Somnigroup International - Q1 2023
May 9, 2023
Transcript
Operator (participant)
Good day. Thank you for standing by. Welcome to the Tempur Sealy first quarter 2023 earnings. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you will need to press star one one on your telephone. You will hear a message advising your hand is raised. To withdraw the question, simply press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Aubrey Moore, Vice President, Investor Relations. The floor is yours.
Aubrey Moore (VP, Investor Relations)
Thank you, operator. Good morning, everyone, and thank you for participating in today's call. Joining me today are Scott Thompson, Chairman, President, and CEO, Bhaskar Rao, Executive Vice President and Chief Financial Officer. After prepared remarks, we will open the call for Q&A. This call includes forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements 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 report on Form 10-K and quarterly reports on Form 10-Q under the headings Special Note regarding forward-looking statements and risk factors. Any forward-looking statement speaks only as of the date on which it 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 the non-GAAP financial information can be found in the accompanying press release, which has been posted on the company's investor website at investor.tempursealy.com and filed with the SEC. Our comments will supplement the detailed information provided in the press release. With that introduction, it's my pleasure to turn the call over to Scott.
Scott Thompson (Chairman, President, and CEO)
Thank you, Aubrey. Good morning, everyone, and thank you for joining us on our 2023 first quarter earnings call. I'll start by sharing some highlights from our first quarter performance, and then Bhaskar will review our financial performance in more detail. After that, I will share some closing comments before we open the call up for Q&A. In the first quarter of 2023, net sales were approximately $1.2 billion and adjusted EPS was $0.53, which represents a 75% growth in sales and approximately 300% growth in adjusted EPS over the first quarter of 2019, a pre-COVID period. Compared to the same period last year, this represents a 3% decline in sales and a 23% decline in adjusted EPS, driven by launch costs to support our new innovative products and a less robust macroeconomic environment.
Our wholesale channel performed well. We reported wholesale sales stable to prior year as our continued global market overperformance mitigated the heightened macroeconomic headwinds. Our direct channel performance was more impacted by the current environment. Unfavorable foreign exchange rates presented a challenge to our international operations and cost us $0.03 per share quarter. As I noted, though industry conditions were less favorable than expected, it is very clear we continue to outperform the market, and units appear to be stabilizing at a historical trough level. In the second quarter, our expectation is that our sales will return to growth year-over-year, driven by continued global market outperformance and the rollout of our new products. We also anticipate industry demand will slowly improve in the back half of the year as comps ease.
As a reminder, U.S.-produced mattresses consumption declined approximately an unprecedented 24% in 2022, representing trough unit production for the last 10 years. Most of the decline was post first quarter of 2022. As we've now fully lapped the challenging prior year comps, we anticipate the industry will slowly recover, resulting in a more stable U.S. bedding environment in the full year 2023, with the back half unit trends stronger than the first half. Turning to highlights and some key wins in the quarter. First, we continue to see positive momentum in our brands and private label products at wholesale. Our high-quality products leading customer service continues to drive third-party retailers to lean into our brands and non-branded products. Our third-party retail partners in the U.S. are especially supportive of the new Stearns & Foster product.
We are tracking to expand our third-party retail slots of Stearns by approximately 20% compared to the previous collection. We believe these slots will be coming from competitors, enhancing the total presence of Tempur Sealy brands on U.S. retail floors. We continue to make progress towards our goal of making Stearns & Foster our next billion-dollar brand, more than doubling its current size today. On the product side, we're well underway with our rollout of the new Stearns & Foster collection in North America. The new products are designed to further differentiate our high-end traditional innerspring brand, while also offering an extended lineup of products that address the needs and differences of consumers. The collection's superior innovation, enhanced step-up opportunities, elevated design together create unprecedented luxury innerspring product that meets the needs of what we believe is an underserved consumer seeking a premium innerspring product.
Overall, Stearns & Foster performed well relative to US market in the first quarter, and we believe is currently the fastest-growing major brand in the US. The second highlight of the quarter is the launch of our new TEMPUR-Breeze product and our new innovative line of smart adjustable bases in the US. These products build on the success of our prior generation of Breeze and adjustable bases to provide even greater consumer benefits to America's most highly recommended mattress. The new TEMPUR-Breeze product features our latest TEMPUR material innovation, which delivers greater TEMPUR feel characteristics and greater cooling benefits. In our new line of adjustable bases, we enhanced our connected sleep platform and our continued focus on improving sleep and overall health and wellness of consumers.
In addition to our sense and response technology for snoring, featured in our previous smart base collection, the new bases also feature lumbar support at the touch of a button, and advanced technologies, including our industry first acoustic massage and a range of relaxation features that help prepare customers' bodies and minds for deep, rejuvenative sleep. Exclusive to the top-tier Tempur-Ergo ProSmart base, wind down programs and soundscape mode offers an immersive and multi-sensory experience. After very positive feedback from consumer studies and retail partner previews, we started shipping the new Tempur-Breeze and the new Tempur-Ergo power bases in late first quarter. The rollout is going according to plan, and we have shipped over 75% of Breeze floor models to date. We pre-built inventory to support a seamless transition across our valued Tempur-Pedic retail partners network.
