Tempur Sealy International Inc

NYSE:TPX

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the Tempur Sealy First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]

It is now my pleasure to introduce Aubrey Moore, Investor Relations.

[Aubrey Moore, IR]

Thank you. 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. The factors that could cause actual results to differ materially from those identified include economic, regulatory, competitive, operating and other factors discussed in the press release issued today.

These factors are also discussed in the company's SEC filings, including, but not limited to, annual reports on Form 10-K and the company's quarterly reports on Form 10-Q under the heading Special Notes Regarding the Forward-Looking Statements and/or Risk Factors. Any forward-looking statement speaks only on the day of which it was made.

The company undertakes no obligations 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 it over to Scott.

[Scott Thompson, Chairman, President and CEO]

Thank you, Aubrey. Good morning and thank you for joining us on our 2020 first quarter earnings call. We are experiencing an unprecedented global health crisis, and our thoughts are with all those people around the world whose lives have been impacted.

On today's call, I'll begin with comments on the quarterly operation performance, and then I'll provide you with some thoughts regarding the impact of COVID-19 on our operations. Then Bhaskar will review in detail our quarterly financial performance, current trends and also provide you with an overview of our balance sheet strength and liquidity position.

Finally, I'll conclude with some thoughts on why we believe Tempur Sealy is well-positioned to manage through this challenging period and why we believe will emerge even stronger as a company on the other side of this global crisis.

The first quarter of 2020 was truly outstanding. It was a record first quarter for sales and adjusted EBITDA. We're firing on all cylinders, both operationally and financially, until mid-March.

As compared to last year, both sales and adjusted earnings grew double digits. In addition, our leverage ratio declined significantly year-over-year, even after acquiring Sherwood bedding and approximately $190 million of stock repurchase.

Both our North America and International segments grew constant currency sales across both wholesale and direct channels. Our performance was very broad-based, with strength across brand, geographies, and channel.

It should be noted that we achieved these results despite a significant drop in sales in Asia for most of the quarter due to COVID-19 as well as the negative impact of the pandemic on our U.S. and European operations exiting the quarter.

Turning to the reported results for the quarter, net sales increased 19%. Adjusted EBITDA increased a solid 63%. And adjusted earnings per share increased a robust 148%. This marks the eighth consecutive quarter of adjusted EPS growth. I should also note that only 8% of this growth in adjusted EPS came from share repurchase.

I should also note that if you consider seasonality, you can see with the first quarter results, we were on pace to deliver approximately $650 million in adjusted EBITDA in 2020. This gives you some idea of the strength of our business model going into the crisis. I'd like to highlight three items on the first quarter results:

First is the completion of the rollout of Tempur-Pedic, Stearns & Foster, and Sealy brand products through our newly expanded U.S. distribution. The new distribution has resulted in increased availability of our customer preferred products both online and in-store.

It was the single largest rollout in the company's history, and it was smooth and well planned with strong execution by all teams. The new distribution gains were significant drivers in our robust first quarter growth.

Second highlight from the first quarter was the 33% growth in our global direct channel. In North America, our direct channel grew 60% year-over-year. Our global direct online sales grew 25%. And subsequent to the end of the quarter, that growth greatly accelerated benefiting from store closure.

I'd like to call out the outstanding work by the team overseeing the Sleep Outfitters acquisition. When we acquired Sleep Outfitters out of bankruptcy in 2019, they experienced significant same-store sales declines, and they were operating at a significant loss.

Since then through improvements in merchandising mix, advertising programs, the team reinvigorated same-store sales growth. We believe Sleep Outfitters was on track for a profitable year in 2020 prior to the impact of the pandemic.

Third highlight is the integration of Sherwood bedding. This partnership with the Ellman's Family marks our entrance into private label category, giving us a complete suite of products ranging from Sherwood's non-branded private label products to our well-known branded products, including Tempur-Pedic, Stearns & Foster, and Sealy.

This acquisition provides an expanded products offering and a wide range of price points. In the long term, we expect to leverage our overall brand portfolio to gain additional distribution for Sherwood products.

In total, we delivered the highest first quarter adjusted EBITDA in the company's history, despite the impact of COVID-19 on global operations. Our robust first quarter results give us confidence that our underlying structure and strategies are working and that we're uniquely well positioned within our industry to withstand the headwinds associated with COVID-19.

Before Bhaskar reviews the recent financial statements, I'd like to provide an overview of our actions we are taking in response to COVID-19 and the resulting economic downturn.

First and foremost, I'd like to review the measures that we've implemented to protect the health and safety of our employees. We restricted travel and face-to-face meetings, allowed employees to work from home where possible and adopted all regional specific health protocols applicable to our global operations.

Keeping our employees and customers safe and healthy during this time of uncertainty is a top priority. We are especially proud of the work that Tempur Sealy has done to support a variety of different people and organizations in need during this crisis.

