Tempur Sealy International Inc (TPX) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Tempur Sealy Fourth Quarter 2019 Earnings Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions)

I would now like to hand the conference over to your speaker today Aubrey Moore of Investor Relations.

Thank you.

Please go ahead, ma'am.

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&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 anticipated performance for 2020 and subsequent periods involve uncertainties.

Actual results may differ due to a variety of factors that could adversely affect the company's business.

These 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 this company's SEC filings, including, but not limited to, annual reports on Form 10-K and the company's quarterly report on Form 10-Q under the headings, Special Note Regarding Forward-looking Statements and/or Risk Factors.

Any forward-looking statement speaks only as of date on 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 information regarding the methodology used in our constant currency presentations.

We have posted the press release on the company's investor website at investor.tempursealy.com and have also filed it with the SEC.

Our comments will supplement the detailed information provided in the press release.

And now with that 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 2019 fourth quarter and full year earnings call.

I will start with comments on the quarter's record operating performance, then Bhaskar will review our quarterly and full year financial performance with you in more detail.

Finally, I will conclude with an overview of our long-term corporate initiatives and our update on current trends.

The fourth quarter of 2019 was outstanding, the best fourth quarter in the company's history.

It was a record fourth quarter for sales, adjusted EBITDA and free cash flow.

As compared to last year, both sales and pro forma earnings grew double digit, and our leverage ratio declined by 1 full turn to 2.9x.

Simultaneously, we've been repurchasing $50 million of common stock each quarter, starting with the third quarter of last year.

Both our North America and International segments grew constant currency sales across both wholesale and direct-to-consumer channels.

As you can clearly see, we are reporting a broad-based performance.

Turning to the reported results for the quarter.

Net sales increased 29%.

Adjusted EBITDA increased 29%.

And adjusted EPS increased a robust 52%.

This marks the seventh consecutive quarter of adjusted EPS growth.

I'd like to highlight 4 items from fourth quarter results.

First, our record fourth quarter global net sales.

Net sales increased 29% for the quarter, and North American net sales grew 36% versus prior year.

We experienced strong growth rates for both Tempur-Pedic and Sealy in North America across both wholesale and the direct channel.

In fact, not only are we growing faster than most of the digital native direct-to-consumer mattress brands, but we are doing it profitably.

I should also point out that our customer acquisition cost in direct-to-consumer declined again this quarter and thus, our profit margin expanded again.

This, in our opinion, is evidence of real brand strength and customer brand preference.

Our growth in North America wholesale channel was broad-based across many retailers with significant new distribution gains in the fourth quarter 2019.

We believe Tempur-Pedic continues to take market share in the premium price band as our products are loaded with innovative features that consumers want and need.

Our growth outside this new distribution gains on Tempur-Pedic was above our expectations.

And as a reminder, we had a very difficult comp of 24% sales growth in the fourth quarter of 2018.

While it is early, we are not currently seeing any indication of cannibalization at our existing retail partners after adding the new points of distribution.

Additionally, we are starting to see our share of voice and advertising grow.

This should fuel future growth.

Turning to Sealy's performance in North America.

We're once again seeing strong sales momentum continue in Sealy.

We spent considerable time and effort investing in Sealy, including within the Sealy assembly plant, the global supply chain, our freight and logistics and customer service.

All of these investments increased operating model flexibility, improved service level for retailers and consumers and enhanced our ability to capitalize on the changes in the competitive landscape.

We believe these investments are helping to drive a resurgence in the strength of the Sealy brand.

While we have been ramping up new distribution, we're investing in quality control to maintain our highest possible product quality and service levels.

Also, this year, we're launching the new innovative lineup of Sealy Posturepedic products.

For all of those reasons, we are optimistic about the fundamental trajectory of the Sealy business.

Our operating team is always evaluating opportunities to optimize our network of plants as a means to continue to deliver improvements in our operating model.

We've identified an opportunity to open a new state-of-the-art Sealy plant in Dallas, Texas in late 2020.

Although we currently have adequate manufacturing capacity to serve the market, we believe we have a long-term upside that we need to capture for Sealy, Stearns & Foster brands.

And this plant will support the elevated demand that we are anticipating across our U.S. network.

The second highlight from the quarter is our crisp execution of our expanded North American distribution.

We, and more importantly our customers, are extremely pleased with the way the launches have been executed.

While we're happy with the early results of our new distribution, it normally takes 6 to 9 months to fully train RSAs and reach an optimized floor.

Therefore, we expect that our performance with these new customers will continue to improve throughout 2020.