Most all retailers will be floored and selling for Memorial Day, which is when our new Breeze and smart base advertising campaigns begin. This is the first North American Tempur mattress launch in four years. The third highlight is that we've significantly fortified our supply chain, we're executing orders within normalized order to delivery times. Our U.S. operating team and plant personnel have worked significant amounts of overtime to get us to the point of normalized order to delivery times. The overtime and expediting cost hurt us a bit in gross margin this quarter, we're thrilled to be back on normal customer service ahead of the prime selling season of second and third quarter. This is especially positive that we've accomplished this while outperforming the broader market.
The final highlight is that we successfully kicked off the rollout of our new Tempur International product this quarter. This all-new lineup of mattresses, pillows, and bed bases have been strategically designed to optimize TEMPUR's global addressable market. The expanded price points and consumer-centric innovations in the new collection will continue to appeal to our legacy ultra-premium consumers at prices of $3,000 and above, while also meeting the needs of consumers shopping for mattresses between $2,000 and $3,000. We streamlined the construction of the new products to drive future manufacturing efficiencies and enhance our ability to adapt our products to individual markets' needs. This updated process has enabled us to feel confident in unlocking a broader price range without materially altering our margin profile of our Tempur International business. We're manufacturing both the new lines of products and the old line of products as we transition.
This is a heavy lift for our overseas team, after the transition period, we plan to optimize production of the new line, which we expect will be a positive driver for gross margins. We are launching the new lineup in over 90 markets worldwide, and we're staggering the rollout of these new products to allow for a customized approach by region. In the 1st quarter, we kicked off the launch of our Tempur European markets. We expect the rollout to be completed for all of our subsidiary markets in Europe and Asia by the 3rd quarter, and to be completed by the end of the year for our third-party distributors. We expect the total rollout to be completed by the end of 2023, except for the U.K., which has some country-specific industry fire retardant regulations.
We expect the U.K. to be fully floored by the first quarter of 2024. The early reaction to the new lineup has been very positive. With that, I'll turn the call over to Bhaskar.
Bhaskar Rao (Executive VP and CFO)
Thank you, Scott. In the first quarter of 2023, consolidated sales were approximately $1.2 billion, and adjusted earnings per share was $0.53. We have approximately $10 million of pro forma adjustments in the quarter, all of which are consistent with the terms of our senior credit facility. These adjustments are primarily related to costs incurred in connection with the exploration of strategic acquisition initiatives. Turning to North American results. Net sales decreased 1.3% in the first quarter. On a reported basis, the wholesale channel decreased 1% and the direct channel decreased 4%. North American adjusted gross margin improved to 37.9%, driven by pricing actions, partially offset by operational headwinds and increased product launch expense.
North American adjusted operating margin declined to 15.3%, driven by investments in advertising and product launch initiatives, partially offset by the improvement in gross margin. Turning to international. On a constant currency basis, international sales increased 1.7%, but decreased 6.4% on a reported basis as we experienced $25 million of headwind in the quarter from unfavorable foreign exchange rates. Foreign currency remains volatile, though recently, we have seen rates trend favorably. Our current full year expectation for 2023 contemplates a slight FX headwind to both sales and adjusted EBITDA. As compared to the prior year, our international gross margin declined to 54%, driven by product launch expense, partially offset by pricing actions.
Our international operating margin declined to 15.3%, driven by investments in advertising and product launch initiatives, the decline in gross margin and the Asian joint venture performance. Commodities, which we think about as inclusive of raw materials, logistic costs, and labor, have been highly inflationary across the global bedding industry for more than two years. In the first quarter, global commodity prices largely trended in line with our expectations. We anticipate that commodity prices could continue to ease a bit throughout the year, although we expect commodity prices in 2023 will continue to trend significantly ahead of 2020 levels. Moving on to the balance sheet and cash flow items.
At the end of the first quarter, consolidated net debt was $2.8 billion, and our leverage ratio under our credit facility was 3.2 times, slightly ahead of our target range of 2-3 times. We generated record first quarter operating cash flow of $100 million, and we invested approximately $52 million in CapEx, including investments in our new foam pouring plant in Crawfordsville, Indiana. We continue to track toward beginning its phased opening in the latter half of this quarter. We will bring the plant online in phases to ensure the highest level of quality while we grow into the incremental capacity. Turning to 2023 guidance. Consistent with previous communications, we expect adjusted EPS to be in the range of $2.60-$2.80.