Over a short amount of time, our innovative R&D teams have developed mattresses, medical-grade foams and other related items to be used in hospitals and other medical facilities. We believe it's important that we do our part to help during this pandemic, which is why we're donating a substantial amount of these specialized products.

Additionally, we are manufacturing personal protective equipment that we are donating, we're selling to cost, in support of all the frontline workers who are serving our community during this global hardship.

Our entire organization remains committed to our customers, suppliers and shareholders during these rapidly changing times. The virus has been impacting different regions at different times. For example, countries within our Asia operations show the degree and stages of the impact within one of our geographic regions.

Operations, specifically in Japan and Singapore were growing at the beginning of April. But since new restrictions were enacted, we've seen orders decline year-over-year. Meanwhile, Korea experienced peak impact of corona-19 in March. Then restrictions were lifted and orders are now growing double-digit year-over-year. In total, our Asia business has been consistent in the last two weeks as compared to the same period in prior year with a sight to grow order.

While each country has its own government infrastructure and responses to the pandemic, the Asian market is an example that helps us understand how markets can recover. We're closely monitoring markets on a country-by-country basis and using this information to make informed strategic decisions across our global operation. In the U.S. consumers are shifting their shopping pattern online in response to their limited access to brick-and-mortar doors. As you know, one of our strengths is our powerful omni-channel distribution model.

While traditional retail has been very weak, our and our third-party retailers' direct online sales have performed very well. As a result, we are leaning into our online channels, which is uniquely suited to serve our customers' needs. Our U.S. online business driven by Cocoon by Sealy and Tempur products for April more than doubled as compared to April last year. We continue to adapt to this new shopping behavior by recently expanding distribution of our online compressed Tempur cloud product to the entire U.S. market. The response online has been strong.

Despite the growth online, we still experienced a major reduction in total sales since COVID-19 began materially impacting our business in mid-March. This required us to reduce our cost. The business model has highly variable cost structure, which allows us to partially offset operational deleverage in the face of sales decline, but we needed to do more. The team quickly implemented actions to further mitigate the financial impact by reducing headcount, eliminating nonessential expenses, delaying capital expenditures and suspending share repurchase.

For example, this week, we've implemented new actions regarding personnel. In the U.S., these actions included a furlough impacting approximately 35% of our salaried workforce for an expected 90 days, and we suspended the 401(k) match for the balance of 2020. In total, considering all recent past actions, we estimate that we have implemented $300 million in annualized savings throughout our business to help mitigate the current sales decline. While we expect near-term financial results to be significantly impacted by COVID-19 headwinds, we see our long-term competitive position strengthening throughout the downturn.

The company has fully recovered from past challenges due to our iconic brands, superior product quality, powerful omni-channel distribution, solid balance sheet and seasoned management. The demand for bedding products has faced numerous temporary headwinds throughout our history. But we believe the fundamentals of our industry are sound and we have constantly demonstrated an ability to adapt to a changing environment.

With that, I'll turn the call over to Bhaskar to walk you through the financial results in more detail.

[Bhaskar Rao, EVP and CFO]

Thank you, Scott. Before going into the details, I would like to call out a few financial highlights from the first quarter. As compared to the prior year, gross margin improved 260 basis points to 43.4%. Adjusted operating margin improved a very robust 550 basis points to 14.7%. Adjusted EBITDA increased 63% to $151 million and adjusted EPS for the quarter was $1.34, an increase of 148%.

There are a few items I want to call out before turning to the results. The company's first quarter trends are bifurcated due to the material impact of COVID. The business financial performance prior to the impact was exceptional. We exited 2019 with very strong momentum, which continued into the first quarter as we experienced robust monthly trends in January and February, with North America sales growing in excess of 30% as compared to the prior year. This strong growth in January and February highlights the underlying strength of the business.

Our strong performance in the beginning of the quarter carried into early March, despite a slowdown in Asia. Thereafter, we saw significant declines as COVID began to have a material impact in North America and Europe. At the end of March, we disclosed in our market update that trends in the U.S. and Europe were sharply declining with orders trending down over 50%.

Orders continue to fall and bottomed out down 80% during a few days in early April as compared to the prior year. Since then, we have seen trends improve, and month-to-date, April is down 55% as compared to the prior year. During the quarter, we also took a charge of $12 million in connection with the customer bankruptcy, unrelated to the impact of COVID-19. Our North American GAAP first quarter results were impacted by this onetime charge. Going forward, we did not expect further charges related to this customer.

Turning to North American results. North American net sales increased 25% in the first quarter. On a reported basis, the North American wholesale channel increased 22% and the direct channel increased 60%. Excluding Sleep Outfitters, the direct channel increased 20%. The new distribution gains were a significant driver of our robust wholesale channel growth. The direct channel includes the acceleration of online in late March that Scott previously mentioned.

