just kind of let's talk a little bit about some of the growth vectors. I mean, clearly, we expect the online in total next year to grow, seeing lots of success in our compressed product. Store openings are going to continue, and they're going to be additive. We called out an OEM initiative that is new, and that's a new opportunity that I expect. We'll talk about more in the Q1, but it's clearly incremental.
Our stepping into the private label business through Sherwood, we're expecting to see strong growth in the Sherwood area. If you go by quarter, clearly, the Q1 we called out on that conference call that we were slightly impacted by the virus. So maybe that's a reasonable compare there. The 2nd quarter is going to be an easy compare because that was just a train wreck everywhere all over the world. In the Q3, this will be a hard compare, but I think we can probably comp it.
So when we look at it in total, and that's why I called it out in our session, it looks pretty good. The other thing that we mentioned in the prepared remarks that you can't really see, but hopefully this will help you a little bit, think about how our business went this year. We closed factory. We got close furloughed people. We brought them back, pretty sloppy, quite frankly.
Then we had excess demand, so that created enormous amount of overtime, which is very expensive for us that we normally don't run at that level. Then we have this component issue where, quite frankly, we hired up. I mean, as I mentioned, we're up 20% in our payroll. We hired up people to build more beds expecting we were going to get components. After we hired them, we didn't get the components.
So our labor factor in the 3rd quarter is relatively sloppy. And you put all that together, there might be a little bit of extra sales in the Q3, but there are a whole lot of COVID related cost and component disruption cost underneath. So we didn't get the leverage and the full profitability that we would normally get. So when I say comp when I put it all together, it looks like barring a recession or an unusually difficult health crisis that we're expecting to get a little bit better, it shouldn't be a problem to grow sales and EBITDA next year.
Thank you. Our next question or comment comes from the line of Lara Champine from Loop Capital. Your line is open.
Thanks, Firstly, what's the why behind that component shortage? Is it impacting your competitors as much as it's impacting TPx? And then in the not too distant past, TPx made its own springs. Is that something that you might need to look at again, just given the issues that you are clearly having with the supplier?
Laura, it's good talking to you. So the first part of that, I'll take it and then turn it over to Scott. As it relates to the challenges that we have on springs, number 1 is yes, that is an industry wide issue. And the primary driver of that is there is material that encases a coil called an encased coil or becomes an encased coil. And that product, the input, that material is being diverted to pull together PPE.
Therefore, there is a shortage of that item, therefore putting constraints on not only us, but across the industry. And as we specifically called out is not only is we expected an impact in the 4th, is that we'd expect that into 2021, perhaps at least the first half.
And then you asked about optionality going forward. Look, we've got a great relationship with our primary spring manufacturer. It's normally outstanding from a quality standpoint and delivery standpoint. They've run into some issues not caused by their operations, but caused by the global pandemic. But look, we're exploring all options and looking at our flexibility and making sure that in the future that we have all alternatives in case we have issues going forward.
But we'll work closely with our current partner.
Thank you. Our next question or comment comes from the line of Carla Casella from JPMorgan. Your line is open.
Hi, good morning. This is Sarah Clark on for Carla Casella. We just wanted to know how you think about a more normalized leverage and what's the right level and also if you have any interest in getting to an IG rating level?
Yes. If you go back through the history of the company last few years, we've brought down our targeted leverage and we've kind of targeted 2 to 3 turns today. As I think we mentioned, we're running a little bit below that right now. I think we'll continue to run a little bit below our targeted range as long as we've got this pandemic we're working through and we'll continue to kind of study the proper leverage. I don't see us wanting to be investment grade.
I don't think that the cost is probably worth getting all the way to investment grade. But I would like to position the company what I'll call conservatively financed, so that we're in a position to take whatever opportunities happen to come to market. So the way to think about it is we've got a target range of 2 to 3 times, but we're probably going to run at the low end or a little bit lower than that for the foreseeable future, but no goal to be investment grade.
Thank you. Our next question or comment comes from the line of William Reuter from Bank of America. Your line is open.
Hi. Just a little bit of a follow-up on that. You mentioned you're keeping an eye on the bond market. You redeemed a component or a piece of the 23s. I guess, what are you thinking about a component or a piece of the 23s.
I guess, what are you thinking about for
the remainder of those?
And I guess, since you are running below your target leverage range, it would stand to reason that all free cash flow will be used towards either one off tuck in acquisitions or towards either one off tuck in acquisitions or shareholder friendly activities. Is that fair?
It's a
lot in that question. Let me kind of unpack it a little bit. No, no, it's a good question. I just want to make sure I'm responsive to it. Look, first of all, yes, we've redeemed a little bit of the bonds.
Think about that as just a liability management and cost of capital issue. And to the extent we end up with extra liquidity in the balance sheet, then we're going to go pay off the highest cost debt, which at this time ends up being those bonds. We hope with our continued strong financial performance and maybe a little more favorable leverage profile that our opportunity for new bonds will be repriced to a little more favorable level than where we're currently sitting from a rating agency standpoint. When it comes to free cash flow, look, it first goes to operations. And whatever operations need, operations get.
If they have a high return on invested capital project, we will fund it because operations are an important thing for the company. Then we're going to pay our dividend that we've talked about establishing and set it at what I'd call the lower end of payout ranges. Then money goes to tuck in acquisitions and opportunities like that to the extent they come up. Don't feel like we have to do any, but to the extent they come up, we get a call on capital. Then you'd start talking about how much stock buyback.
We told the market, think 3%. Our cash flows on a projection certainly would tell you there's extra cash flow there. And that would be kind of a balancing act between stock buyback. I don't know if we would actually pay any more debt off, but we continue to look at that based on what's going on in the world and the uncertainty in the world.
Thank you. Our next question or comment comes from the line of Seth Basham. Your line is open.
Thanks a lot and good morning and congrats on an outstanding quarter and reaching the aspirational comp plan. Thank you. My question is 2 part. First, as it relates to the 4th quarter EBITDA growth guidance, just confirming that includes additional incentive compensation from your hitting your annual targets. And then second, as we think about growth in the Q4, I know you don't usually talk about individual customers, but you have talked about having some perspective on the relationship with Mattress Firm at this point.
And if you could give us some color on how that's expanding, that'd be great. Are you gaining additional floor space and share within the store? And how do you expect that relationship to develop over time?
Sure, Seth. I'll take the first part of that. Yes, as we think about the 4th quarter and the guide or the thinking about high teens, yes, that does include the incremental compensation.
And then when we talk about individual retailers, I'm going to answer your question, but pivot into kind of a bigger question, which is how are we doing with our large customers? Mattress Firm is certainly an important customer, but we've got quite a few large customers that are very important. And quite frankly, the trend line is the same. I see the larger customers generally performing better than the industry. I see the larger customers becoming very adapt at Internet sales, and that's positive for us and them.
And I see our relationship with all the larger customers positive. And I guess, I don't know, a while back a year or so ago, we think about our positioning, not in number of beds that are on the floor and anything, but total velocity because we want those beds to be productive for those customers as opposed to just trying to fill up their store with our product. I think that's healthier for us and it's healthier for the retailer. And I think clearly from our numbers, I don't know where 47% in the U. S.
Or something, 43%, whatever it is. Productivity of our SKUs and our large customers have been outstanding, and I would expect them to continue to be outstanding.
Thank you. That concludes our question and answer session. I would like to turn the conference back over to Mr. Scott for any closing comments.
Thank you. To the over 8,000 employees around the world, thank you for what you do every day to make our 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. Operator, that ends our call today.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.