This considers sales growth of mid-single digits, primarily driven by the execution of our key initiatives and also benefited by the sell-in of discounted floor models and the wraparound impact of pricing, sales and marketing investments of $20 million just to support product launches and record advertising spend of over $500 million as we continue to support our leading brands and new products, which will result in adjusted EBITDA of approximately $980 million at the midpoint of our EPS range. Our guidance also considers the following allocations of capital in 2023. CapEx of approximately $200 million, which includes $90 million of growth CapEx, primarily to fund the completion of our Crawfordsville facility, and a quarterly dividend of $0.11, representing an increase of 10% relative to 2022. Lastly, I would like to flag a few modeling items.
For the full year 2023, we expect D&A of about $200 million-$210 million, interest expense of about $135 million-$140 million, a tax rate of 24%-25%, and a diluted share count of 178 million shares. With that, I will turn the call back over to Scott.
Scott Thompson (Chairman, President, and CEO)
Nice job. Thank you, Bhaskar. I'm excited to share that we have announced this morning that we've signed a definitive agreement acquiring Mattress Firm, the nation's largest mattress specialty retailer. This acquisition aligns with our strategy of acquiring companies that extend our competitive advantages, enable us to move closer to consumers, and facilitate continued innovation. This combination will complement Tempur Sealy extensive product development and manufacturing capabilities with vertically integrated retail. First and foremost, Mattress Firm has been a valued retail partner for more than 35 years, and we look forward to welcoming their talented workforce and more than 8,000 employees to the Tempur Sealy family once the deal is closed. The transaction is expected to close in the second half of 2024, subject to satisfactory and customary closing conditions and applicable regulatory approvals.
Mattress Firm is expected to operate as a separate business unit within the Tempur Sealy organization. To continue to provide customers with brands and products they desire. This morning, we released a separate press release investor presentation related to this transaction. Both can be found on our investor webpage. These documents provide further details on the transaction and the strategic rationale. We see this transaction as being attractive, both strategically and financially. With that, we'll open up the call for questions, operator.
Operator (participant)
Thank you. As a reminder, to ask a question you will need to press star one one on your telephone and wait for your name to be announced. To withdraw the question, simply press star one one again. We do ask you to please keep your questions to one and if necessary, get back in the queue. Please stand by while we compile the Q&A roster. Our first question is from Susan Maklari with Goldman Sachs. Please proceed.
Susan Maklari (Senior Equity Research Analyst)
Thank you. Good morning, everyone. My first question.
Scott Thompson (Chairman, President, and CEO)
Good morning, Susan.
Susan Maklari (Senior Equity Research Analyst)
Good morning. My question is around, you know, the acquisition that you announced this morning, appreciating what the synergies are, but how do you think about managing some of the perhaps channel conflicts that are going to come through with this, you know, some of the adjustments that will need to be made in terms of product and, offerings and logistics and those types of efforts in there? Just how are you thinking about some of those elements of this deal?
Scott Thompson (Chairman, President, and CEO)
Wow, five questions in one. Great job. Great question.
Susan Maklari (Senior Equity Research Analyst)
Good start.
Scott Thompson (Chairman, President, and CEO)
First of all, let me talk about channel conflict. First of all, we consider it one of our expertise is the ability to manage omni-channel strategy throughout the world and have been doing it for a number of years. If you look at the most recent acquisition before this, Dreams as kind of a, maybe a beta test, you know, Dreams is obviously a large retailer in the UK. We're obviously in the UK. We did not have any problems with channel conflict in that acquisition. We've been working on this, at least this has been in the marketplace where people have thought about this for years, probably five or six years. I doubt there's anybody in bedding that is surprised with this transaction.
If you move over to the States, we're in retail stores. We've got our Sleep Outfitters operation, which is a direct competitor to Mattress Firm in the marketplace. We've got our Tempur stores. Although years ago, and I'm gonna say, what, 4 or 5 years ago, Bhaskar?
Oscar (Company Representative)
Yes.
Scott Thompson (Chairman, President, and CEO)
There used to be a little bit of noise in the system. I think once retailers saw how we operate our stores, that I'm gonna say we're a good retailer, and we're not really trying to steal share from anybody, it hasn't been a problem. Additionally, over the years, we have discussed this concept with various of our various customers, large and small, and I think we have a good understanding of what their expectations are. Look, it's gonna depend on us having quality product, quality service, quality advertising, and servicing them correctly, and making sure that they are not put at a competitive disadvantage. I'm not expecting any significant channel conflict as long as we deliver quality product at the right price with the proper support around it.
You asked about kind of logistics, and I assume you're kind of moving towards synergies. You know, look, they're both very large companies. We've put $100 million down on a piece of paper. The kind of stuff you should be thinking about is warehousing and logistics. There are cities where we literally have warehouses within five miles of each other. On a TEMPUR product, we would make the product in our plant, put it on a truck, take it to our warehouse, take it off the truck, put it in the rack where it would sit and wait for an order from Mattress Firm. We would get another truck, take it down from the rack, put it on the truck, and we would take it to their warehouse.
They would take it off the truck, put it in their rack, and they would wait for a customer order, of which then they'd get another truck, take it down from the rack, and take it to the customer's house. I mean, that's just the way the systems work. We've never been able to get the two companies to figure out how to clean up some of the logistics. We think there's good synergies in logistics and warehousing. The other thing that may not be as evident to the people who aren't in the business is on the TEMPUR side of the house, not the mattress side of the house. I think everybody knows we're order to delivery on Sealy.