North American gross profit margin improved 330 basis points to 40.9% as compared to the prior year. This improvement was primarily driven by favorable fixed cost leverage on higher unit volumes, lower commodity cost and decreased floor model expenses. North American adjusted operating margin improved 510 basis points to 16.9% as compared to the prior year. The improvement in adjusted operating margin was primarily driven by the improvement in gross margin and operating expense leverage.

Turning to International. Net sales decreased 1% on a reported basis. On a constant currency basis, International net sales increased 2% with positive growth in both the wholesale and direct channels. The first quarter international results include a material impact of COVID. Our operations in Asia began to feel the negative impact of the pandemic in February as the virus began to spread throughout the region. When you consider what the international group has dealt with in the first quarter, we are very pleased with these results and the resilience and flexibility of our business model.

As compared to the prior year, our international gross margin improved 230 basis points to 55%. The improvement was primarily driven by operational improvements, favorable country mix and lower commodity costs. International adjusted operating margin improved 250 basis points as compared to the prior year. The improvement was primarily driven by gross margin and favorable operating expense leverage, partially offset by the performance of the Asian joint venture, which is concentrated in China.

Turning to the company's global performance. Adjusted operating income was $121 million and adjusted EBITDA was $151 million, up 63% from last year. This is the fourth consecutive quarter of year-over-year double-digit adjusted EBITDA growth.

The increase in the adjusted EBITDA was primarily driven by fixed cost leverage on higher unit volumes, decreased floor model expenses, lower variable compensation and lower commodity costs.

Commodities were slightly better than expected for the first quarter. Going forward, we would expect on a per unit basis to continue to see that favorability. Given the uncertainty from the crisis, we do not currently have good visibility to estimate volumes and thus the potential total commodity benefit to future EBITDA. Adjusted EPS for the quarter was $1.34, up 148%. This growth was almost entirely driven by improvements in operating performance.

Now moving on to the balance sheet and cash flow items. We generated operating cash flows from continuing operations of $15 million in the first quarter and spent $26 million in CapEx. As a reminder, we expected CapEx in 2020 to be elevated to support the investments needed in our ERP software. We're pleased to report that our Sealy U.S. ERP system went live in April. This was a very heavy lift and we're proud of the outstanding efforts of our IT team in collaboration with other cross-functional departments. There is still more work to do there, but this is a good start.

I would like to turn to our liquidity position. At the end of the first quarter, net debt was $1.7 billion. Our leverage ratio under our senior credit facility was 3.0 times, down significantly from 3.8 times during the first quarter of 2019 and is in the middle of our target range of 2.5 times to 3.5 times. This is after spending $39 million for the acquisition of Sherwood and repurchasing approximately $190 million of shares during the first quarter of 2020. We accelerated our share repurchase based on our conviction in the long-term prospects of our business and our declining leverage levels at that time.

It is important to note that the reduction in our leverage ratio from the prior year was driven by increased operating profit, and to a lesser extent, by our decision to pay down debt in 2019. Going forward, we anticipate that our current leverage will be a significant competitive advantage as we enter this downturn.

I want to take a moment to give an overview of our debt and liquidity position. The company is well positioned to withstand a prolonged period of severe sales decline. We had no near-term debt maturities, with the first being in 2023. We have approximately $300 million liquidity, including $197 million of cash on hand as of March 31 and approximately $100 million available under our revolving credit facility.

We expect to generate operating cash flow in 2020. Based on our current expectations in this very dynamic situation, we do not see any material issues with our debt agreements. Although, we do anticipate our debt-to-EBITDA ratio to temporarily increase above our target ratio in 2020. We believe that our current liquidity is adequate based on our current and expected market conditions. However, given the uncertainty and the nature of this crisis, we have initiated discussions with our commercial banks to secure incremental liquidity in the form of a variable rate term loan.

We are working to obtain this additional liquidity within the next 30 days. Our ability to repurchase shares will be limited under this new short-term loan agreement. As mentioned, we expect our second quarter financial results to be significantly impacted by the challenges associated with COVID. Our second quarter to-date consolidated net sales trends reflect a decline of 55% compared to prior year. The trends were the worst in early April and have recently improved.

As Scott outlined earlier, there are many things that we have done to react to the current environment. This includes reducing expenses by $300 million on an annualized basis, with approximately $225 million across the last nine months of 2020. These reductions are primarily in advertising, personnel, including the furlough of 35% of U.S. salaried employees, other staffing-related items and variable compensation. The vast majority of these items will benefit our cash and liquidity position for the year with about $5 million being stock comp amortization.

We have also reduced our planned CapEx by approximately $25 million for 2020 as we have delayed non-essential projects. Despite these cost actions, we would expect significant headwinds to near term margins. Within recent trends, we have seen a reduction in average selling price, as consumers are purchasing lower-priced products during this crisis period.

