Tempur Sealy International Inc (TPX) 2022 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Tempur Sealy's Fourth Quarter 2022 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference may be recorded.

I would now like to hand the conference over to your speaker host for today, Lauren Everett, Investor Relations Manager. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for participating in today's call. My name is Lauren Everett, the Investor Relations Manager. Before getting started, we want to extend our congratulations and best wishes to Aubrey, who is currently on maternity leave.

Joining me today 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.

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 this 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 release.

And now with that introduction, it is my pleasure to turn the call over to Scott.

Thank you, Lauren. Good morning, everyone, and thank you for joining us on our 2022 fourth quarter and full earnings call. I will begin with some highlights from our fourth quarter, and then I will turn to discuss how we've delivered on our long-term initiatives. Then Bhaskar will review our fourth quarter financial performance in more detail and discuss our 2023 guidance. Finally, I'll close with a few comments on how we view the current market environment. Then we'll open the call up for Q&A.

In the fourth quarter of 2022, net sales were approximately $1.2 billion, and adjusted EPS was $0.54. This represents a 36% growth in sales and a 59% growth in adjusted EPS as compared to the fourth quarter of 2019, a pre-COVID period. Compared to the same period last year, this represents a 13% decline in sale and a 39% decline in adjusted EPS as we navigated a weak overall market and experienced robust inflation. However, we continue to outperform the broader industry by a good bit and enhanced our competitive position. Consistent with our previous quarter, we observed a slight increase in resilience of our premium customers. with sales of value-focused customers a bit more subdued.

I'd like to begin by highlighting some of the key wins for the quarter. First, as we discussed last quarter, we successfully kicked off the North America launch of our new collection of Stearns & Foster products, which is designed to further distinguish our high-end traditional Innerspring brand from the numerous mid-market Innerspring brands in the marketplace. Our third-party retail partners have demonstrated their enthusiasm for both the new Stearns & Foster product portfolio and our commitment to supporting the lineup through compelling national brand marketing. This excitement for the new product is reflected in robust year-over-year order trends. In order to ensure the new product meets our stringent quality requirements, we have extended the launch window in response to a slight component delay. We expect to complete the rollout by Memorial Day holiday selling period. Overall, we remain on track to expand Stearns retail slots by more than 20%.

Turning to our second highlight, our U.S. e-commerce channel performance performed well in the quarter, delivering approximately double-digit growth. Our new Stearns & Foster and Sealy e-commerce sites have exceeded our expectation, the greater mix into the more premium SKU assortments resulting in unexpectedly high ASP across both brands. Our Tempur e-commerce business also delivered solid growth in the quarter, which is especially notable considering the difficult prior year compare. With the recent launch of our new Sealy website, we now have operations in direct-to-consumer websites in U.S. at each of our leading brands. Our expanded e-commerce presence is a powerful tool that enables us to be closer to the customer, drive share of voice and build on our omnichannel strategy. Over the last 5 years, we've developed a direct relationship with millions of customers gaining valuable consumer insights and furthering our direct marketing capability. This helps build our long-term customer relationships and drives marketing efficiencies.

Moving to ESG. We further our commitment to protect and improve our communities and the environment. We recently published our 2023 corporate social value report, which is available on our IR website. We are proud of the progress we've made in our ESG goals. In the fourth quarter, we achieved our goal of 100% landfill diversion from our U.S. and European manufacturing operations. We also made progress towards our goal of carbon neutrality for our global operations, reporting a decrease in emissions per unit.

Before turning the call over to Bhaskar, I want to take a moment to step back and review the progress we've made on our long-term initiatives during 2022. Though the year was fluid from a macroeconomic standpoint, we remain focused on positioning the business for long-term success. Starting with our first key initiative, which is to develop the highest quality products in all the markets we serve. When it comes to product development, our #1 objective is to anticipate and react to consumers' evolving sleep preferences. In early 2022, we made continuing progress against this objective through various product launches. As part of the refresh of our U.S. Sealy Posturepedic portfolio, we launched a new line of premium and hybrid Sealy mattresses featuring improved comfort, superior support, innovative cooling technology. This lineup has truly resonated with our Sealy targeted consumer base. We leveraged our Sealy brand to tap into new market segments as well. We launched our new Sealy Natural collection in the second half of the year. Constructive or eco-friendly sustainable source material. This collection appeals to environmentally conscious consumers and continues to broaden our customer base. We also launched our Sealy FlexGrid Mattress line, which features pressure-relieving grid -- gel grid that represents the evolution of the technology in the market today. With a unique, scalable manufacturing approach, we're able to offer these products at a mid-market retail price.