The third highlight for the quarter is our over 60% growth in our global direct channel.

We believe this performance compares favorably when benchmarked against dedicated direct-to-consumer brands.

In North America, our direct channel grew nearly double year-over-year and grew almost 30%, excluding the acquired Sleep Outfitters stores.

We currently have 57 premium Tempur-Pedic retail stores throughout the U.S. that excel at providing a low-pressure environment for consumers to explore our entire line of innovative Tempur-Pedic products.

As we've said previously, we believe that over the long term, there'll be an opportunity to have 125 to 150 Tempur-Pedic retail stores, and we plan to open approximately 20 new stores this year.

I'm pleased to share with you that we have signed a lease to open our first Tempur-Pedic store in Manhattan.

Late in the second quarter of 2020, we expect to open a 3,000 square foot space at the corner of 58th and third in the Bloomberg building.

We expect the store will perform like our other Tempur-Pedic stores and drive local brand awareness while also providing incremental direct sales.

The store, combined with our new compressed TEMPUR-Cloud product, designed for a few high-density markets; and our various other compressed bedding offerings, will drive our share of the market that has been a feeding ground for unprofitable bedding brands.

Turning to International.

Our direct sales grew 20% on a constant currency basis, with growth both in our e-commerce business and our company-owned stores.

The last highlight for the quarter is that we reported a record amount of fourth quarter free cash flow at $87 million, and the lowest debt-to-EBITDA leverage ratio in Tempur Sealy's history.

Our iconic brands and products have been performing well throughout the world, resulting in record sales growth, gross profit growth and gross margin.

We now feel our fortified balance sheet and improved cash flow are significant competitive advantages.

Turning to a few general comments.

I want to emphasize our commitment to Tempur Sealy's purpose, our people and our environment.

It is our belief that the commitment to environment, social and court governance improvement sustains business growth and generates long-term shareholder value.

I'm proud to say that's always been a critical part of Tempur Sealy's DNA.

But given that we've recently published our first corporate social value report, I would like to take a moment to share with you a few of our initiatives.

First, a recent long-term funding of the Tempur Sealy charitable foundation in order to serve important causes and organizations.

Second, our mattress donation program, which since inception has donated mattresses valued at over $300 million to individuals in need, including military veterans and people impacted by natural disasters.

Lastly, our recently announced state-of-the-art solar power project in Albuquerque, which, when operational, will power nearly half of our New Mexico Tempur-Pedic plant with renewable energy.

Additionally, our facility in Duffield, Virginia has achieved the U.S. Environmental Protection Agency's ENERGY STAR Challenge for Industry by reducing its energy intensity by almost 40% within 4 years.

And successfully achieving the ENERGY STAR Challenge, Tempur Sealy's Duffield facility has reduced over 3,800 tons of greenhouse gas per year and saved enough energy to power over 500 homes.

Before turning it over to Bhaskar, I want to highlight one more topic.

We recently acquired a majority interest in Sherwood Bedding, a major manufacturer in the U.S. private label and OEM bedding market.

We're excited to partner with the Ellman Family, who will retain 20% interest in the business and who are experts in private label and OEM mattress manufacturing.

Sherwood operates 4 manufacturing facilities and is a top 10 U.S. bedding producer.

This partnership marks our entrance into the private label category, giving us a complete suite of products, offering ranges from Sherwood's nonbranded private label products to our well-known branded products, including, Tempur-Pedic, Sealy and Stearns & Foster.

We've always closely followed the private label managed business, and we had a -- and we've long admired the Ellman Family's business and operating abilities.

So when the Sherwood opportunity appeared, we were thrilled and jumped on it.

The operations will be stand-alone, independent business unit within Tempur Sealy and will continue to be led by its current management team.

Their estimated annual revenues are over $150 million, and the business is expected to contribute to Tempur Sealy's cash flow and profits in 2020.

With that, I will turn it over to Bhaskar to walk you through the financial results in more detail.

Thank you, Scott.

Before going into the details of the quarter, I would like to call out a few financial highlights.

As compared to the prior year, adjusted gross margin improved 190 basis points to 44.3%.

Adjusted operating margin improved 80 basis points to 14.2%.

Adjusted EBITDA increased 29% to $152 million.

And adjusted earnings per share for the quarter was $1.37, an increase of 52% versus the prior year.

This was driven almost entirely from operating performance versus share buybacks.

There are a few items I want to call out before turning to the results.

First, during the fourth quarter, we took a charge of $30 million in connection with a customer bankruptcy.