That means we don't know what beds we're gonna make until we get an order from somebody. They generally call it three, four days. These are in Sealy operations, as you know, these are manual manufacturing. We whipsaw the workforce. There's some days they show up at work and we've got lots of orders, and we expect or would like for them to work overtime. Some days they show up at work and we don't have enough orders, and they only get to work four hours. At most plants, we decide on Friday afternoon if they're gonna work the weekend. Of course, there's overtime involved in some of these swings. It's also just a quality of workforce and be able to hire people because the hours are variable.
If we had real committed orders, i.e., and had certainty of distribution, we could pre-build and level out the manufacturing. On the days that we don't have specific orders, if we knew for sure we were gonna get some orders, we could go ahead and build some product and level it out. I think that's a big quality improvement for us. It's a workforce issue, and there's also, I believe, significant cost savings. We of course, would have the normal insurance savings, and we'll call it a little bit of overhead here, kind of savings. I think the other thing, it may not be obvious, but we're really thrilled about is one thing COVID kind of really highlighted was the supply chain around the world is not very robust. Okay.
If you stop and think about it, the reason it's not very robust is a little bit of what I just said. Nobody down in the supply chain knows for sure what their orders are, so everybody's working kinda just in time. Being able to have, we'll call it fully committed distribution, I think will allow us to fortify the supply chain by giving suppliers more certainty and being able to sign long-term contracts, which I think will also have, quite frankly, some synergies. The last one I'll kind of throw up, there's a longer list here, but we got your first question, is I think one of the other things that the combination does is we have very sophisticated labs that test the quality of product.
it is the core of TEMPUR, it's the core of Sealy, best in class ability to analyze foam springs, durability. One thing we can do, that would help a retailer is we can make sure the products that are put on their floor are of the quality that they're supposed to be, and continuously test to make sure that we're getting what we're paying for. I think that will make the product sharper at Mattress Firm. I think that's good for the customer, I suspect we'll find some opportunities from a cost standpoint once you do the really hard analytics and test the product.
Operator (participant)
Thank you. One moment for our next question, and it comes from the line of Bobby Griffin with Raymond James. Please proceed.
Bobby Griffin (Managing Director, Equity Research)
Good morning, everybody. Thanks for taking my question. Scott and Bhaskar, it won't be a 5-part, but it's gonna be a 2-part question at least. First, Scott, can you maybe just talk about the timing of it? I think the strategic rationale of this acquisition makes a lot of sense, and a lot of investors will understand that, but there is some clear economic concerns. Maybe just talk about the timing of it. Then, Bhaskar, can you share financial details for Mattress Firm that's getting used in kind of the accretion analysis, whether it's 2022 or 2023 EBITDA? Anything there would be helpful.
Scott Thompson (Chairman, President, and CEO)
Sure. Let me kind of step back a second. First of all, I would say if you talk about real timing, the timing's been probably seven years. It's always been on our chalkboard as something that made a lot of sense strategically for some of the reasons I mentioned and others. It never was right. Both times we weren't right, times they weren't right, times, market wasn't right. It's been on the board, so it's not like a new concept or a new idea. First of all, it's been a seven-year journey. Okay. Second of all, we've been engaged with the Mattress Firm folks for the last two years as they put the company up for a sale or process, and they ran a dual process.
We've been around, hanging around the hoop in my terminology for the last 2 years, exchanging some data, getting some price discovery, thinking about it. We filed an HSR in October of 2022. The 2 companies filed an HSR, which then gave us access to the FTC folks, and we could get some feedback on some of their thinking. So that before we would get down to a definitive agreement, both parties would have some data on the FTC process. So that's that kind of works through the timing, but I think you're also talking about the economic cycle and that kind of stuff. But I want to make sure that everybody got kind of the timeframe.
This has been a, long and thorough review by both companies as to what would be in the best interest of both the companies. Now you're still going as like, okay, this is interesting, Scott, I guess, but man, you know, who knows what the economy is and everything. There's different ways to think about it and people agree and disagree. For where we are and where we're sitting and where we the data we look at, it would look like the bedding industry, not the macro comp, but the bedding industry, go to U.S. units produced, are probably the lowest they've been for more than 20 years. I'm looking at Bhaskar because sure I don't... I think when you...
You can probably go through some other sources and look at that. The unit production, is at trough numbers that we've never seen as an industry. Of course, we'll point out that both companies are very profitable even at these trough units. It, it would appear to us, you know, it's trough, and it feels like we've been bouncing around the bottom of the bedding industry for the last 3 quarters or so. It is not shown, a lot of recovery, and we can talk about that at this question or another one. It clearly doesn't look like another leg's falling, and it looks like it's just bouncing around the bottom.