In addition to supporting our 2022 launches, we set the innovation pipeline for 2023 and beyond. Later this quarter in the U.S., we'll launch an upgraded line of TEMPUR-Breeze products and smart adjustable basis. Then later in the year, we expect to expand the distribution of our Tempur-Active Breeze cooling system into select wholesale doors. We expect these launches to further strengthen Tempur's appeal to the premium, wellness-minded consumer and drive improved attach rates and strong ASP.

Turning to our international group. Beginning this quarter, we'll undertake the largest international product rollout in the company's history, reaching more than 90 markets worldwide. This new lineup of mattresses, pillows and bed bases has been strategically designed to drive addressable market expansion of Tempur products. The launch is phased over multiple quarters to allow for the customization by region. Finally, I would point out that our investment in Silicon Valley Sleep Tech start at Bryte, our partnership with sleep data company, Fullpower Technology and our industry-leading R&D team will ensure Tempur Sealy remains at the forefront of sleep innovation. As evidence of our commitment to product quality and innovation, our leading brands received a number of recognitions throughout the year. Notably, Tempur-Pedic rated #1 in customer satisfaction among mattress brands in the J.D. Power 2022 report for the fourth year in a row for retail mattress category. And for the second year in a row, ranked #1 in the online mattress category. A true testament to the customers' trust of our brand and products.

Turning to our second initiative, which is to promote our brands with compelling marketing worldwide. We supported our brands and products with a record marketing investment of approximately $450 million this year. In addition to generating strong near-term returns, and driving outperformance relative to the broader bedding market, these investments also serve to seed the market for our 2023 product launches. Sealy and Tempur continue to be the #1 and #2 best-selling mattress brands in America and among the most highly recommended, recognized, desirable brands in the industry, with 95% of shoppers aware of at least 1 of the TSI brands.

In 2022, we leaned into the untapped potential of our Stearns & Foster brand by doubling our presence on national television. In addition to contributing to growth and awareness and consideration for Stearns, these marketing investments grew our retail support, which combined with the new product lineup is reflected in a significant increase in placements. Our investments in product, brand and channel successfully drove Stearns & fosters' website traffic and sales growth in 2022, making clear progress to our goals to make Stearns & Foster our third $1 billion brand. Last year, we also seeded the market for our upcoming international launch with strategic marketing investments in store sales programs and e-commerce initiatives worldwide.

Our third initiative is to optimize our powerful omni-distribution platform. We evolved our global omnichannel presence in step with consumer preferences to be wherever they wanted to shop. The largest pillar in our omnichannel distribution strategy is our more than 26,000 third-party retail doors. This broad footprint ensures that consumers can easily find and experience our products in person. While we're well represented in third-party retailers in the U.S. today, there are opportunities both to increase our balance of share with existing retail partners and to sell to certain retailers who do not currently retail to perceive the products.

Turning to our OEM operations. While we entered this space only a few years ago in 2020, we made significant progress in growing our operations, both within our Sherwood private label, Innerspring business and our foam-pouring business. In 2022, we delivered significant growth in our OEM operations as we continue to charge towards our target of $600 million in OEM sales. Note that OEM sales growth will decrease the cost per unit for all of our branded products as we spread our fixed costs and drive more advantageous supply agreements on the enhanced volume. In addition to growing our wholesale and OEM business, we are now running in excess of $1 billion in annual sales in our global direct-to-consumer business with a robust 5-year compound annual growth rate of over 40%. Regarding our direct retail store operations, we opened 50 retail stores in 2022 and currently operate over 700 brick-and-mortar storefronts around the world. Our retail network is comprised of both wholly owned and joint venture locations, led by over 200 Tempur retail and multi-branded Sleep Outfitters stores in the U.S. and our more than 200 Dreams locations in the U.K. In total, including the e-commerce sales they facilitate, our company-owned stores generate an average sale of $2 million per location with the U.S.-based Tempur retail stores averaging a robust $4 million for sales per location.