In addition, we expect deleverage as fixed manufacturing costs are spread over fewer manufactured units. This will create deleverage in gross and operating margins, resulting in an expected operating loss and negative unadjusted EBITDA in the second quarter. Going forward, we anticipate operating income in the third and fourth quarter being dependent on the pace of the sales recovery in the markets impacted by COVID-19.

Lastly, I would like to flag a few items for modeling purposes. For the full year 2020, we currently expect D&A to be between $130 million and $135 million, total CapEx to be between $75 million and $90 million, which includes maintenance CapEx of $70 million, interest expense of $90 million to $95 million, a tax rate between 29% and 30%, and a diluted share count of 53 million shares.

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

[Scott Thompson, Chairman, President and CEO]

Thank you, Bhaskar. You and your team have done a great job this quarter. We're living through unprecedented time and it has forced us to reassess our business outlook in the near term. However, it's important for us not to lose sight of the tremendous progress that was underway prior to COVID-19 pandemic and the momentum that we've built as a company.

Tempur Sealy is a market leading, vertically integrated global company that has had exceptional growth. We believe that that growth is a direct reflection of the focus and passion we have on our long-term initiatives. You'll recall our four-key long-term corporate initiatives are: first, develop the highest quality bedding products in all the markets that we serve. Two, promote worldwide brands with compelling marketing. Three, optimize our powerful omni-channel distribution platform. And fourth, drive increases in EBITDA. Our focus on these four initiatives has allowed us to achieve our recent results and has positioned us well as we head into this crisis.

Let me than elaborate on them today, I'd like to highlight a few reasons why I feel confident that we're not only can we weather this storm, but that we can actually emerge even stronger on the other side. We had very strong momentum entering the crisis with North America sales up 30% in January and February and accelerating trends in Europe and Asia prior to COVID-19. Two, our omni-channel distribution model allows us to reach consumers wherever they want to shop, and with a robust and growing e-commerce business that operates even when physical stores are shut down.

We have the best products in the industry, have invested heavily in our technology and global manufacturing. We have iconic brands spanning all price points with a focus on the luxury segment. We have solid balance sheet and liquidity. And most importantly, we have a talented and dedicated team of people with a history of overcoming significant challenges.

Finally, before I open up the call for Q&A, I'm pleased to announce that various members of the executive team have joined me in pledging donations to charity, and that the Board of Directors have elected to forgo their board fee for the remainder of 2020. The company has chosen to contribute these funds to the Tempur Sealy Foundation, the United Way and the Red Cross. Tempur Sealy Foundation supports charities providing critical service to children in need and families. During this time of uncertainty, I'm proud to see that the actions of Tempur Sealy leaders are reflective of the collective responsibility we feel as a company to support our communities.

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

[Operator]

[Operator Instructions] And our first question comes from the line of Bobby Griffin with Raymond James.

[Bobby Griffin, Raymond James]

Good morning, everybody. Thanks for taking my questions and congrats on a good first quarter, really impressive.

[Scott Thompson, Chairman, President and CEO]

Thank you.

[Bobby Griffin, Raymond James]

My first question, I'll just go ahead and ask the follow-up with it is, can you maybe just talk a little bit about the health of your wholesale distribution network, in particular the small and medium-sized business customers? And then as a second part to that, can you talk about what you're hearing from these customers around expectations and plans for the Memorial Day weekend?

[Scott Thompson, Chairman, President and CEO]

Sure. And I've seen your question is targeted in U.S. retail customers. So I'll speak to the U.S, if it's not, then just queue back up. Look, the U.S. customer -- retailers got hit hard. They were having a very good January and February that includes the smaller retail customer that you're talking about and as you can see from our numbers, robust growth. And I think in general, that they would say they were probably having one of the best quarters that they've had in recent years. When they got hit hard, like we did, in late March, and then got closings and very confused governmental regulations, both statewide and locally.

And there was certainly a period of total disruption as they were trying to figure out what to do. And then over a few week period, these retailers are very creative, very talented business people, they began to adjust, and we could see it and feel it. They began to really lean into online, which before they might have had a web page, but quite frankly, they weren't committed to it. When they were forced to close their brick-and-mortar stores, they became committed to it. And it is not unusual for us to hear stories of retailers with two times, three times their online sales. They're coming off a small base, so it doesn't nearly cover their brick-and-mortar loss.

But I do think they've learned something. I think there'll be better retailers for. And I do think that every retailer is now 100% committed to the Internet. They also became more creative in setting up appointments with customers when even though they had stores closed, they began to schedule personal appointments, and they have found that to be very successful. I think that's a technique that will continue in the industry even after this crisis.

On what their health is, that's a very difficult analysis because, obviously, that there's a lot of players. They're small. You don't really know their capital base. But what I would tell you is certainly our collections in receivable in March and so far in April have been relatively stable. And we haven't seen any large or unusual actions. They've been a little bit softer, so I'd expect our days to extend, but not materially. So, I'm going to say right now, they feel okay, the smaller ones, but I don't think they're going to be able to take a crisis that goes 90 days. But maybe with the current opening of the stores and a little bit of good news that we've been getting, they'll be fine.

