Tempur Sealy International Inc (NYSE:TPX)
Bank of America Merrill Lynch 2013 Leveraged Finance Conference
December 4, 2013 2:50 PM ET
Dale E. Williams – Executive Vice President and Chief Financial Officer
Tempur Sealy is here to present with us this afternoon. And with that, I’m going to turn it over to Dale.
Dale E. Williams
Thank you. This is Dale Williams this afternoon. I also have Mark Rupe, Vice President of Investor Relations with me. We’re excited to be talking to you all. I’m going to give you basically a very condensed version of a publication we did in September at our Investor Day in New York. The more detailed longer presentation is still available on our Investor Relations website, so if you would like to see that and you can also get the transcript that’s still available also as to get all the information that was given and what was roughly a two hour presentation at that time. So since we have limited amount of time, I’m going to give you a very condensed version of that and an overview of Tempur Sealy International and take sometime for Q&A as well.
Forward-looking statements, you can read that at your leisure. Tempur Sealy is a combination of Tempur-Pedic International and Sealy. We acquired Sealy; Tempur acquired Sealy on March 18 of this year. The combination we are very excited about from a strategic standpoint and from a global opportunity standpoint like put together a very comprehensive portfolio of iconic brands.
The product offerings are very complementary and we’ll look at each of these a little bit in more detail. We are a truly global company. We the only global mattress company in the world. We see significant value creation opportunities. We believe we have a very strong management team and also believe that the financial characteristics of the business are outstanding.
In terms of looking at the brands that we picked up when we bought Sealy and how they stack, we have a very strong brand hierarchy now. So we have five excellent brands each hitting different segments of the market, so the Sealy brand is actually the value brand and this bring some specialty but at the value into the market then you step up to the Posturepedic brand, which is more in the mid priced segment in the market.
Sealy has a specialty brand Optimum, which really plays in the $1,000 to $2,000 price point category and then Stearns & Foster which is by far the strongest premium stream brands in the market and then Tempur-Pedic is an ultra-premium brand on top. So we really like the hierarchy that it gives us we think that we have very clear differentiation between the different brands and the different price segments of the market and this combination gives us tremendous opportunity to go after a much broader part of the market than we could just as Tempur.
We have a complete range of the mattresses and technologies. So we offer innersprings. We now offer hybrids. We offer adjustable firmness, latex, visco and Tempur Material. So the product range technologies that we have available to our disposal to create new products, new integrated products like the hybrids [Indiscernible]. We have a complete range of products to go along with mattresses. Foundations, adjustable bases, pillows, accessories that complement the mattress allow for a full service that we can provide to you in terms of all the things that you need to have a better night sleep. And as I mentioned we are the industries only truly global company.
You can see here map of the world. The green is where Tempur Sealy is present around the world. We cover over a 100 countries around the world now. We cover those primarily through our own business units, but we do have some license arrangements in certain markets on the Sealy side, on the Tempur side of the business, some of these markets are covered by a third party distributor that gets the product from us represent those in that country. But this is an area that we spend a lot of time talking about in the investor presentation in terms of how over time the world will become even more green as you will and how we will have those third parties and licensees more apart of the overall business.
The Global Master industry is a sizeable industry. It’s over $20 billion globally. North America represents about $7 billion of that industry, Asia Pacific, Australia represents about $7.5 billion and this is based on public information. We actually believe that’s a little bit overstated. We think that China number is a little bit too high. But this ballpark, clearly for other parts of the world the data is a little bit more reliable that are known Europe is roughly about $5 billion market. And then the rest of the world is about 1.5 billion and actually a good chunk of that is in Brazil.
The majority of our business is as I said earlier comes from wholly owned markets, markets where we fairly control the distribution, the manufacturer, the sales of our products, you can see by far largest area of the world is North America. The $2.2 billion between the U.S. and Canada, Europe is our second largest market. That $300 million that’s all Tempur for the most – on this slide, this slide all fully owned of that is but European business is all Tempur business. China is the Tempur business. Australia is the Tempur business. Sealy is present in Asia through licensees and a joint venture, which gives us the longer-term opportunities. But you can see that we have a lot of presence with wholly owned subsidiaries around the world, a lot of the business, but we have tremendous growth opportunities as we move forward that we’ll talk about a little bit more actually on this next slide in terms of revenue synergies.