Finally, I should note that in aggregate, our U.S. web has grown at a compounded annual growth rate of over 25% since 2017. Our fourth and final key initiative is to drive increased EPS through operational execution and prudent capital deployment. In 2022, we generated full year adjusted EPS of $2.66. This represents a 5-year compound annual growth rate of 26%. We executed on our balanced capital allocation strategy to return value to shareholders. We allocated approximately $1 billion in capital. First, we reinvested over $300 million in operations. This includes a onetime investment to stand up our new foam-pouring plant in Crawfordsville, Indiana, which is expected to commence operations in 2023, enhancing our ability to service our customers by ensuring product availability to meet increased demand in the premium sector, creating shorter lead times and reduced per unit logistics cost in the Northeast market. Second, we invested $10 million in Bryte, a technology-based mattress company with differentiated and new product offering targeted at a different premium customer than we currently serve today. Third, we invested over $665 million in share repurchase to buy back approximately 10% of our shares outstanding at an average price of $33 a share. And finally, we paid $70 million in cash dividend. I should note, we announced today a 10% increase in our quarterly dividend, bringing it to $0.11 per share.

I'd be remised if I didn't mention our ERP transition, which will play a critical part in our ability to deliver on all of our long-term objectives. In 2022, we completed the multiyear journey of transitioning more than 50 of our global subsidiaries from using 5 different ERP systems into 1 common system. This investment in consolidating operations expected to drive long-term efficiencies across our global operations, enhance cybersecurity, facilitate customer communications regarding order status and improve our direct-to-consumer capabilities.

With that, I'll turn the call over to Bhaskar.

Thank you, Scott. In the fourth quarter of 2022, consolidated sales were approximately $1.2 billion and adjusted earnings per share was $0.54. We had $10 million of pro forma adjustments this quarter, all of which are consistent with the terms of our senior credit facility.

Turning to North American results. Net sales decreased 12% in the fourth quarter. On a reported basis, the wholesale channel decreased 13% and the direct channel decreased 5%. Early indications are that we outperformed the market. When looking at our sales growth, please note our fourth quarter of 2021 was significantly benefited by a Tempur-Pedic backlog reduction of $100 million.

North American adjusted gross profit margin declined to 37.9%, primarily driven by operational headwinds and mix related to the prior year Tempur-Pedic backlog reduction, partially offset by pricing actions. The backlog reduction in the prior year accounted for approximately half of the margin decline. North American adjusted operating margin declined to 15.1%, driven by the decline in gross margin and operating expense deleverage.

Now turning to International. Net sales decreased 14% on a reported basis. On a constant currency basis, international sales decreased only 2% as we experienced a $36 million headwind in the quarter from unfavorable foreign exchange rates. Foreign currency remains volatile, though we have seen favorable trends since the fourth quarter. Our current expectation for 2023 contemplates a modest FX headwind to both sales and adjusted EBITDA. As compared to the prior year, our international gross margin improved to 55.2%, driven by pricing actions to offset commodity inflation, partially offset by mix. Our international adjusted operating margin improved to 20.7%, driven by the improvement in gross margin and operating expense leverage, partially offset by the impact of COVID on our joint venture operations in Asia.

Turning to commodities, which we think about as inclusive of raw material inputs, logistic costs and labor, all of which have been highly inflationary across the global bedding industry for more than 2 years. In the fourth quarter, global commodity prices largely trended in line with our expectations. Some commodities have gravitated off their peaks, though others remain pressured. We anticipate that prices could continue to ease throughout the year, although we expect commodity prices in 2023 will continue to trend significantly ahead of 2020 levels.

Now to Global Operations. We are taking actions to fully support our customers while managing through an evolving global supply chain and a tight labor market, which has resulted in $10 million of incremental expense in the fourth quarter. As the global supply chain continues to stabilize and as our new ERP system drives productivity, we expect improvement throughout 2023 and beyond.