[Operator]

Thank you. And our next question comes from the line of Keith Hughes with SunTrust.

[Keith Hughes, SunTrust]

Thank you. My congratulations on the quarter as well. My question is on the April numbers. You talked about the revenue declines that you've seen so far. Is there substantial differences amongst your brands and amongst your price points on how difficult business has been here in April?

[Scott Thompson, Chairman, President and CEO]

Sure. Let's do brand first because it's relatively easy. If you adjust our distribution for our new distribution gains, another way of saying, the new distribution is heavily Sealy compared to Tempur, then there's no difference in the performance of the brands in the U.S. and as you know, overseas we're generally more just Tempur-weighted. So I'm going to say from a brand standpoint, we're not seeing anything significant between the two brands after you adjust it for distribution changes.

When you go to, within the brand, and we call it merchandising mix, for lack of a better way to talk about it, within each brand, the merchandising mix, there is pressure to go down from a merchandising mix standpoint. We're generally seeing the lower ASP products perform better both in Tempur and in Sealy. Some of that's probably economic and consumer confidence. But I think the lion's share of that is really a distribution issue because if you study distribution of our products before the crisis, it would be very obvious that the ASP in an online situation is lower than an ASP on in-store brick-and-mortar RSA-assisted sale.

So yes, we're feeling that. But what I don't know is what's going to happen as brick-and-mortar stores open, which is really the important part of the question, which is what's the ASP going forward? I don't know, it depends on how the brick-and-mortar stores perform. But obviously, with online, you're going to get some pressure from a merchandising mix standpoint.

[Keith Hughes, SunTrust]

Thank you.

[Operator]

Thank you. And our next question comes from the line of Curtis Nagle with Bank of America.

[Curtis Nagle, Bank of America]

Good morning. Thanks very much for taking the question. So, I wanted to turn to DTC online; obviously, doing very well at the moment. I guess does the coronavirus maybe change your thinking on DTC. You guys have been heavy investors in the category over the past few years, it's done real well, both online and stores. But maybe the world is shifting there a little bit more, maybe you guys want to have a little bit more control over the supply chain. Do you think to use this as maybe opportunity isn't right word, but trying to lean even heavier into it? Or how should we think about that? And how should we think about Sealy and DTC?

[Scott Thompson, Chairman, President and CEO]

Okay. Thank you. Thank you for the 14 questions. And let me talk about DTC for a little while. First of all, let me just go to Asia. Asia had SARS, and so they've been through this before. And so we studied what happened after SARS in Asia to see if there's been any change in customers shopping online or something, there really wasn't. So I think that clearly during the short-term period, while the stores are closed, there's no question, the online business has exploded.

As I said, after March 31, our online business has more than doubled. And just about every retailer I've talked to in the U.S. and quite frankly overseas, online has done very well. I think until the stores are opened, we don't really know what that looks like. But our research tells us, whether it'd be in Asia after SARS or whether it'd be the current research we have, although we don't have anything that's this fresh, but 80% plus of customers want to try out a bed before they buy it.

So I think that maybe there is some shift there. So maybe it goes to 75% of customers want to try out a bed before they buy it. But I'm not currently a believer that it's a huge shift. I think right now most of what we're feeling is people wanting a bed and looking for alternate distribution, I think their preference will still be to go to the store. And I suspect there's probably a give back. Once the stores open, we'll probably give some back from the Internet standpoint, but it probably accelerated the trend.

Now when you talk about DTC, that obviously includes online and brick-and-mortar, so I just kind of talked about online, and we'll continue to be very competitive there, and I expect it to grow, and it's a wildly profitable channel. And we're probably one of the best online bedding companies in the world now coming from almost a ground start.

When you go to the stores, the Tempur stores are all closed. I suspect we'll get about half of them open by May 15. The stores that are closed are generally on the West Coast and in Northeast for obvious reasons. We're still growing there. We're still working on growth there. So the store -- Tempur stores are moving forward.

The pace of opening stores is going to be a little delayed, not because of strategy or any change by us, but quite frankly, the real estate market is a mess right now, as you might guess, and it's hard to do build out and those kind of things. So, probably -- we'll probably be a little bit slower on opening the stores. But again, that's an execution issue in real estate, that's not a strategic issue.

The Sleep Outfitter stores, they're closed, and I suspect we'll get those opened here in the next 30 days or so, with probably the exception of Kentucky. And that strategy hasn't really changed based on how they perform and what their return on invested capital is will depend on the pace at which we want to expand. And we are selling a few more beds online, Sealy, specifically.

But generally, I think the retailers are doing that job really well, bed e-tailers who are selling a lot of Sealy beds online. And there's not a lot of margin there. So, I don't want to spend too much effort there.