They represented less than 1% of our global net sales, and their bankruptcy did not have a material impact on our 2020 outlook.

Going forward, we do not expect further charges related to this customer.

Second, we made a special contribution of 100,000 shares of common stock to certain public charities, including the Tempur Sealy Foundation.

These shares have a market value of approximately $9 million and represent the largest single contribution in the company's history.

Our North American GAAP fourth quarter results were impacted by these noncash onetime charges.

As previously announced, our acquisition of Sleep Outfitters was fully integrated into our North American direct channel during the second quarter.

Sleep Outfitters had historically been part of our wholesale channel since they were previously a third-party retailer.

Accordingly, this impacts our growth rates within both channels.

I should mention that Sleep Outfitters outperformed its 2019 budget, and we are very happy with the acquisition.

Turning to North American results.

North America net sales increased 36% in the fourth quarter.

On a reported basis, the North American wholesale channel increased 32% and the direct channel increased 94%.

Excluding Sleep Outfitters, the direct channel increased almost 30%.

The new distribution gains were a significant driver of our robust wholesale channel growth.

The launch with Matt Firm started during the quarter and resulted in a sales lift, partly from discount floor model as well as full-priced back stock inventory.

There are a lot of moving parts to our business as we ramp with new distribution, and accordingly, we would like to provide some color on our top line.

We currently expect our first quarter net sales in North America to grow between 25% and 30% as compared to the first quarter of 2019, again, partly from discounted floor models.

For modeling purposes, we expect strong growth over the next 3 quarters and then a hard sales comp in the fourth quarter of 2020 as we lap the Mattress Firm rollout.

By the end of the second quarter, we think we'll be in a position to have an initial idea of what the new steady state business will look like with new distribution.

This would include the potential lift in our base business from increased doors and higher share of voice, net of the potential consumer cross shopping.

North American adjusted gross profit margin improved 250 basis points to 42.3% as compared to the prior year.

This was primarily driven by favorable brand mix, fixed cost leverage on higher unit volume and lower commodity costs.

These improvements were partially offset by increased floor model expenses resulting from the expansion in our wholesale business.

North America adjusted operating margin improved 240 basis points to 16.6% as compared to the prior year.

The improvement in adjusted operating margin was driven by the increase in gross margin and operating expense leverage, offset by the increased variable compensation.

Turning to International.

Net sales increased 2% on a reported basis.

On a constant currency basis, International net sales increased 4%, the direct channel increased a robust 20%, and the wholesale channel was flat.

We continue to experience a degree of market uncertainty in France, Hong Kong and China, which created choppy business conditions.

While this made it difficult to grow our business in those markets, the overall International performance was in line with our expectations.

I would like to take a moment to comment on the latest health concerns stemming from China.

We feel for those that have been impacted and are supporting our customers, partners and employees in China and Southeast Asia.

We're a diversified global company.

The majority of our business in China runs through our 50% joint venture.

This somewhat mitigates the impact on our business from the current issues in China.

Having said that, it is too early for us to estimate the impact on us, if any, from these recent health concerns.

We continue to monitor this dynamic situation.

As compared to the prior year, our International adjusted gross margin improved 250 basis points to 54.2%.

The improvement is driven by country and channel mix.

International adjusted operating margin declined 150 basis points as compared to the prior year.

The decline was driven primarily by increases in operating expenses, partially offset by improvement in gross margin.

Turning to the company's global performance.

Adjusted operating income was $124 million and adjusted EBITDA was $152 million, up 29% from last year.

The increase in adjusted EBITDA was primarily driven by higher volumes and favorable commodities.

This was partially offset by higher launch expenses, higher variable compensation and higher advertising investment.

Regarding commodities.

Input costs were in line with expectations for the fourth quarter.

As we look forward, we'd expect between $5 million and $10 million of favorability in 2020, with the majority of the year-over-year benefit occurring in the beginning of the year.

The adjusted tax rate was 26%.

And interest expense was $20 million, down from the prior year.

The result was adjusted EPS for the quarter of $1.37, up 52%.

Now moving to the balance sheet and cash flow items.

We generated record operating cash flows from continuing operations of $113 million in the fourth quarter.

Cash cycle was unfavorable by 5 days compared to the fourth quarter of 2018.

This was principally driven by lower days payable resulting from the timing of payments.

At the end of the fourth quarter, net debt was $1.5 billion, down slightly from the third quarter of 2019.

Our leverage ratio under our credit facility is 2.9x, down 1 full turn from 3.9x compared to last year.

I'm pleased to highlight that we have significantly lowered our financial leverage, primarily from stronger operating performance while also repurchasing stock and investing in the business.