Now moving to the balance sheet and cash flow items. In the fourth quarter, we had operating cash flow of $95 million. In response to the global supply chain volatility, we took actions in '22 to reinforce our safety stock of raw materials and finished goods. We believe this focus on providing our customers with the best possible product quality and customer service was one of the key drivers of our outperformance relative to the broader industry last year. Our inventory days improved in the back half of '22 as we began to normalize our safety stock. We anticipate inventory levels will continue to normalize throughout 2023 as the supply chain further stabilizing driving cash cycle improvements. Our new foam-pouring plant in Crawfordsville, Indiana is on track to begin its phased opening in the second quarter. In order to optimize production in this new facility, we will face bringing the plant online to ensure the highest level of quality while we grow into the incremental capacity. This plant's location complements the existing manufacturing footprint and enhances our ability to service our East Coast customers. We expect our CapEx to decrease significantly in 2023 and return to a more normalized level of spend thereafter. We think of annualized CapEx as approximately $150 million driven by maintenance spend of approximately $110 million and growth spend of approximately $40 million.

At the end of the fourth quarter, consolidated debt less cash was $2.8 billion and our leverage ratio under our credit facility was 3.1x, slightly ahead of our target range of 2 to 3x. We anticipate returning to our target leverage range in '23.

Now turning to 2023 guidance. We expect adjusted EPS to be in the range of $2.60 to $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 to support product launches and record advertising spend of over $500 million as we continue to support our leading brands and new products, resulting in EBITDA of approximately $980 million at the midpoint of the range. As I think about 2023 phasing, the first quarter will be our last pre-war comp. That, combined with front-loaded product launch and advertising cost will result in a difficult year-over-year compare in the first quarter. We expect to outperform the market, the consolidated first quarter sales are consistent to prior year and adjusted EPS that represents 19% of 2023 EPS expectations.

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, a quarterly dividend of $0.1,1, representing an increase of 10% relative to '22 and the repurchase of at least 5% of our outstanding shares funded through free cash flow, which is generated in the back half of the year.

Lastly, I would like to flag a few modeling items. For the full year 2023, we expect D&A of about $200 million to $210 million, interest expense of about $135 million to $140 million on a tax rate of 24% to 25% and a diluted share count of 178 million shares.

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

Thank you, Bhaskar. Nice job. Before opening the call up for Q&A, I'll take a moment to share some thoughts about our expectations for the macroeconomic backdrop in 2023.

In the U.S., we've aligned our outlook with the consensus GDP forecast of economic -- economists that major banks and we're assuming that we'll encounter a mild recessionary operating backdrop in 2023. We see growth opportunities in Asia this year, led by less volatile environment in China. In Europe, although we see consumers exhibiting resilience in the face of the ongoing war in the Ukraine and elevated inflation, we expect a mild recession.

Turning specifically to our U.S. bedding industry expectations. Last year, the U.S. bedding industry experienced its worst decline in history. We do not have complete information yet, but we would expect U.S.-produced units were down an unprecedented 20% to 25% compared to 2021. Our 2023 guidance is grounded in a stable U.S. bedding environment with units consistent to the prior year with the back half stronger than the first half. We are currently thinking the U.S. bedding industry units will return to growth in 2024.

Overall, our 2023 outlook targets growth on both the top and bottom line. This contemplates our continued outperformance across the bedding industry worldwide, driven by our new products, strong brands and omnichannel initiatives. Our strong competitive position continues to provide us with significant long-term growth opportunities.

And with that, I'll open up the call for questions. Operator?

(Operator Instructions) And our first question coming from the line of Susan Maklari from Goldman Sachs.

My first question -- or my question is around thinking about this data to consumer. You gave a lot of good details on how you're thinking about the various product lines and the brands and how they're performing. As you look out, how are you thinking about the pushes and the pulls on the different income segments and the way that the consumer may respond this year to the macro?