So, I guess, it's a long-winded answer to I don't really think anything changed. I think we want to be wherever the customer wants to be. But if we see the customer wants to be online or wants to be more direct, then we'll allocate capital there. But I think we'll just continue to manage it the way we have.

[Operator]

Thank you. And our next question comes from the line of William Reuter with Bank of America.

[William Reuter, Bank of America]

Good morning. You referenced a potential capital raise. It sounded like it was going to be some sort of secured debt. I guess, have you thought about the size of that? And then in that context, when you've been planning for liquidity in different scenarios, after that raise, how long will you feel like you have sufficient liquidity even if the crisis were to extend? That's it. Thanks.

[Scott Thompson, Chairman, President and CEO]

Great question. To make it clear on the capital raise because when we say capital raise, I kind of like flinch because that sounds like some kind of equity instrument. And that is not -- we're not thinking about anything related to equity from a capital raise. All we're doing is a traditional bank line with our -- basically, our bank syndicate, and you should consider it normal business.

It is a term debt item. It's about $200 million LIBOR plus 2.375%, straight debt, nothing exotic and quite frankly, just proving that we're a bankable asset in this marketplace to probably -- money that we probably would not expect to use under most scenarios.

So again, this is normal business. And if we weren't in a weird world we're in, we probably wouldn't even talk about it, but it seems like we need to talk about it in a world we're in. So normal straight debt. 30 day-ish, Bhaskar, close...

[Bhaskar Rao, EVP and CFO]

Yes, that's correct.

[Scott Thompson, Chairman, President and CEO]

Call it, 30 days. The only thing that's different in that straight debt that we're talking about as compared to our current lending arrangements of any material difference is we did restrict the amount of stock buyback during the period, which, quite frankly, we thought was very appropriate, and we were going to do it anyway. So, that's the capital raise.

How much money do we have depending on how long the crisis goes on? It -- that becomes kind of a medical question. You tell me if I don't have any sales, then the cash burns pretty quickly. If you tell me, we have reasonable sales, quite frankly, we produce cash. And I think -- I don't think, we expect based on what we know today -- and again, it's medical dependent as opposed to product dependent or operating dependent, we'd expect to produce operating cash flow in 2020.

So, I think one of the strengths of the company is the variable cost structure, which Bhaskar talked about in his section. If you give us some kind of reasonable sales number, even though it's down, we will not be eating cash, we'll still be generating cash.

So we don't do the analysis of when you run out of money, like some companies because quite frankly we don't expect to burn significant amount of money other than the second quarter, which, look, we expect the second quarter to be very bad. But after that, we expect, as these stores open around the world, to be in a position where we're generating operating cash flow. Fair, Bhaskar?

[Bhaskar Rao, EVP and CFO]

That's very fair. I mean, just incrementally, not to be repetitive, we have about $300 million of liquidity, $200 million of that is cash, $100 million availability on the revolver. As Scott mentioned, we got operating cash flow for the balance of the year. So, we feel good about where we're at. And that's before the, call it, the insurance liquidity that we're getting from the bank.

[Operator]

Thank you. And our next question comes from the line of Atul Maheswari with UBS.

[Atul Maheswari, UBS]

Good morning. Thanks a lot for taking my question. So, Scott, there's clearly a mix shift down to lower ASP beds. So, do you think even after the stores do open and recessionary conditions prevail, the higher-end bedding will simply be slower to rebound than the entry-level beds? Do you have any thoughts on that based on what you're seeing currently and the experiences that you've had in past recessions? And then I have a quick follow-up from your previous comment. You said that you'd stop burning cash when there's a reasonable level of sales decline, what level is that? If you could quantify? Thank you.

[Scott Thompson, Chairman, President and CEO]

Yes, I'll start, and then I'll let Bhaskar take the hard part of the question. I can't really tell you based on where we are right now, where with the ASP issue is because, again, I've got distribution issues because the stores aren't open. And we're just running the stuff through online. So, current information is not helpful to answer the question.

If I look at past recessions, okay, it is normal for ASP to go down during those periods and then work their way back up. I suspect that this is the same thing. But this is a really strange period, okay?

When I look at it, an individual consumer has more money in their pocket because gas prices are way down, and that's normally a big, big impact on customers. They've got huge government checks coming. So, we're going to have much unemployment. But it's unemployment with people, quite frankly, that are making more money being furloughed than they were making working.

So, I don't really know how to think about that because they're going to get these government checks that are -- that more than compensate them for not working. They certainly have lower entertainment costs. I mean, they are not going out to restaurants; they're not spending money entertaining. So that's going to be a lower amount.

And I think the car sales are in real trouble. And car payments and new car sales have generally been taking a big chunk of the consumer's wallet during this period. So, when I kind of look at the customer and say, okay, what's really going on? I think the retail customer is going to have a lot more money in their pocket than most people perceive and certainly more money in the pocket than they've ever had during a recession.