As we look forward on our capital allocation strategy, we have gone through an evaluation of the current economic conditions and business model.

We have concluded the appropriate leverage target should be between 2.5x and 3.5x debt-to-EBITDA.

The business generates a lot of cash and has low maintenance CapEx needs which allows us the ability to stay at our current debt-to-EBITDA levels, while we continue to consider high ROIC projects or acquisitions, while also continuing to repurchase shares.

We see our financial strength as a competitive advantage in an industry that is thinly capitalized.

The company also repurchased $50 million of shares in the fourth quarter and over $100 million of shares for the full year 2019.

We announced today that our Board of Directors increased the authorization to repurchase shares to approximately $300 million.

We expect to continue our disciplined share repurchase strategy, and based on current conditions, to continue to repurchase approximately $50 million of shares each quarter in the near term.

Since our management changed in 2015, we have repurchased approximately $675 million of shares.

Now turning to 2020 guidance.

The company expects EBITDA to be in the range of $575 million to $650 million for 2020.

This includes the benefit from strong sales growth in North America driven by the material benefit from new distribution in the first 3 quarters of 2020, which we expect to drive record full year revenues.

Internationally, we would expect growth in other countries to offset the country-specific headwinds I mentioned previously, our direct-to-consumer business, continuing to expand through new doors and capturing share profitably online.

We will be investing in additional R&D as well as a record amount of total advertising dollars.

In total, we would expect adjusted EBITDA to grow about 20% for 2019 to the midpoint of guidance for 2020.

Lastly, I'd like to flag a few items for modeling purposes.

For the full year 2020, we currently expect D&A to be between $135 million and $140 million; total CapEx to be between $100 million and $110 million, which includes maintenance CapEx of $70 million, investment in an ERP upgrade and a new Sealy plant; interest expense of $80 million to $85 million; a tax rate of 27% to 28%; and a diluted share count of 54 million shares.

Please note, the above items consider the expected impact of our budgeted share repurchase plan.

Before turning it over to Scott, I would like to quickly address some common questions about our aspirational plan.

The aspirational plan is tied to challenging performance targets and is measured on a rolling 4-quarter basis.

If the company achieves between $600 million and $650 million of adjusted EBITDA, as determined by the compensation committee of the Board, by the end of 2020, then the program vests between 33% and 50% of the 1.7 million restricted stock units, resulting in a noncash onetime charge.

To be clear, share -- to be clear, the maximum share vest at 50% of 1.7 million shares is 850,000 shares or a 1.5% dilution.

The noncash accounting expense would fall into amortization line of the P&L and will not impact EBITDA.

With that, I will turn the call back over to Scott.

Thank you, Bhaskar.

Great job.

Now turning to the company's long term initiatives.

First, develop the highest quality bedding products in all the markets we serve.

The company's undergone several large, successful, new product launches for Sealy, Stearns & Foster and Tempur-Pedic over the past 2 years.

Our consumer-centric approach has led to the development of the best overall product portfolio in the market.

Our products are innovative and feature strong step up stories that are easy to understand for both consumers and retail sales associates, making Tempur Sealy the most desired partner for retailers.

This year, we are launching 2 new products.

First is the all-new TEMPUR-Ergo Smart Base collection with Sleep Tracker technology.

Combined with the adaptive Tempur-Pedic mattress, the TEMPUR-Ergo smart base creates a completely integrated sleep system that features automatic snore detection and response, personalized sleep analytics and coaching and smart home connectivity and voice control.

This product was founded on more than a decade of advancements in sleep science as more and more research shows the critically -- critical importance of a good night's sleep rest for health, memory and concentration.

Second, we have the all-new Sealy Posturepedic Plus line.

This innovative collection of mattresses offer improved comfort, best-in-class cooling capabilities and increased support.

We've paired the impressive, all-new Posturepedic technology with bold, on-trend aesthetics and the Sealy's brand combined 136 years of heritage and trust.

With this lineup, we're offering a clear step-up story above $990, with simplification for -- of the shopping experience and offer increased in-store conversion opportunities with the goal of driving profitability and ASP for the retailer.

Initial feedback on our new 2020 products has been strong, and we're actively working with retailers to roll these products out into the market throughout this year.

Turning to our second initiative, promote our worldwide brands with compelling marketing.

We invested significantly in 2019, and we anticipate increasing our advertising further in 2020.

In fact, we expect a record amount of advertising spend for Tempur-Pedic and Stearns & Foster brands this year.