The deal was not predicated on the revenue synergies. The deal was predicated on, it was a good strategic and financial transaction for the business, but we see a lot of opportunities for growth just because of the combination. In North America, as I talked earlier, we now have in-house a broad range of technologies that’s available to us to offer different and unique products to consumers. We have significant channel synergies of opportunity in North America where Tempur has a very strong channels, Sealy is even not better or weak in that channel or by first that we can work support the other side of the business in those channels. And what we believe that in North America we own there at least $200 million of revenue synergy opportunity that we will see over the coming years.
On the International side, we’re saying that there is at least $300 million of revenue synergy opportunity in the coming years. And ideally that international opportunity I think has significant understated in terms of what the true opportunity is if we can execute on this. But we have non-consolidated JV that is in Asia that at some point in time we have a contractual right to buy that JV out.
We have licensees in certain countries. We will look at, we’ll evaluate whether it makes sense to bring those licensees back in-house. We have some third-party arrangements in certain countries where a distributor represents us and we have the opportunity and Tempur has done this historically. We’ve gone in and taken control of those markets and seen significant growth after we’ve taken control of those markets. There – also internationally there are significant synergies opportunities just around certain countries for example in – or regions in Europe Tempur has, as we saw in the earlier slide, a very strong business in continental Europe, Sealy has a very weak business in continental Europe.
We can use this strength of the Tempur infrastructure, the strength of the Tempur relationships with the trade to bring the Sealy products in and distribute through our existing trade relationship. Another example the opposite way is in Argentina Sealy has a wholly owned subsidiary in Argentina then it’s a very strong business as very well Tempur side even in Argentina. And the way the Sealy goes the market in Argentina they have their own stores.
So we will in the next year be offering Tempur product within the Sealy stores in Argentina, great opportunity to expand the market presence in the market where we already have structure. So significant revenue synergy opportunities, we believe cost synergies again the deal has not done around the cost synergies, it was nice that there were some. At the time that we evaluated the deal, we thought there was roughly about $40 million of cost synergies that we would achieve over about three years.
Well now that we’re eight months into the ownership of this business in the first year and the first March 18th forward, we’re achieving about $18 million in cost synergies this year, we believe next year we will be at $40 million. We believe in 2016, we’ll be at $70 million and we believe the total cost synergy opportunity now is around the $100 million that we will be able to take out of the business over in the coming years. We characterize the synergies in three fairly large buckets, the one is kind of corporate overhead and another SG&A items, which are fairly tough exclamatory.
For housing and distribution it is a significant opportunity that – which just starting to scratch the surface of in terms of results this year, but we have great plans on how we can impact the business. And one of the key things here is for the most part the Tempur product and the Sealy products are going to a lot of the same retailers. And on a given day, a Sealy truck will show up and deliver Sealy products and that truck likely is not full. And later that day another truck shows up with Tempur products and that truck is even not full.
By redoing our distribution system which will takes sometime, but we’re already working on it. We will be able to deliver Tempur and Sealy products on the same truck for the retailers. So the retailer has one doc appointment that of two. They’re getting all the products they need in one shipment rather than two. And for us its retransportation. Now, it’s not two trucks go into the same place. So if significant opportunities that we have before us is really going to drive significant synergies as we get it growing, sourcing and manufacturing again there are significant opportunities, the bulk of the savings that we’ve got here in the first year is related to sourcing leverage of the combined entity, but we do see some manufacturing opportunities as well as we go forward.
We believe we have a very strong management team and management team has been in the business – has been here for number of years, Mark Sarvary, our CEO, has been here for five years now, David Montgomery, who runs our international business has been here for 10, Larry Rogers, who have picked up in the Sealy acquisition has been in the industry – he has been in the industry for 34 years. I’ve been the CFO of the business now for over 10 years. And as putting in the businesses together, we felt we needed someone else who join the team, so we hired Tim Yaggi, a very strong background from Whirlpool who joined the team earlier this year as acting as COO of North America for the business.
So at the Investor Day we talked about, okay, at that time and it had been about four months, five months since the acquisition. So what are we thinking about this acquisition, how we framing it, how do we think – what do we think the business will look like a few years in? So we fixed the data of 2016 three years out and said okay, this is what we think we’ll be doing by then.
This year on a full-year basis would be about $2.7 billion that by 2016 we believe the business that we’ll be able to achieve $3.3 billion in revenue from an adjusted EBITDA standpoint, 10% CAGR and would be about $550 million of EBITDA from an EPS standpoint about $4 which is a 15% CAGR. And the leverage, we expect by 2016 will be down to a little less than 2.5 times and our long-term goal is to get the leverage down to about 2 times of that the EBITDA. We believe that that is an efficient capital structure. That was our capital structure before the acquisition and a position we want to get back to because that gives us ultimate flexibility on a go forward basis.