Fundamentally, you decide, do you want to, you know, transact under that basis, or do you want to wait and see green shoots or those kind of things? There's a price to that. There'd be a different pricing at that point, a different environment. Look, we feel very confident in our ability and we feel pretty good about the market. Then you lay on top of that, this is going to take a while. We're not closing this deal next week. The real economy that you're looking at when you're trying to find the right price and normalized earnings is really 12 to 18 months from now. It's not tomorrow. Could there be a little more rock and roll the next few quarters? Yeah, maybe so. If there is, doesn't affect us.
We're effectively buying the company, you know, in the future, and at that point, we feel pretty good about it. Plus, quite frankly, we think we're kind of bouncing around the bottom now. I think I kinda answered that.
Bhaskar Rao (Executive VP and CFO)
I think so. When you think about your question about the accretion, when 1 year post-acquisition, all those things that Scott mentioned, there is a bit of time between where we are today and where we're gonna be a year or so from now. The way to think about that is we gave up the $435 or the $432 last twelve months. What we'd anticipate is whatever the rock and roll happens from a macro standpoint, we get to the other side of that. We'd see some continued growth from a Mattress Firm perspective.
A way to think about the, let's call it the accretion, is from a targeting perspective, again, lots of uncertainty that could happen between now and then, but from a targeting perspective, I would think somewhere between $0.20-$0.25 of incremental EPS. When you get a couple of years out after that with full run rate or synergies, I would anticipate about $1.
Operator (participant)
Thank you. One moment for our next question. It comes from Peter Keith with Piper Sandler. Please proceed.
Scott Thompson (Chairman, President, and CEO)
Hey, Peter.
Peter Keith (Managing Director, Senior Research Analyst)
Hi, thanks. Good morning. Congrats on announcing the big deal after seven years of work.
Scott Thompson (Chairman, President, and CEO)
Yeah, I appreciate it.
Peter Keith (Managing Director, Senior Research Analyst)
I'm not sure how much you'll be able to answer this question, but I wanna ask because it sounds like you have been engaged with the FTC for a number of months. Has there been any preliminary opinion or any insight that you've gained on getting approval or how this could all look post-acquisition?
Scott Thompson (Chairman, President, and CEO)
Sure. I mean, first, early days, we've been engaged with them, but I would say early innings, but it's given us some preliminary information, none of which was particularly surprising. Those folks have a job, all very talented men and women, and we look forward to kind of working with them. Obviously, we wouldn't have moved forward if we didn't think that ultimately, we would be able to clear the process, either in the traditional sense or through litigation.
Operator (participant)
Thank you. One moment for our next question. That comes from Curtis Nagle with Bank of America. Please proceed.
Curtis Nagle (Director, Senior Equity Research Analyst)
Great. Maybe I'll just break with the questioning a little bit, and one question just on the business, as it stands now. Just, Bhaskar, curious if you could talk to how much of a headwind, floor models and, you know, some of this catch up and over time, to get, you know, shipping correct, or back to normal, how much that hit gross margin. Then just a quick follow-up in terms of just thinking about, you know, with for Streams and now Firm, I mean, is this kind of a, I guess, go forward model in terms of how you guys continue to expand, particularly, internationally? Do we have the template now, I guess?
Scott Thompson (Chairman, President, and CEO)
Yeah. I'll take the last one while Bhaskar does a little flipping of the pages look. These are pretty unique transactions. There are only a few large, great specialty retailers in bedding in the world, and we've got the two best. There's not really one sitting in every country. We could maybe do some other relatively smaller deals in some countries, but these two would be the lion's share. There may be a hand, two or three that we would think about. Again, we don't have to do these. When the time's right, the price is right, and it lines up strategically for that market, we'd certainly wanna look at them.
Bhaskar Rao (Executive VP and CFO)
From a gross margin perspective is that I was pleased with the performance overall when you think about year-over-year, a 40 basis point decline. In the face of what, from a floor model launch perspective, as you pointed out, is that we did have some headwinds, again, all driving future growth. Specifically as it relates to the operations, on a global perspective, I would call out about 100 basis points of a headwind. Again, is that we did carry into 2023 a bit of a backlog. We did prioritize meeting our customers' needs. We incurred an incremental overtime associated with clearing out that backlog. Going to the launch question on a global perspective, we have about 100 basis points of headwind.
Again, what I would go through or how I look at that is that once we get through the floor model launch side of it as well as the operations, the continued improvement there, is that the earnings power of the business is very attractive.
Operator (participant)
Thank you. One moment for our next question that comes from Atul Maheswari with UBS. Please proceed.
Atul Maheswari (Equity Research Analyst)
Good morning. Thanks a lot for taking my question. Scott, based on what you know today, what are the biggest risks to this transaction if like a few years from now, if the synergies are less than expected or if there are any re-revenue dis-synergies, what would be the most likely cause of that? If I ask this question another way, like, what is the biggest risk that exists today based on what you know and what are you working actively to avoid, some of the pitfalls?