And even more importantly than the total spend, we have aligned our advertising strategy to maximize our reach and effectiveness.

The strength of our brands is evident early this year, when Tempur-Pedic was awarded #1 in customer satisfaction for the retail mattress segment in the J.D. Power 2019 Mattress Satisfaction Report.

This was the second time in 3 years earning this honor.

This year, in addition to earning the highest score for overall customer satisfaction, Tempur-Pedic was ranked the highest for support, durability, comfort, value, warranty, contact with customer service.

This award is tangible indication of our customers recognizing our commitment to focusing on what matters most to them.

Turning to our third initiative, optimizing our powerful omni-distribution platform.

In addition to developing the most innovative bedding products, we also make sure that our products are well represented wherever the customer wants to shop.

Our wholesale business continues to be our largest channel of distribution, and we're focused on growing both within our existing retail partners and adding new wholesale accounts.

In 2019, we experienced broad-based growth with existing third-party retailers, spanning multiple channels of bedding retail, including furniture, big box, specialty and online only.

In addition to strengthening our existing retail relationships, we also have identified new business opportunities.

As a complement to our material wins in our wholesale distribution, our direct channel continues to rapidly expand.

For the full year of 2019, we realized robust global direct channel growth of over 55% through a combination of online sales growth, same-store sales growth and expanded company-owned doors.

Our direct-to-consumer initiatives have significantly evolved over the past 2 years, and we are now within easy reach of consumers wherever they choose to shop.

We believe we have the most successful direct-to-consumer bedding business model in the world.

This is exemplified by our North America Tempur web page, which has strong average revenue per mattress unit of over $5,000.

Revenues from our expanded direct channel distribution funds increases in advertising, which, in turn, enhances our wholesale business.

This balanced approach improves Tempur Sealy's overall sales and profitability potential.

Our last long-term initiative is to drive increases in EBITDA.

We think our current report on our financial performance and our 2020 guidance range is evidence of our passion for driving increases in EBITDA.

Lastly, before opening the call up for questions, I'll share a quick update on current trends.

In North America, our current trends are slightly ahead of our initial expectations, with both brands growing.

Internationally, Europe has started off well and Asia, as you would expect, has been soft.

In total, International is slightly off our expectations.

With that, operator, please open the call for questions.

(Operator Instructions) Our first question comes from Michael Lasser with UBS.

This is Atul Maheswari on for Michael Lasser.

How much of a sales lift was received in the fourth quarter from the floor model sales?

And can you talk a little bit about the sell-through that you're seeing thus far at Mattress Firm at full price?

And then along those lines, what is the thought process behind the wide guidance range for 2020?

What are some of the key unknowns?

And what would have to happen for you to either reach the lower end or the upper end of the range?

This is Scott.

I'll try to answer the 5 questions, which means I'll answer probably 4 of them then take the hard ones and push them over to Bhaskar.

First of all, you asked about individual sales through at Mattress Firm, and we're not going to talk about an individual customer.

I think what -- all I'll say is that we're very happy with our new distribution, both at Big Lots and Mattress Firm.

And you can see from our comments about how the quarter started, that we said North America was slightly ahead of our expectations.

So from that, you can read through, probably, a pretty good answer.

One of the other questions you embedded in there was the wide guidance range.

I think we have about a $75 million range this year, where normally, we've been running about a $50 million range.

We widened it out a little bit because there's a little bit more uncertainty, and the uncertainty has to go what we talked about last quarter, which was we need to see how this new distributions kind of feeds into the marketplace in North America.

And we also need to see how these 2 large new customers, what price points they sell beds at, more of a merchandising issue within each of those companies and whether they sell towards the top end of the merchandising bracket or the lower end.

Those 2 variabilities played primarily in widening out the range.

And then, quite frankly, there's obviously a little bit of drama going on in Asia, and we didn't really put it in the guidance.

But it certainly gave us a little bit of comfort to get a little wider range.

Bhaskar, what were the other questions?

I think the question about sales lift in the fourth quarter.

What I would say is, without disaggregating the revenue the way to think about it is, if you think about the number of stores that the new distribution had, it was a sizable launch.

And not only was it the launch, then we have the full valued back stock to fill the inventory.

That said, we did say, as we thought about the fourth quarter, that Tempur, the underlying business, it did exceed our expectations.

And lastly, I'd just say, I would expect we tighten up the range fairly quickly during the year as we learn more about the distribution.

Thank you.

Our next question comes from John Baugh with Stifel.

Two questions.

One, I'm assuming…

(technical difficulty)

You're breaking up.