So, I think the issue is not a financial issue, assuming that this recovery is relatively robust, starting in the third quarter, not the second quarter. It's really a consumer confidence issue. And I think the consumer confidence is bad, and it's going to take a little while for the consumer confidence to get back.

And so to me, that all ties to your ASP question. And so I don't know if past recessions are really a good barometer. The last thing I would say is for retailers, for bedding to work at retail, they have to sell at high ASP. Selling a bunch of low ASP beds from a retailer, whether they're online or whether in-store is not a business model that long-term will be successful.

So, as encouraged as we are about wanting to move ASP up, the retailers, it's a matter of life and death for them to move the ASP up, and I think they will. Right now, I think they're just pushing volume out. But once they want to become profitable and have a sustainable business plan, they've got to move ASP up. And there was a second part of the question, Bhaskar, what's that about?

[Bhaskar Rao, EVP and CFO]

Yes, about how long the -- how deep the sales decline as it relates to cash. Maybe I could take that.

[Scott Thompson, Chairman, President and CEO]

Sure.

[Bhaskar Rao, EVP and CFO]

So, the way I would think about that tool, first thing is I've been around this business for a very long time. And what I would say is this is the most interesting period that we're currently going through. And what I really feel good about is how quickly and how nimble the company has been able to react.

If you look at it, $300 million of annualized cost out of the operation, $225 million of that in the back half and that's a function of the team working aggressively, but I would also say that's variable cost nature of the business model that we have in place.

When you think about how we think about the model from a go-forward standpoint, there are many moving pieces that go into that type of analysis. What I would say is, is that, if I think about the $300 million that we have from liquidity, the incremental that we're looking at from working with our existing banks is that we have severely depressed the model, and we feel good about that.

[Operator]

Thank you. And our next question comes from the line of John Baugh with Stifel.

[John Baugh, Stifel]

Thank you. Good morning. Congrats on a great first quarter. I'll Jump right in. April, you mentioned down 50%. Could you help us, A, put April in the context of a waiting for the June quarter? And what if you had to guess, as a percentage of your wholesale, your retail customers were closed during April, where did you exit the month? And any guess as to where you might be entering Memorial Day? Thank you.

[Scott Thompson, Chairman, President and CEO]

Yeah. I'll play with that one for a little while. As you can guess, it's pretty cloudy, the information. We've kind of called it the fog of war internally as you kind of work through these things. But look, I suspect probably – we're talking U.S. because it takes too long to do the whole world. But in the U.S., probably 55% to 60% of the doors were closed starting April. And I suspect that, that's probably pretty close to where we are as we sit here today. There's been stores openings and closings, and it's dynamic. I expect that in the next week or so, that number of closings ratio is going to change. And we're going to get a good number of stores opened, certainly in Texas and some other markets that are open. So that gives you some idea of kind of the store closings.

As far as like, I guess, really volume, if you want to kind of talk about April, I think like late March, maybe March 27 or so, we announced that sales were down more than 50%. And at that point, they were falling. And that's a worldwide statement. Ultimately, probably first week in April-ish, I'm going to say, I don't have the exact day, we probably bottomed out down 80% for a few days, probably with some inventory burn off within in that number. And then since then, we've been working our way back up. And month-to-date, we're probably 55-ish, 50%-55% down and that's both a U.S. statement and a global statement. In North America, U.S. is doing much better than Mexico and Canada, which are doing very poorly right now.

[Operator]

Thank you. And our next question comes from the line of Peter Keith with Piper Sandler.

[Bobby Friedner, Piper Sandler]

Hey, good morning. It's Bobby Friedner, on for Peter. Thanks for taking my question. I want to return to the topic of customer health. Is there anything you're doing or can do to mitigate impact in the event of other customer bankruptcies or distress like you saw in Q1?

[Scott Thompson, Chairman, President and CEO]

Yes. I mean, I think as you know, the way the industry is set up, we effectively end up financing retailers. We serve a little there – a little bit of a bank for the industry. And over the years, I think the history would show that we're very good at that. And we generally don't have a problem in that area and we work with big retailers and small retailers. It's just part of the core practice of business worldwide.

Having said that, certainly, retail is under stress, we continue to use our tools to work through it. Sometimes we shortened up the receivable to mitigate risk. To the extent that it's a risk that we see coming, we have demonstrated, I think, very well that we don't lose money and manage those situations. Situations that come out of the blue that like, oh, didn't see that coming, we have a tendency to lose some money or at least not make profits on some last few beds we sold them.

So things we can do, I don't know if there's anything more we can do. We work with them daily. But at the same time, I think retailers – pardon me, have heard me say that 100 times, I'm not going to be your bank and finance your equity capital in your business. So we're a vendor and we get vendor economics. But if they get in trouble to the point where they need equity, or I'm not going to take equity risk returns. But I think – look, there's some segments that are more challenged than others, and I don't want to call them business models like department stores, okay? That's a challenged model that we probably can't do much to help.