So the cost synergies while we originally believe that that would be about $40 million of cost synergies, we built that into our margin expectations that in terms of these long-term projections we’re saying what the original synergies as well that was – be accounting. Any additional synergies we will use to help support growth as a business be it in additional marketing, additional advertising, product innovation, it’s going to cost us something to redo the supply chain to achieve all those supply chain synergies. But we will use the excess cost synergies to fund the growth of the business to ideally do better than what the numbers that were on the previous page. And what that mean to an operating margin target through the business by 2016 and 13.5, we believe the longer term target that looks very achievable of 15% combined operating margin business over the long-term.
And we think that the cost – capital structure that we have today is an efficient capital structure to this capital structure. We were able to raise the capital, thanks to many of you to buy the Sealy acquisition – buy Sealy and also to refinance the existing Tempur debt, but we think this breakdown of that capital structure works very well for us and in a very short period of time we’re going to be able to delever the business quite a bit.
So in summary, we believe that we have a business that has a comprehensive portfolio of iconic brands with the largest global bedding company and we’re the only true global ones. We have significant opportunities to do the integration of the business both on the cost side and on the revenue side of the business and we think that the cash flow and financial characteristics of the business are unrivaled to this industry.
With that, I’ll take the questions.
Dale E. Williams
[Question Inaudible] 2016 targets it looks like 2.5 times, 5.50 is about 1.4 is that mean your planning to pay down about $500 million of debt over the next few years?
Dale E. Williams
Yes, other question.
Maybe you can talk a little bit about the product introduction pipeline and what you see at this point, you can talk about lifecycles of new product introductions across the industry and how you see that changing and evolving overtime?
Dale E. Williams
Okay. Product lifecycles that’s – it’s one of those fun questions, it’s very different. Tempur’s – lifecycle of products for Tempur historically has been very different than the rest of the industry. The rest of the industry has evolved into kind of a two-year product cycle. You rollout a new product line. It’s very relevant first year, in the second year it starts getting evolve and then in the next year you rollout, you re-do it and you bring out another product line. So the industry pretty much works on an every other year basis your renewing segment of your product lines.
Tempur has historically had a much longer product cycle. Tempur’s product cycle has ranged from three to four years to seven years. One of our most successful products that we ever introduced [indiscernible] was introduced in – late in – sometime second half in 2006 and we are in the second half of 2013 and it’s never been changed and its one of the most successful products we’ve ever had. And so, it doesn’t have to be – the consumer is already in the market for mattress about once every 10 years. So something you introduced five years ago still may be the consumer.
The issues we have is as an industry is we sell to the retailer, the retailer has RSAs, retail sales associates. The retail sales associates get tired of the products. It loses its newness to the RSA, it’s not – it doesn’t lose newness to the consumer, it loses its newness to the RSA. So the industry is spending a lot of money, refreshing products to keep the RSA interested. So that’s something that as an industry it would be nice to sort out how we can solve that because its – both the manufacturers and the retailers are wasting a lot of money, changing up floors to bring in new products to every other year because the RSAs get tired of them.
So virtually, the Tempur, we didn’t have that thing. Now, we are seeing some sorting of old product lifecycle, we have a lot of the new products that we have introduced in the last year and a lot more coming in the coming year as we’re totally revamping our product line and introducing new technologies and new applications for consumers, but by and large, about a two-year cycles for most of the industry its something that’s ideally we would like to see many things a little bit. Other questions?
All right Dale I have another one.
Dale E. Williams
I’m interested and curious how you think about advertising whether you believe that through some of the new innovations and changes in technology coupled with advertising, you can grow the category or is it ultimately a share gain?
Dale E. Williams
Yes, advertising is particularly Tempur advertising, we’ve seen this, our retailers tell us this even some of our competitors say this Tempur advertising has created – creates a halo for the industry because we’re the super premium product because we developed a lot of interest with consumers and our product, if consumers go to the store, historically we’ve always known the number one reason why a consumer considers the Tempur product and doesn’t buy this, they can’t afford it. But the interest is they go to the store, they check it out, they see the price, I can afford this, so then they buy something else. But Tempur has been able to draw consumers to stores, generate interest in the mattress category which then benefits the retailer and actually it provides benefit to other manufacturers as well.