Sorry, can't hear you.

There's an approximate cost of the Tempur stores in 2019…

(technical difficulty)

Can't hear the question, broke up.

Operator, I think we've got to move to another question.

We're not able to hear what he's asking us.

Our next question comes from Bobby Griffin with Raymond James.

Can you hear me all right?

Yes.

This is a 2-part question, Scott, your favorite.

But I guess, first, can you help us isolate some of the incremental or kind of discrete items that hit the P&L this quarter, like new product launch and incremental stock comp, and quantify those?

And then secondly, maybe to go off the first question to kind of look at it a little bit different way.

But in context of the $400 million that you talked about for all the new expanded distributions, how much of that, if you had to estimate, shifted into the fourth quarter?

And then we can just adjust that in our models.

Was it $50 million, $30 million or anything like that?

Yes.

Bhaskar can do that.

From a seasonality standpoint, you can adjust the $400 million for him.

And the big rocks in the fourth quarter that affect it'd probably the discounted floor models.

And then the -- we had a very big hit in comp.

Those are the 2 things that jump out in my mind.

Why don't you walk him through those?

Yes, absolutely.

So just circling back to those, when you think about what happened during the quarter, obviously, we had a large expansion from a distribution standpoint.

That was really a few parts that came around slotting the news -- slotting the new mattresses as well as the channel fill and then the sell-through.

With the slotting of new mattresses, you're going to have some floor model with that.

And then we have been talking about the incremental stock comp -- sorry, the variable compensation or the bonus plan that we took, and that was approximately, for the quarter, about $18 million.

As it relates to how you think about the $400 million...

With '18, what was the delta?

That is the delta because it was 0 the prior year.

Okay.

Okay.

As you think about the $400 million is what we called out on a 12-month basis, and just think about starting that in the fourth quarter.

And as you think about that, is the $400 million included the channel fill and the floor models, et cetera.

So think about it as a sales surge in the fourth quarter.

And then as you get into the first quarter and through the rest of the year is -- that would be ramping.

Our next question comes from William Reuter with Bank of America.

Just in terms of -- you mentioned that there was one customer bankruptcy during the quarter.

I was wondering whether the -- if there are any comments or thoughts on the health of the remainder of some of your smaller independent customers.

Sure.

Great question.

The first thing I would say is managing our credit portfolio is part of what we do every day.

What I would like to highlight is, on a year-over-year basis, our agings have improved materially.

And as it relates to Matt One is we've taken all associated charges with that particular customer.

And you don't believe it will impact revenues going forward?

That is correct.

It shouldn't impact.

Our next question is from Brad Thomas with KeyBanc Capital Markets.

Congrats on the nice momentum.

Let's see if I can squeeze in a 2-parter myself here.

A question that we get a lot is about how to think about the growth potential for the business as we get past all of this incremental distribution.

So I guess, Scott, I was hoping for your latest thoughts on maybe how to think about what the revenue growth rate of the business should be as we look out to 2021, 2022?

Is that mid-single digit?

Is that high single digit?

And then if we could just get a little more color on how you all were thinking about advertising this year potentially, given the momentum in the business right now and the prospect of ad costs maybe going up as we get closer to the election?

Okay.

I may work on that a little bit.

I mean first of all, let's just kind of de-aggregate some of the things in the quarter.

Don't miss that we had growth internationally, okay?

It had nothing to do with new distribution in North America.

Certainly, we have growth in DTC, which, of course, has nothing to do with new distribution.

If you look at the base business, we had growth in the base business in North America, ex the new distribution.

So there's quite a bit of underlying growth on top of the distribution.

When I think about it, yes, I have a tendency to kind of back up a little bit and just look at where we are from a competitive standpoint, I look at our competitive advantages in each market.

And I got to tell you, when I look at our competitive advantages and the improvements that we've made over the last 3 or 4 years, we're very optimistic that our competitive position in all of the markets that we're in has been strengthened, and in some markets, has been strengthened significantly.

So when you get to underlying growth rate, what you end up with is, okay, what's the economy and what's going on in that particular market?

And I don't have a growth projection.

But I think what I would tell you, and I think I could support pretty aggressively, is that our competitive position in the bedding market in the world, has never been better, never been stronger, and we've never been more in control of our destiny.

As it relates to advertising, what we did call out in the prepared material is that 2020 would represent a record advertising year for us.

And a couple of things are helping us with that is, obviously, with the new distribution, it allows us to invest in some share of voice as well as the overall growth of the business.

Our next question comes from Seth Basham with Wedbush.