Scott Thompson (Chairman, President, and CEO)
Yeah, great question. Look, the biggest risk is macroeconomic. You know, where we are in the cycle, what the cycle looks like, 18 months from now. I think by far, you know, what I'll call the factors outside of our control, would be the largest. After that, look, it's probably people, culture. You know, as you know, the history of acquisitions can be checkered. Generally, if you study them, it usually has to do with people, structure, culture, those kind of things. The kind of synergies that we're talking about, because remember, this is a vertical integration. They aren't as complicated as some acquisitions to get where you're doing horizontals and lots of people losing their job and all of that kind of stuff.
This is a very clean vertical integration. Again, I use Dreams as an example just because it was a vertical. Still, you still have people issues, you still have structure issues that you need to work through. You know, other than that, Oscar, can you think of any, like, any other big risk that's keeping you up at night? I think, you guys remember, these companies have worked together for 35 years together. We work daily throughout the organization, interfacing with the companies. I think we know each other well. We're, you know, clearly, you know, Tempur Sealy from a manufacturing standpoint in the U.S. is having a great run. New product is doing very well. Stearns & Foster is probably the fastest growing major brand in the United States. TEMPUR's doing well.
We're coming from a very strong manufacturing base. If you study Mattress Firm, and there's some material that we sent out, you know, Mattress Firm has been eating up a good bit of market share. We would expect them to continue to, you know, outperform the market. I can't think of anything that comes to mind other than what I just said.
Bhaskar Rao (Executive VP and CFO)
I mean, Scott, what I would say is I sleep on TEMPUR, so I always sleep well at night. Specifically when you think about the synergy number, nothing's ever easy. Things are always complicated. However, just to put it in perspective, when you think about the COGS that are available between the two companies, let's talk about $5 billion, and what we're talking about is $100 million on that $5 billion. Again, I'm not saying it's easy and et cetera, but it seems like there's enough go get that it makes it manageable.
Scott Thompson (Chairman, President, and CEO)
Let me give you at least some thoughts on synergy so we're all on the same page. I think the number, $100 million, I think is very conservative. It's, but at the same point, I think when you buy a business, especially when you buy a successful business, some people are so focused and so energized on synergies that they take undue risk and break the great asset they bought. We'll be slow on implementing synergies, like we've done on all the acquisitions, and make sure that the management team that's coming over, and the Tempur Sealy team kind of agree on what's worth going for and how to do it.
The absolute number, as Foster pointed out, is not that big a number to the cost potentials that we have to work with.
Operator (participant)
Thank you. One moment for our next question that comes from Seth Basham with Wedbush Securities. Please proceed.
Seth Basham (Managing Director, Director of Research)
Thanks a lot, and good morning. Congrats again on the deal. My question is revolving around some of the prior questions. First, in terms of the timeline to close, you know, a year plus is a very long timeline. You mentioned that you're gonna continue talking with the FTC, but are there concessions that you're expecting to have to make, any changes to the current asset base? Secondly, in terms of the synergies, what you put on paper and what you talked about are a little bit different. $1 in synergies is materially higher than the $100 million of cost synergies you talked to. Are you expecting some revenue synergies, or are you just seeing more signs upside there? Thanks.
Scott Thompson (Chairman, President, and CEO)
Okay. Let me work through those. You know, first of all, look, we're open. We're talking to the FTC. We'll consider doing things that make the FTC happy with the transaction. That may include divesting of some stores. That's something that we would look at. Obviously, we would consider it. Then we would see how that would impact the future financials. Yeah, we're gonna consider all options because that's what you do when you go to the FTC. On the revenue side, are we considering, you know, synergies on the revenue side? Not really. I mean, we're not looking to significantly move the floor or change the floor.
If you look at our previous acquisitions, we did not push what I'll call our manufactured products onto the floor. We've let the retailers own the merchandising decision and hold them accountable for their numbers. Now, if you go back and look, did generally our floor BOS increase? Yes, as we work through some of the quality products that we're retailing, sure. Then just naturally because of the quality of our products. No, we're not baking in in this acquisition a huge amount of re-revenue synergies. In fact, I don't think we're really baking any in.
Bhaskar Rao (Executive VP and CFO)
We're not. We're not. Seth, thanks for the follow-up. Let me clean that up a little bit. When you think about a year out or so, what we've indicated is that it's, that's accretive. On that same year, just assume $100 million of synergies. With run rate synergies, let's call that low double digits. What I was giving color to previously was, let's think about in a normal economy, et cetera, a couple of years out, thereafter, we see some growth, meaning Mattress Firm continues to growth and continues to grow. If you step back from that, is that if you look at the industry over the last 20 or so years, you'd expect, let's call it 4%-5% growth.
We would continue to believe that Mattress Firm has historically captured market share. That would continue. They would grow ahead of the market. You put some growth on it, improved margin flow through with those synergies, that's how I got to my high-end number.
Operator (participant)
Thank you. One moment for our next question that comes from Brad Thomas with KeyBanc Capital Markets. Please proceed.