Sure. Thank you for your question. I'm going to focus on the U.S., because that's obviously our biggest segment. And to go around the world would take the entire call. So focusing on the U.S. consumer, couple of observations. One, we're seeing the high-end consumer continuing to hang in there. Low-end consumer has been where a lot of the deterioration has been. I think when we look at it, call the units down 20%, 25% this year. That is well down from where we historically have been and is very close to actually trough unit production in North America. We're probably 5% or 6% off the trough, and that would be 2009-ish -- I think -- I mean Bhaskar. So clearly have taken a downturn. But store traffic continues to be a little bit soft. I think what the retailers would tell you, but people show up by. We're seeing, I guess, a little bit fewer people financing it. I think it's I would say, from a consumer standpoint. So you heard our outlook. We're basically looking for 2023 to be stable, which again is almost at trough unit production in the U.S. and assume that by 2024, the unit growth will come back into the industry. .

And our next question coming from the line of Seth Basham with Wedbush.

Please give us a little bit more color on the bridge to your margin guide for 2023. You talked about a few components, but of those launch costs, advertising, et cetera, can you tell us where you think that the biggest drivers of pressure are? And then as it relates to commodities, again, how much do you expect benefit there?

Absolutely. So when I think about EBITDA margins and as I go into 2023, we are anticipating some improvement on a year-over-year basis. to put together those building blocks, the way I think about it, in no particular order is, I would think of operations. We've made some investments in 2022. Our expectation is that as that supply chain continues to stabilize, if that will turn into a tailwind for us in 2023 as the year plays out. In addition to that is we have pricing actions. The last action we put in place is in June of 2022. We will get the wraparound benefit of that in 2023. As you mentioned, we do have floor models, very excited about what we have going on. We have the Breeze coming out in the second quarter. We're wrapping up Stearns in the first quarter. We have (inaudible) that's happening -- sorry, the International launch that's happening all throughout 2023. However, the costs associated with that will be the floor model discount. Let's call that principally in the second quarter as Breeze gets out there. And then finally, all throughout the year, we will be investing in advertising, as we mentioned on the call, over $500 million. You add all those puts and then fundamentally is that we have initiatives that are going to grow the top line. So of our mid-single digit growth is that half will come from those initiatives and with the balance coming from floor models as well as a bit of the pricing actions. .

And our next question coming from the line of Curtis Nagle with Bank of America.

Kind of on my last question in terms of just breaking out the sales guidance, which I think was a little better than expected, so that's good. Maybe just digging a little more into the U.S., Scott, over the past, I don't know, the previous 4 months, we've been talking about stabilization, right, in the U.S., which sort of started in 4Q through where we are right now, has that continued? Can we talk a little bit in terms of just how the U.S. is trending at the moment and how you're feeling about that? .

Well, I mean, as of 08:00 a.m., I can tell you how we're doing. Look, it's very stable. I mean it feels like from a trend standpoint, we're getting off, we'll call the COVID trend of people shopping more during the week than they used to and less on the weekend. It's moved back to more traditional shopping with more shopping on the weekend than during the week. One of the other trends that we saw during COVID was that the holiday periods were not quite as robust and the business was steadier through the calendar. And now we're going back to what I think is more the historical pattern, where the trough is a real trough and the peaks are real peaks i.e., the holiday periods become critical for the industry. But all of that would be what I would call normal getting back to stable. And look, I think our volumes -- we haven't seen anything since year-end that would make us think the industry is anything, but at least stable. And I'll add that I haven't seen anything that makes me think that we won't continue to take a reasonable amount of share in 2023.

And our next question coming from the line of Bobby Griffin from Raymond James.

Scott, in your prepared remarks, you talked a little bit about an opportunity to sell some products, maybe some retailers who don't have as much share. I think you guys do have a test going on with Sam's with maybe some potential to launch that in store. So can you maybe update us on how that initial rollout is going and some of the timing around that? And is anything assumed in the guidance for picking up some new slot placements there?

Yes, we are in Sam's online, and you can see it online. And we're working very closely with Sam's and other customers to fill their needs. I don't really have an update for you, and we generally don't talk a lot about specific individual customers. But I would say our relationship with Sam's is good and expanding. Do we have anything specific in our guidance? No. I would say that we have lots of opportunities, and sales team have goals. But we certainly don't start putting that kind of stuff in a forecast until we would have a firm deal.

And our next question coming from the line of Atul Maheswari from UBS.