Congrats on a great quarter.

My question is regarding the upside to your sales expectations in the fourth quarter.

I don't know if you can quantify it, but directionally, how much of it was from your base business versus being from new relationships?

And as a follow-up, as you think about in 2020, do you expect that base business in the wholesale North America segment to grow as much as it did in the fourth quarter of 2019?

Yes, the upside surprise within the base business in the fourth quarter.

In Tempur specifically.

As you remember, we've talked about before how new distribution feeds into the market, whether there's any cannibalization.

And if you look at my prepared remarks closely, there's a sentence in there that says, basically, it's early.

But based on early indications, we are not seeing any cannibalization in the Tempur brand.

And in fact, 1 plus 1 might be slightly more than 2.

On the Sealy side, we aren't seeing any cannibalization, but it's not as clear because there's more factors that impact, we'll call it, the mid-price points.

But we're not seeing anything that looks like cannibalization in either brand.

So base business grew in the fourth quarter.

Expectations during the year, I would expect the base business is going to continue to do relatively well.

We're not feeling any pressure as far as slot counts.

And I would expect that we will continue to have some wins in -- with new clients going forward, although certainly not very large compared to what we did last year.

There's just not that many large customers out there.

But I would expect the -- we'll have more wins, for sure, in the coming year.

Our next question comes from Peter Keith with Piper Sandler.

Great results, guys.

I'm going to ask a 2-part but related question.

So the last couple of years, we've had launch costs as a headwind.

Just looks like there's fewer products rolling out this year, so could you maybe give us the launch cost benefit in 2020?

And then directionally, Bhaskar, how should margins flow through the year?

Based on the year-on-year trend, it seems like it may be a little bit stronger in the first half and then some moderation in the back half.

Great question.

Let me take that, and Scott, you can clean me up.

As it relates to margin expectations, if I were to step back, on a full year basis, I would expect margins to be up on a year-on-year basis.

And just when you think about sequencing a bit to get into that point is, in the first quarter, is we are launching the Sealy brand with our new distribution.

So though, up on a year-over-year basis, it would be a bit pressured when you look at it sequentially versus the fourth quarter.

So overall, we've got a lot of nice tailwinds that are heading into 2020 that's going to help us from a gross margin expansion standpoint.

Part of that benefit is launch cost.

That is correct.

And when you think about it, you are correct, over the last couple of years, we've had some launches.

And in 2020, they're very nominal.

Our next question comes from Keith Hughes with SunTrust.

I've got a question on Mattress Firm.

As we head towards the holiday weekend coming up, can you give us some sort of idea of how much of the launch is complete heading into this weekend, not training and stuff like that, just in terms of slots?

Sure.

I mean all the Tempur launch is complete.

All the Stearns & Foster launch is complete.

And I would say the vast majority, more than half of the Sealy launch is complete.

Now when I say complete, that means the beds are on the floor.

There might still be some POP that's in process.

And certainly, there is a robust training process that starts once the beds hit the floor.

And although RSAs have probably been trained some, generally, that takes -- to get them fully trained, that means 6 to 9 months of training.

So I expect that we'll continue to ramp up.

But early indications are all very positive, both for us and Mattress Firm.

Our next question comes from Curtis Nagle with Bank of America.

Just wondering if you guys could provide an update in terms of the initial EBITDA numbers for new distribution, which I believe were $75 million to $100 million.

I know it's still early days, but obviously, things seem to be going pretty well.

So yes, any update on that?

I'm going to answer that, no.

So I'm going to give you a chance to ask another question because I don't want to disaggregate the business by customer.

Oh bummer, you got kicked off the line.

But what I would say is that $75 million to $100 million is the way that we originally thought about it, and that's where we remain today.

At the end of the second quarter, we'll have better visibility of what that may look like.

The one thing I would want to point out is that $75 million to $100 million is on a rolling 12-month basis, so that effectively started in the fourth quarter.

So as you think about 2020, think about the fourth quarter comp.

(Operator Instructions)

Our next question comes from Carla Casella with JPMorgan.

I want to just dig in a little bit more deeper on China and any impact you're seeing with your own or other competitors from either shipping delays.

Are you seeing or hearing anything about out of stocks -- or out of stock floor sets from any of the retailers?

And then will you -- should we fear that after this is all over, we could see a step-up in dumping because of the product that can't get out of China now?

Okay.

Let me see if I can work on some of that.

We have 6 plants in China.

They run through the Asian joint venture, about 1,200 employees.

Currently, all 6 plants are closed.

We expect to open 5 of them here probably in the next week.