Brad Thomas (Managing Director, Equity Research Analyst)
Hi, thanks for taking my question, and let me add my congratulations on the deal announcement as well.
Scott Thompson (Chairman, President, and CEO)
Thank you.
Brad Thomas (Managing Director, Equity Research Analyst)
I wanted to come back to, just the, you know, current trends in the business, you know, the outlook for this year. I was hoping, Scott, you could talk a little bit more and maybe focus on North America about what you were seeing through 2Q and through 1Q and early 2Q. You know, we'd heard about a strong start to the quarter, but then some weakness in March. Just any more color on what you were seeing. Then you, as we think about the year, you know, you made a comment about, you know, units hopefully getting a point to where they bottom. But this is, of course, happening in an economy that's still been relatively healthy in terms of employment and consumer credit. So just wondering your latest thinking on potential downside risk.
Scott Thompson (Chairman, President, and CEO)
Sure. First of all, just a couple of points. One is there's no question that we've moved back to more traditional seasonality, where holiday periods have become much more important than they were during, we'll call it the COVID era, where business kind of leveled out throughout the months. You have taller peaks and bigger valleys. That's pretty well the way the industry was pre-COVID, and we've pretty well moved back to that. You know, you make it all kind of in the holiday period. Again, it's probably fair, start out pretty robust during the year.
Brad Thomas (Managing Director, Equity Research Analyst)
Right.
Scott Thompson (Chairman, President, and CEO)
Slowed down a little bit in the first quarter.
Brad Thomas (Managing Director, Equity Research Analyst)
Mm-hmm.
Scott Thompson (Chairman, President, and CEO)
Second quarter started out very order deliveries have started, they're good.
Brad Thomas (Managing Director, Equity Research Analyst)
Shipments have been good.
Scott Thompson (Chairman, President, and CEO)
They're growing, which gives us strong conviction that looks like for us, second quarter will be a positive from a sales standpoint. You know, we're feeling pretty good on, we'll say, the start of the second quarter. We feel good about the start of the second quarter, but we share the same concerns and are looking at the same things you are about, okay, what's the state of the macro? How long can the consumers hold in? How much of their savings accounts have they spent? What's unemployment? Blah, blah, all the stuff that we all read. A couple points. Looks okay to us. You know, unemployment looks, you know, the employment's holding well.
The kind of people who buy the products where we make our money, i.e., the high-end stuff, they continue to be very strong. Where you see the real weakness is in entry-level bedding. Entry-level bedding and the retailers who focus on entry-level bedding, you can see it. There's a clear separation between entry-level bedding and then the rest of bedding. We'll watch that. The good news is that's not that impactful to our earnings and retailers' earnings.
Operator (participant)
Thank you. One moment for our next question that comes from Bob Drbul with Guggenheim Securities. Please proceed.
Bob Drbul (Senior Managing Director, Equity Research)
Hi. Good morning, and congrats on the transaction. If I could, you know, follow Brad and just focus on some of the, you know, recent trends. Can you talk a little bit just, you know, about some of the new customer testing you've been doing, you know, just within the opportunity down in the value channel a little bit more and what you're seeing?
Scott Thompson (Chairman, President, and CEO)
Yeah.
Bob Drbul (Senior Managing Director, Equity Research)
You know, with some cover trends there? Thank you.
Scott Thompson (Chairman, President, and CEO)
Yeah. You know, I gotta go with the Sealy. You know, we've tested.
Brad Thomas (Managing Director, Equity Research Analyst)
Testing, yeah.
Scott Thompson (Chairman, President, and CEO)
Testing some products at a large big box retailer. That's gone very well. We've done about 100 stores, expecting to run out, run another 100 stores out here shortly. What I would say is, where we've had new customers and put our Sealy product in and taken other product out, the Sealy product has outperformed the product they replaced, in every situation that I can think of in the last few years. We're doing well, in that particular market in what is a relatively tough entry-level market. No, all's good sign, and we continue to pick up some incremental distribution, not just at the entry level, but we should mention that Stearns & Foster's, slots, I think incrementally are gonna be up north of 20%.
Brad Thomas (Managing Director, Equity Research Analyst)
That's right.
Scott Thompson (Chairman, President, and CEO)
those are all from competitors, we bring that up 'cause Stearns is a very powerful product for us and for the retailers.
Operator (participant)
Thank you. One moment for our next question that comes from the line of Laura Champine with Loop Capital. Please proceed.
Scott Thompson (Chairman, President, and CEO)
Good morning.
Operator (participant)
Laura, check your mute button. May I take the next question, sir?
Scott Thompson (Chairman, President, and CEO)
Yes. I clearly answered her question earlier.
Operator (participant)
All right. Our next question will come, one moment please. From the line of William Reuter with Bank of America. Please proceed.