In the last year, this was brought to like a little bit more clearly because due to – for competitive pressures et cetera and some business realignments that we are needing to do on the Tempur business we cutback our advertising. We significantly reduced our advertising in the second half of last year. We continue to advertise but as that reduced level in the first half of this year by mid-year we were getting a question though we’re pleased from retailers to start advertising again. And so we have because it was time and we felt we were getting to the business to the point where it’s time to start advertising again we were getting the product line right, we were getting – starting to get traction that we needed. So we have re-engaged from an advertising standpoint.
We now only started spending more money on advertising again here in the second half of 2013 but we went back to a different mix of media that’s where everything is we’ve changed the mix of need the way we were doing primarily national broadcast, media as opposed to cable. Now we’ve gone back to a better mix of national and cable which yet increases the frequency of the ads. So you will see it more and we’ve also – we have introduced a new ad – advertising copy and it turned out to be not as successful as or impactful as we wanted it to be. So we went back to our older campaign of Ask Me.
So the combination of those three things picking up this spend again, changing the mix of how we’re spending it and bringing back Ask Me has started to impact the consumers, started to rebuild interest in the brand has made the retailers very happy that they’re seeing the ads again. Consumers are coming and asking about it again, or it’s a lot of the evidence that we see is our advertising benefits actually the entire industry. Yes.
I have two questions, and do you anticipate that there is any – you now had several product lines in Tempur and Sealy. Are there any lines that you consider an overlap that you might discontinue at this point?
Dale E. Williams
We are not considering discontinuing any product lines. There is some overlap of the chain, what we likely will do is we’ve been improving although there is less overlap. We want each brand and each product line to be known by the consumer and the consumer know what it stands for, for us to be serving a market need. And so right now there is more overlaps than we would like, we’ll do so some crooning to make it more clear what the distinguishes are, but there is going to have be some overlaps as you transition between different price segments in the industry.
On the promotion side with your retailers, is there a way to prompt your retailers, I don’t know if you do this now, if somebody finds the Tempur product to expensive to guide them towards the Sealy product that it stays within the family or is that something that’s familiar enough.
Dale E. Williams
That will be nice. We would like that to happen. That will be part of our goal, but part of that is the Sealy offering has to be and our job is to make the Sealy offering compelling in it’s own rights that the consumers tell that if they go in and say you know I just can’t afford the Tempur, but this is a really good product and this is a more affordable value for me. So that’s our job is to make each product line – each of those brands distinct, differentiated and understood by the consumer is that what they are, what are they bringing, what’s their value of each brand has the opportunity to create it’s own pool of interest, but also if a consumer comes in looking for Tempur and then decides they can buy it then they will love to choose one of our other brands before somebody else.
So last question how far away are you from that?
Dale E. Williams
How far away from that? Well, we are just starting – yes, we just closed this transaction in March. Brands are not something that can be turned over overnight. So it is going to be – it’s a long process. It’s something we are working on. It’s underway and how long will it take to get us exactly where we want, I’m sure it’ll take years, but we’ll see progress ideally quickly. Yes sir.
In your quarterly call, you talked about how your sales presume Tempur product into that finishing the quarter better than what you guys are thinking back on the June call and then one of your competitors interestingly enough sales start-off more stronger in the early part of the quarter and finished weaker. Give me a vital color in terms of what caused your product to resonate more with the consumers that the change in trend that you saw and maybe just any competitive response if you see in first quarter?
Dale E. Williams
Yes. Just talking specifically about 3Q, when we did our second quarter really as we said that the June, July has not started well. We just did not have a good promotion around Fourth of July. In this industry, there are four weekends that are important, President’s Day weekend, Memorial Day weekend, Fourth of July, and Labor Day. Now those are the big promotional windows in this industry. We did not have a good Fourth of July promotion, the promotion didn’t resonate with the consumers or the RSAs. So we just did not perform well around Fourth of July. For Labor Day, we had a different promotion that was much more creative. It was actually much more cost effective for us and the retailers, but it created – generated significant consumer interest. So in July, we promoted poorly and we’re promoted in the – at Labor Day, we had a great promotion that did very well.
Dale E. Williams
Yes, we didn’t have any brand new, I guess we introduced a product in the second quarter but that wasn’t the driver.
Dale E. Williams
Nothing really different. The promotional – the first quarter is actually, is not the one big holiday in the fourth quarter, the one big holiday that drives consumer behavior is Christmas and much as, like mattresses had not really hit the Christmas list. So the first quarter is actually the weakest quarter of the year for the industry because the consumer focus is on Christmas electronics, games. I think we’re out of time. I appreciate all your attendance and comments.
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