That gives you just kind of some status on the current company.

We are in very good shape from a product standpoint, supply chain standpoint.

We only really import adjustable bases, long lead time, got plenty of them in inventory.

We have plenty of them on the water.

So we are not seeing any issues on being able to provide our customers the products.

Other retailers who may be getting their products somewhere else, they may have different supply chains.

They might have different issues.

But as far as Tempur Sealy goes, we're not seeing any issues in the supply chain right now.

Obviously, depending on how long the issue is outstanding, we could bump into something.

But right now, we feel very good about it.

As far as how it might impact dumping, I don't see any impact on dumping.

The tariffs pretty well blocked China from that.

And anything that's being imported is generally coming from Vietnam or Mexico, Indonesia or somewhere else.

And give or take, I'd say those imports were, Bhaskar, generally flat?

Correct.

Is probably the last few months' worth of report.

Correct.

Our next question comes from John Baugh with Stifel.

Apologies about the breakup earlier.

I will ask one question.

And it's simply -- but is there an approximate comp for the Tempur-Pedic stores in North America in 2019?

Is there a comp?

I mean we have same-store sales increases on the stores, if that's what you're asking me?

If you're asking me if there's a comp of any other store or retailer to look at, absolutely not.

It's a fairly unique retail format and is highly profitable.

Our next question comes from Laura Champine with Loop Capital.

It's my understanding that even with your growth at Sealy, at Big Lots and with the acquisition of Sherwood, you're still seeing AUR up.

Is that true?

And if you could ballpark what you expect to be the lift in AUR in Q1 and for the full year for your business overall?

I've got to go look at some numbers for a second, make sure -- average unit up.

Sure.

What I would say as I can speak into the fourth quarter is, absolutely, our average sales price did go up.

Principally, when you think about it, Tempur was stellar performance, driven not only by the underlying base business that we did see growth in is that Mattress Firm, that was the sell-in.

So our AUR was up.

Yes, it was up primarily because of brand mix.

Correct.

Because Tempur brand grew faster than Sealy, even with the new distribution.

Correct.

Our next question is a follow-up from Curtis Nagle with Bank of America.

So 2 real quick ones.

One, just -- I had heard perhaps there could be some motion in terms of more antidumping activity on, I guess, non-China countries?

And then just a quick one for you, Scott, in terms of just, why lower the leverage targets?

It sounds like -- you just want to be in a -- or maintain a strong capital position.

But anything more you could say on that, that would be great.

Yes.

I don't really have any comments on future anti-dumping actions.

I'm not really the expert in that area.

And there's others who are, so I'm going to let you go to them.

We continue to watch the situation closely, but that's about all I've got to say on the dumping issue.

And when it comes to capital allocation, look, we looked at lots of different data.

And there's no question to us that when you look at data on stocks like TPX, we think there's -- it's clear that the leverage ratio and the valuation multiple have an inverse relationship.

So we believe, over time, a lower leverage target is going to be a positive to stock valuation.

Second, really, lower leverage provides us great strategic optionality.

We might use that extra capacity at some point for opportunistic acquisitions like Sherwood or upsize the stock buyback, if there is a market disruption.

But we also really like building in that additional strategic optionality.

And I guess, lastly, as we've studied the industry, we've looked through some things.

It's very clear to us that the industry worldwide is run on a very thin capital base, and we see a strong balance sheet and cash flows as really a competitive advantage and it's a competitive advantage that we'd like to keep and we think, ultimately, will help support a higher multiple for the stock.

Our last question is a follow-up from Peter Keith with Piper Sandler.

Actually, this is a great follow-on question, Scott.

So on capital allocation, any thought to initiating a dividend?

I'm curious on the Board discussions there just because the cash flows are tremendous, and as you point out, the competitive positioning has never been better.

So it seems like there's really good stability in the business looking forward.

Yes.

We talk about capital allocation, as you would expect, at every Board meeting, robust discussion from Board members.

Certainly, dividend is always part of that conversation.

As of today, there's no indication that we'll be starting a dividend, but it's certainly always an option.

But right now, when we look at it, the -- we think there's some reasonably priced acquisition opportunities.

And we also think that our stock continues to be a very compelling investment.

But we'll continue to have dividend on the agenda and as part of the discussions.

And this concludes the question-and-answer session.

I would now like to turn the call back over to Scott Thompson for closing remarks.

Thank you.

To the over 7,000 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 and lenders, thank you for your confidence in Tempur Sealy's leadership team and the Board of Directors.

This ends the call today.

Thank you, operator.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.