William Reuter (Managing Director, US High Yield Research)
Hi. I only have one. You provided the LTM EBITDA for Mattress Firm. I was wondering if they had provided to you their outlook for where the numbers could be this year. The question is a little bit in light of the fact that, historically you have had such a variable cost structure, and I'm sure that they have a much more fixed cost structure. I was wondering if you could speak to how their fixed costs stack up relative-
Scott Thompson (Chairman, President, and CEO)
Yeah.
William Reuter (Managing Director, US High Yield Research)
To your own to the extent that you have that information at this point.
Scott Thompson (Chairman, President, and CEO)
Sure. We've got the management's projection, of the future, which we're comfortable with. We've stress tested, both our numbers and their numbers Under various scenarios. I think the interesting thing about the fixed cost comment you made, because before we did the analysis and worked through it, I would have said yes to your comment. Actually when we worked through the fixed cost, variable cost as part of our stress testing, what are we 75%? Bos, can you go to 70%? Why don't you give them the details.
Bhaskar Rao (Executive VP and CFO)
Yeah.
Scott Thompson (Chairman, President, and CEO)
I was surprised. It was... It's not as impactful as you might think it is.
Bhaskar Rao (Executive VP and CFO)
When you think about the needle mover, we were historically 35, 65, let's call it 40, 60 now. MattressFirm has done.
Scott Thompson (Chairman, President, and CEO)
Which fixed and variable? Sorry, yeah.
Bhaskar Rao (Executive VP and CFO)
40% fixed, 60% variable. When you think about what MattressFirm has done coming out from a bankruptcy process is that they've dramatically improved their footprint, remained in those profitable stores and managed their costs very effectively. When you look at it from a totality standpoint, the fixed variable nature of the, of our consolidated business does not change that much.
Scott Thompson (Chairman, President, and CEO)
Yeah. The other thing that I didn't pick up originally, but as we worked through this thing over the years, if you think about a downturn, you play the downturn scenario. The other thing that's, that doesn't pop immediately is it is really beneficial to have certainty in distribution. You know, if there's a, if there's a downturn, having actual certain distribution of your product is actually maybe even more important than a little bit of change in fixed and variable. When I think about it in total, I think it is. I don't think it's any harder to go through a downturn with MattressFirm than it would be to go through it without MattressFirm in total when I think through all of the variables of a downturn.
On a financial standpoint, yeah, it's slightly more fixed cost.
Bhaskar Rao (Executive VP and CFO)
One of the items that we gave in our investor presentation was also a way to think about leverage not only this year, but when this transaction is contemplated to be complete. As we mentioned, what the expectation is that it'll be complete in the second half of the year, second half of next year. When you think about that leverage profile at that point in time, what we, what the way we're thinking about it'd be somewhere between, let's call it 3.25 and 3.0.
Operator (participant)
Thank you. Our next question comes from the line of Carla Casella with JP Morgan. Please proceed.
Carla Casella (Managing Director, High Yield Research)
Hi. You mentioned you're gonna fund the deal with cash, unsecured financing. Is that something we could see sooner rather than later? Is that something you'll just wait till you get closer? What hurdles do you need to see before you're comfortable going out there with financing?
Scott Thompson (Chairman, President, and CEO)
We'd be closer in. I mean, I don't think there'd be any reason to do it early. We might not wait till the very end either. We can be opportunistic, and we've got a fairly large time period here to work on it. If the market were to soften up, we'd have tendency to do it earlier. If not, we can wait a little while.
Operator (participant)
Thank you. Our final question comes from the line of Jonathan Matuszewski with Jefferies. Please proceed.
Jonathan Matuszewski (Senior Vice President, Equity Research Analyst)
Great. Good morning, and I'll add my congratulations. My question is just on the future of the store base. I guess there's 2,300 Mattress Firms today. You know, as you mentioned, Scott, over the next couple of months, maybe we'll hear from the FTC regarding any concessions like divestitures. You know, absent that, how do you think about go-forward unit growth when the chain is under your ownership? Thanks so much.
Scott Thompson (Chairman, President, and CEO)
Yeah, look, I, you know, we're, we'll listen to the current management team in more detail about their thinking, as it'll be important for them to drive their business plan. I would say our initial reaction is there are probably still too many stores. I would expect the store base, the total number to come down over time. It, and it actually becomes more important as to where the stores are rather than how many there are. There'd be quite a few that might move around to better locations. The absolute number of stores, I would expect the unit numbers to continue to kinda trickle down a little bit. There's still quite a bit of opportunity to fill in, but it's more moving around stores as opposed to just closing stores.
I think you'll see activity on both sides, the total number down some.
Operator (participant)
Thank you. With that, I will turn the call back to Scott Thompson for any final comments.
Scott Thompson (Chairman, President, and CEO)
Thank you, operator. To our over 13,000 employees around the world, thank you for what you do every day to make the company successful. To our retail partners, thank you for your outstanding representation of our brands. To our shareholders, lenders, thank you for your confidence in Tempur Sealy's leadership team and its board of directors. This ends the call today. Thank you, operator.
Operator (participant)
Thank you, everybody, and you may now disconnect.