And thanks for all the great color on the call. Scott and Bhaskar, a question on the sales guidance. So up 5% or rather up mid-single digits, if there were a scenario where in sales were to fall short, say, sales were flattish or low single digits. Do you have enough cushion in the P&L to maybe pare back on expenses and still achieve the EPS guidance of $260 million to $280 million?

Well, there's really -- there's embedded quite a bit in that question. When you know our variable cost structure, which -- what do you have, Bhaskar in the variable cost structure?

70-30.

70-30. So we have the ability to, call it, rightsize the organization relatively quickly if there's a downturn. I think the real issue, though, is would you pull all those levers, you certainly would pull levers if you thought you were headed towards several quarters of recessionary activity. You may or may not pull the levers though if you think you've got a very short-term downtrend in business because within the organization around is complicated and you might take it as an opportunity not to pull those levers. So I can't guarantee what we would do. What I think might be interesting to note that, as an example, in 2022, if you look at our advertising expenses, our advertising expenses in North America on a dollar basis is up. And obviously, as a percentage because our sales are down, is up. And you might wonder, well, why didn't we pull that lever? We could have pulled the lever and pulled back on advertising in the latter part of 2022 and had a higher EPS number and maybe make somebody happy on the street. I don't know. But we run the business for the long term, and we've taken the opportunity to continue to support our brands. So it's a great business model, so we have the flexibility to deal with those situations. But right now, we're in a pretty strong competitive position. And my guess is, we're talking about short term, a little bit of blip in the overall macro market. I suspect we'll continue to be aggressive, take share and support our brands.

And our next question coming from the line of Peter Keith with Piper Sandler.

This is Matt Egger on for Peter. Sorry if I missed it, but can you just walk us through the puts and takes of your input costs this year? I know you said it's expected to be down, but just can you go through maybe on kind of individual basis, how you're expecting numbers 2019 and what's embedded in the guidance?

Yes, absolutely. So when I think about commodities, as I mentioned on the call, I think about everything from ocean cargo to raw material to labor. Broadly speaking, we've seen unprecedented increases in commodities over the last few years. So the way I think about 2023 and what we saw in the fourth quarter 2022 a bit, is that they have come off their peaks and the peaks being earlier in the year. But what I would say is that we are expecting, let's call it, a modest tailwind into 2023, however, by no means are they at the pre-pandemic level.

And our next question coming from the line of Jonathan Matuszewski from Jefferies.

I had a question on the competitive landscape. Your largest competitor recently filed for bankruptcy a couple of weeks ago. Just curious if you could give us a sense of how conversations with your retail partners have looked since this news broke and how are conversations progressing regarding potential slot gains for the TSI brand?

Yes. Thanks for the question. Look, I don't think that particular news was shocking to the industry, I think it was well telegraphed and expected. So I don't think it's fundamentally changed the discussions with our retailers. What the retailers care about is quality products, support with advertising and those kind of items. I think our chief competitor has strong brands and is a hard, tough competitor. But we continue to work aggressively with our retailers. So I don't think the actual filing changed very much in most retailers. Minds is as long as they provide quality products and service in the marketplace.

(Operator Instructions) And our next question coming from the line of Brad Thomas with KeyBanc.

Scott, I was hoping to ask about the international product changes, are they underway? Obviously, the potential will be really, really substantial for the company. I was hoping you could share a little bit more detail on perhaps how much this expands the addressable market for Tempur and how you think about what the financial impact could be once this is rolled out?

Yes. I'll start, and I'll let Bhaskar probably clean me up. As you said, look, this is a significant launch internationally, bigger than a normal Tempur launch as we're repositioning the brand and we're changing some of the manufacturing procedures. As to how we make Tempur so that we can hit some lower price points and service our customers better. Early on, we're in the middle of it. Early indications are good. And I'd say what's the addressable market expansion, do you think is it 20%, 30% 20%, 30% absolutely from an addressable market standpoint, of course, we have to perform. You can't just put that and say, okay, that's going to increase Tempur sales by that much. But we're working very hard on the area. But I do think it unlocks a growth potential for the international operations. From a sales standpoint, we should start seeing that in the second quarter of this year. Because of the launch cost and stuff, you'll see the benefits of EBITDA probably starting in 2024 and the full benefit of it. But I think long term over the next 2 or 3 years will be very important from our growth standpoint.