But those beds, to the extent that those businesses are having some headwinds, those beds are going to show up somewhere else in our distribution because we're so well distributed. And quite frankly, depending on where they show up, some of the other channels do a much better job of working a customer to a higher-end bed. And so actually, it could be good for us long term, if there is some shift in the channel that helps support specialty bedding versus some of the other channels.

[Operator]

Thank you. Our next question comes from the line of Seth Basham with Wedbush.

[Seth Basham, Wedbush]

Thanks a lot and good morning. Two questions, one for you, Scott, because I know you love that. The first is related to the last question you were answering around the health of your U.S. retail customers. Have you cutoff shipments to any material customers at this point in time? And then secondly, Bhaskar, as you talked about your expectation for operating profit in the second half of the year, what level of sales decline can you sustain to deliver that operating profit? Thank you.

[Scott Thompson, Chairman, President and CEO]

I'll deal with the first part of that question. The first part of the question is easy. Have we cut off sales to any customer? The answer to that is always yes. We do routinely, okay. At times, if we have a problem with receivables, we stop to ship, okay, and we work through it. And at times, we – and this we'll do more often than not, we look at cash on delivery. So they're actually stop shipping for the most part, most of the time, you end up with, okay, we aren't sending you any more inventory until you send us cash. And we do that routinely. I think your question is, is there any material customer that we've stopped shipping? I can't – one doesn't come to mind, but we are routinely working through customer issues at times. So, I'm sure we've got people on – we certainly have some people on cash in advance.

[Bhaskar Rao, EVP and CFO]

As I think about the rest of the year from a trajectory standpoint, as Scott mentioned, this is not an operating issue, this is more of a medical matter that we're working with. And I would just go back to the actions that we've taken from a cost standpoint, about $225 million in the rest of the year, and we can go get those costs, but some of those costs will be more in the, call it, in Q3 and Q4 time frame. So that's how we're thinking about that.

[Scott Thompson, Chairman, President and CEO]

Yeah. And I'm going to add on a little bit because we've got a couple of questions on retailer health. There seems to be a little more indigestion out there than I probably think is warranted at this point. I think someone asked me kind of like what do I worry most about, which is kind of a common question. I think the first one, I mean, just to be very transparent, is really consumer confidence.

And if I were to focus on something, it would be consumer confidence, and it would be, we'll call it, the health issues and the ability for brick-and-mortar stores to open and to stay open, and I'm sure there will be some more shelter-in-place orders issued over time. Hopefully, they're small ones. I think those would be the two big issues. Retailer health would be in the top five, but I don't want to leave the impression on the call that it would be the top one or two. I think the other two I mentioned are by far more significant.

[Bhaskar Rao, EVP and CFO]

And more broadly speaking is that, if you think about the omni-channel, the approach that we have, we are where the consumer wants to shop, whether it's through our own doors, whether it's through from an online standpoint or whether it's in a unique experience through our Tempur flagship. And what we've been able to demonstrate before is that if the consumer wants to consume and interact with our product and our media in an online area, we're there, we're a traditional retailer. And as Scott always has also mentioned is that those units are going to find a home, we'll be there from a consumer standpoint.

[Operator]

Thank you. Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets.

[Brad Thomas, KeyBanc Capital Markets]

Good morning. Thanks for squeezing me in here. A lot of my questions have been answered, but I guess, to clean up the model a little bit, can you talk about how you all are thinking about marketing dollar expenditure going forward? And Bhaskar, I know you said you couldn't give us a dollar figure on the raw material savings, but can you give us a little more flavor directionally what percentage it seems like perhaps some of these petrochemicals and steel prices, steel inputs maybe being kind of quoted down to you here at this point? Thanks.

[Bhaskar Rao, EVP and CFO]

Absolutely. What I would say is in the first quarter, we saw about $8 million or $9 million of commodity benefit on a year-over-year basis. I would anticipate the commodities would continue to come in, so I would expect that on a per unit basis and overall to be favorable on a year-over-year basis. So I think it's reasonable how you're thinking about it. As it relates to our – how we're spending from an advertising standpoint, as we're thinking about it today, it is very focused on online, that's where the consumer is, and that's where we're investing our dollars.

As we have more visibility on how the stores are opening up and what that looks like, we'll start feeding the market. And what we want to do is that we want to make sure that when the consumer returns to that retail footprint is that we're there and energizing that consumer to – on their consumer journey.

[Operator]

Thank you. And that concludes our question-and-answer session. I will now turn the call back over to CEO, Scott Thompson, for any closing remarks.

[Scott Thompson, Chairman, President and CEO]

Thank you, operator. To our 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 its Board of Directors. This ends the call today. Thank you, Operator.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.