And our next question coming from the line of Laura Champine with Loop Capital.

It's on the kind of inputs to the guide for mid-single digit growth this year. Does the industry need to recover in the back half and actually be positive in the back half in your view for you to hit that estimate?

Yes, probably so. I mean, you're talking about crystal ball stuff. So give me a little bit of heads words on this. But look, I suspect -- let's say, as we said in the fourth quarter, units were down 20%, 25%. We think, we don't have all the final data yet, but that's probably certainly in the ZIP code. So I think going into the first quarter, I suspect that units will be down in the first quarter. That is a very tough compare for the industry. It is the last pre-war compare. So in the first quarter, we'll call it projected to be down, and I feel pretty confident that the units would be down in the first quarter. By definition, you've got to have some units go the other way. And so you'd end 2023 with growth in, call it, the third and fourth quarter.

And our next question our next question coming from the line of Carla Casella with JPMorgan.

I just want to ask, given kind of the turbulence in the market, that you guys seem to be navigating very well. Is it opening up more M&A opportunities? Or is there -- are there thoughts set for you to continue to grow your OEM and expand the business that you need M&A as well as organic growth?

Yes. It's interesting. As we've always said, it's something in the world is in the bedding industry, and there's an opportunity we want to look at it. And we do when we look at quite a few opportunities every year. Historically, we've done 1 or 2 transactions a year. I think we've done like 9 since I've been here. But the whole strategy is really based on purely opportunistic purchases and where we can find a win-win. And so having said all that, what that means is, look, we look at stuff, sometimes we price stuff. Sometimes the price works and something happens. Sometimes, the price -- we're miles apart and nothing happens. And then sometimes the price is pretty close, and we stay close to that particular company for a number of years using the example of Dreams as it is probably the classic one, is, I think we effectively negotiated with them for 5 years until we both felt like we had a win-win transaction, which I think actually was a win-win transaction for both companies now that we've had them for a year. Some transactions happen very quickly, and the one that comes to mind is Sherwood. I think from start to finish, that might have been more like 30 days if we were aligned very quickly with that team to what the future look like. So that was a very quick transaction. So with the market, it had some -- it was a difficult year when you look back at it, whether you talk about the unexpected war in Europe, the inflation, the rapid unit decline, FX, COVID over in Asia. So yes, it's certainly a colorful year. So are there more opportunities? There probably are. I mean there are more opportunities. Whether or not we ever get aligned on anything, I don't know. But we continue to talk to people and really look for transactions that are good for both parties, good for our customers, good for the industry, and we'll continue to talk to people.

We have one last question in queue coming from the line of Atul Maheswari from UBS.

I just had a quick question, Bhaskar, on the first quarter guidance. It seems like you're guiding to a 20% to 25% EPS decline. Could you provide some incremental color on the building blocks that gets you there in terms of revenues, gross margin and cost?

Yes. Before he does that, let me -- we felt like we needed to give you a little more color on the first quarter. We normally wouldn't give that much kind of color on a quarter. But we really want to make sure everybody realizes that's the last tough comp for the bedding industry and not be surprised if it last pre-war.

Atul, that's a good question. Let me answer it this way. Year-over-year, when you look at Q1 to Q1, there is a lot of things that are happening, whether it be FX, whether it be the war, the macro, the inflation, et cetera. So let me do it this way. Let me go from Q4 to Q1. I think it's a much more straightforward way to think about it. So what we've implied for Q1 off of Q4 is that we would expect some slight revenue growth, seasonality -- from a seasonal standpoint, that would make sense. Then what you -- obviously, from that incremental revenue, we'd expect some flow-through associated with that. And then what we have is that we have 2 items that are unique to the quarter when you think about it versus Q4. And that is the launch of our international products as well as the ramp-up of our Stearns & Foster. So the way I think about that is -- and brand advertising to support those launches. So again, relative to Q4 to Q1, what I would expect is a bit of revenue and then investments associated with those products, let's call that brand advertising as well as the investments for the launch and OpEx.

I will now turn the call back over to Mr. Scott Thompson for any closing remarks.

Thank you, operator. To over our 12,000 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 Board of Directors. That ends our call today, operator. Thank you.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.